Australia: High Court sets out duty of care for builders of commercial property

Last Updated: 14 October 2014

In a unanimous decision, the High Court has overturned a decision which had held that a builder owed and breached a duty of care to an Owners' Corporation and was liable in negligence for damages for pure economic loss.

The High Court has previously held that a builder may owe a duty of care to subsequent purchasers of residential premises in the context of claims for pure economic loss. However, this duty had not been extended to purchasers of commercial property.

Although no duty was found to exist on the facts of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61228 ([2014] HCA 36), the High Court has not closed the door on the possibility of such a duty arising, depending on the circumstances.

The buyer discovers defects

The case concerned the construction of a mixed-use retail, restaurant, residential and serviced apartments complex. The Owners' Corporation came into existence after the building work was completed and upon registration of the strata plan for the serviced apartments. It subsequently discovered defects in the common property which had to be fixed. Because these defects had not caused any damage to a person or to property, the Owners' Corporation's loss was limited to the cost of the remedial works. This loss is an example of "pure economic loss" which may be broadly described as loss which is unconnected with any physical damage.

The Owners' Corporation brought proceedings to recover this loss from the builder. The builder was successful at first instance but lost on appeal in the New South Wales Court of Appeal.

The principal question raised was whether the builder owed the Owners' Corporation a duty to exercise reasonable care in the construction of the building to avoid causing the Corporation to suffer purely economic loss resulting from latent defects in the common property.

Vulnerability to lack of care

Vulnerability has been traditionally recognised as the key touchstone for a finding of negligence for purely economic loss. In a slight deviation from past approaches, the Court gave little attention to this concept. It emphasised that provided the contract governs the quality of work to be provided, investors will not be found to be vulnerable to lack of care by the builder in the performance of its contractual obligations.

Responsibility for loss

An additional issue the Court addressed was whether the builder had any responsibility in relation to the loss flowing from latent defects extending beyond the confines of its contractual obligations owed to the developer as counterparty to the contract. The Court found that while the builder may owe a duty of care to the original owners of the development, it did not owe an equivalent duty to the Owners' Corporation – the Owners' Corporation is not a proxy for the lot owners and was not in existence at the time of execution of the contracts.

Buyer beware approach

The Court emphasised that each purchaser was free to negotiate and seek extensive warranties from the vendor and could have walked away if dissatisfied.

Domestic statutory regimes are in place to protect consumers who may not be sufficiently astute to protect their own interests. However, it is not the court's role to extend this protection to investors and circumvent the deliberate policy choice of Parliament.

Take-home message

The essential message to be drawn from this decision is that in the commercial property sphere, investors will have to be diligent in protecting their interests. The consequences of a failure to exercise such diligence will not be able to be sheeted home to builders through negligence claims.

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this bulletin. Persons listed may not be admitted in all states and territories.

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