Australia: You get what you pay for: liability in negligence for latent defects

Last Updated: 21 October 2014
Article by Veno Panicker

Some certainty in post completion liability

You get what you pay for. A builder prices its works based on risk, including risk of future liability to successors in title to a property.

So why did it take a High Court decision to find that a builder's liability is usually limited by its contract with a developer?

In a unanimous decision delivered on 8 October 2014 the High Court overturned a decision of the New South Wales Court of Appeal which had otherwise caused considerable concern for builders and developers with respect to their liability in negligence for latent defects. All 7 judges heard the appeal and agreed that it should be allowed.

This landmark decision will provide considerable comfort for the industry. Whilst not a panacea for the morass that surrounds liability for pure economic loss, the judgment further provides at least some clarity in this vexed area of law.

The Facts

The case concerned the construction of a mixed use retail, residential and serviced apartment complex in Chatswood, New South Wales pursuant to a contract between a developer and Brookfield Multiplex.

The subject works were completed in 1999.

In 2008, the Owners Corporation of the serviced apartments, as successor in title to the developer, commenced proceedings against Brookfield alleging latent defects and, relevantly, claiming damages in negligence.

Court of Appeal

At trial, his Honour Justice McDougall held that it was not appropriate for him to find what he considered a novel duty of care as between the Owners Corporation and Brookfield.

In the Court of Appeal, this finding was overturned. A critical plank in finding for the Owners was that they were 'vulnerable' as purchasers of the properties, i.e, that they were unable to protect themselves from a builder's failure to exercise reasonable care giving rise to latent defects.

In the circumstance, the Court of Appeal held that the builder owed the Owners a duty of care to avoid latent defects causing pure economic loss arising from:

  • structural defects;
  • defects which constitute a danger to persons or property in the vicinity of the building; or
  • defects which otherwise render a building uninhabitable.

Perversely, albeit in obiter, the Court of Appeal went on to recognise the potential for:

  • a concurrent duty as between the developer and Brookfield beyond that anticipated by the building contract (in the absence of clauses limiting liability for latent defects); and
  • a subsequent purchaser being entitled to rights against Brookfield which were not rights held by the developer (effectively passing on better title than it held!)

The High Court Appeal

Following the grant of special leave earlier this year, in four separate judgments, the High Court overturned the decision of the Court of Appeal.

The High Court held that Brookfield, the builder of the strata titled serviced apartment complex did not owe a duty of care to the Owners Corporation, the successor in title to the developer, to avoid causing it pure economic loss arising from latent defects in the common property.

The High Court emphasised that there is no general duty of care to avoid pure economic loss and the exceptions to that should be confined to cases where the plaintiff was vulnerable, i.e. unable to protect itself.

The High Court did not accept that the Owners Corporation was vulnerable as:

  • the design and construct contract between Brookfield and the developer contained detailed provisions with respect to the quality of the works to be completed, including a defects liability regime during a prescribed defects liability period; and
  • the standard form sale contract to purchasers annexed the design and construct contract and additionally provided rights in relation to defects in the property.

There was no duty of care in respect of pure economic loss flowing from latent defects owed by Brookfield to the developer - nor could such a duty be imposed on Brookfield with respect to subsequent purchasers.

This is not to say that in certain circumstances a builder could not be held to owe a duty of care to a subsequent purchaser - as was the case in Bryan v Maloney with respect to a simple building contract relating to a single residential dwelling. Of note, Gageler J reinforced that the implicit assumption of vulnerability by the Court in Bryan is no longer appropriate and the question of whether a plaintiff was vulnerable was a matter of fact to be established by evidence.

The decision means that, carefully drafted, the risk for such liability has been significantly curtailed.

The decision also highlighted the Court's recognition of the importance of commercial certainty in this area of law.

Lessons learned

If a developer wishes to pass on the benefits of warranties for latent defects for aspects of a project to successors in title, such as an Owners Corporation, it can do so and a builder will price and be paid accordingly.

Whilst the decision is close, it does not absolutely preclude a finding that in other circumstances, there may be a risk of a duty of care being imposed. The Court will continue to assess such matters on a case by case basis. Accordingly, out of an abundance of caution, despite the decision, consideration should continue to carefully be given to:

  • express provisions in contracts limiting liability in negligence with respect to a developer;
  • express provisions in contracts limiting liability for latent defects;
  • revision of sale contracts to limit or exclude liability in negligence to subsequent purchasers;
  • long term subcontractor warranties, assignable to successors in title, particularly for items prone to latent defect claims (structural items, waterproofing, corrosion etc); and
  • long term subcontractor indemnities for latent defects which may constitute a danger to persons or property.

The decision should be borne in mind when purchasing a property - caveat emptor!

P>The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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