In a recent decision, the High Court of Australia has ruled that
the owners corporation of a 22 storey apartment building could not
sue the builder, Brookfield Multiplex
(Brookfield), for the costs of fixing latent
defects in common areas. The court's decision, in summary, was
that the owners corporation did not have a contractual relationship
with the builder, and there was found to be no separate duty of
care outside of the terms of the construction contract.
Brookfield designed and constructed the apartments in Chatswood,
NSW under a contract with the developer and owner, Chelsea
Apartments (Chelsea). Chelsea leased the
apartments to a subsidiary of the Stockland Group, to operate the
apartments as a serviced apartment hotel under the "Holiday
Chelsea remained the owner of the land at Chatswood until it was
subdivided into lots and common property when Brookfield registered
the strata plan. Upon registration, the owners corporation came
into existence and it became the legal owner of the common
property. It had no contractual relationship with Brookfield or
Chelsea – a salient point in the dispute.
The design and construct contract between Brookfield and Chelsea
included a 52 week defect liability period, and required Brookfield
to maintain professional indemnity insurance for a run-off period
of four years after the final certificate was issued. The design
and construct contract attached a copy of the standard form
contract of sale for buyers of the apartments. The buyer's
contract required Chelsea to repair any defects in common property
upon written notice from the owners corporation within seven months
after registration of the strata plan.
Latent defects were discovered in common areas which were beyond
the limits of Brookfield's responsibility under the design and
construct contract. The owners corporation sued Brookfield for
economic loss, for the diminished value to the building,
rectification costs, and the loss of income and rent during the
The High Court found that the contracts for the construction and
sale of the apartments set out the circumstances in which the
builder was liable to rectify defects. It concluded that Brookfield
did not owe Chelsea, or the buyers, any separate duty of care under
the law of negligence to avoid causing economic loss for defects in
This overturned the decision of the Supreme Court of New South
Wales Court of Appeal, which found that Brookfield did owe a duty
of care to avoid causing pure economic loss to both Chelsea, and to
the owners corporation as successor in title.
The court's decision is good news for construction companies
in terms of clarifying the extent of their duty of care in the case
of economic loss in non-residential apartment complexes. However,
where residential lots are involved or in cases where the builder
and developer are the same party, contracts should clearly state
the extent of liability of all parties in the case of rectification
works. It's always best to consult an experienced lawyer before
entering into any contract. If you have concerns, Rockwell
Olivier's building and construction lawyers can assist.
The Council announced planning policies to encourage more inner suburban retirement village and aged care development.
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