Australia: The rise and fall of the duty of care of builders to owners corporations

Builders and developers will be relieved to learn the High Court has refused to impose a duty of care on builders to protect owners corporations against economic loss caused by latent defects where the parties had an agreement articulating obligations to remedy defects.

In these circumstances, owners corporations (and purchasers of apartments) will be limited to relying on their contractual protections for latent defects or advocating for the introduction of legislative reform.

In Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36, the High Court has sent a clear message that the common law will not step in to assist purchasers in respect of latent defects where parties had an agreement setting out the builders obligations.

In this case, the right of the owners corporation to request repairs to common property was limited to seven months after the registration of the relevant strata plan.

The decision may see purchasers attempt to negotiate more extensive protection against defects, although they may face practical difficulties in achieving this. Relevantly, the Court did not appear to be concerned at the inequality of bargaining power as between an individual purchaser and developer, reflected in the nature of the standard form sale contracts agreed to by purchasers.

Builders and developers now have greater reason than ever to ensure that the rights and obligations of the parties concerning the quality of the construction works and liability for defects are clearly set out in both design and construction contracts and standard form sale contracts.

If any further protection is to be offered to owners corporations in respect of defective developments, the High Court's decision makes clear that such protection can only come from legislative reform.

Further, while this case focused on a commercial development, there is a real prospect the decision will also impact residential developments.

The High Court was not required to determine whether by agreeing to limited contractual protections against latent defects, residential purchasers would not be vulnerable and so would not be owed a duty of care, but the Court's reasoning suggests this would be so.

However, the decision does not remove the existence of a duty of care owed by builders to subsequent purchasers of residential developments for latent defects if those purchasers are sufficiently vulnerable.

BACKGROUND

The case involved a claim of negligence brought by the owners corporation of serviced apartments against the builder of those apartments, Brookfield Multiplex, for economic loss it suffered as a result of latent defects in common property.

The apartments were constructed under a detailed design and construct contract with a developer, Chelsea Apartments Pty Ltd. The developer sold the apartments, which were part of a strata scheme, to different purchasers under a standard form sale contract.

The High Court was asked to overturn the NSW Court of Appeal's unanimous decision that the builder owed a duty to exercise reasonable care in the construction of the serviced apartments to protect the owners corporation from economic loss arising from latent defects in the common property.

That duty of care was dependent upon a duty first being owed by the builder to the developer. Central to the NSW Court of Appeal's reasoning was that both the developer and owners corporation were vulnerable in that they were reliant on the builder's expertise and care.

HIGH COURT'S DECISION

The following two propositions were critical to the High Court's unanimous rejection of the Court of Appeal's decision:

• if a duty of care was imposed, this would supplement the limited rights bargained for in the contracts and would alter the allocation of risks agreed to by the parties; and
• neither the developer, the purchasers or the owners corporation were 'vulnerable' in the sense necessary to attract the imposition of a duty of care.

Contractual obligations

The design and construction contract included extensive provisions regarding the quality of the builder's work and assigned liability to the builder for latent defects. The sale contract obliged the developer to repair defects in the common property when notified by the owners corporation within a specified period of time.

On this basis, the Court found that neither the developer nor the purchasers (on whose behalf the owners corporation was acting) had been unable to bargain for contractual protection against the risk of defects.

Vulnerability

Consistent with established principle, the High Court said that damages for pure economic loss are recoverable only where a party is owed a duty of care because it is 'vulnerable' in the sense that it is unable to protect itself from the risk of loss.

The developer was not vulnerable as it was a sophisticated commercial entity with extensive construction experience and had bargained for the contractual protections in the design and construction contract.

Because the owners corporation was, in effect, acting as agent or representative of the purchasers, its vulnerability was dependent upon the vulnerability of the purchasers.

Regardless of whether the duty of care to the owners corporation was expressed as dependent upon, or independent of, the duty of care owed to the developer, because the purchasers were also found to have bargained for protections in the sales contracts they too were not vulnerable in the necessary sense.

Several members of the Court noted that purchasers could have bargained for more extensive protections or simply decided not to proceed with the sale.

In addition, the High Court also found that because the owners corporation did not exist at the time of construction, it had no reliance on the builder independently of the purchasers, nor could there have been any separate assumption of responsibility to it by the builder.

We will provide a further update on the practical impacts of this decision for property developers.

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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