Builder’s liability to future owners for latent defects clarified

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The High Court re-affirmed the law that builders are not liable to future owners of commercial buildings for defects.
Australia Real Estate and Construction
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Builders are not liable to future owners of commercial buildings for defects – High Court re-affirms the law

In the recent case of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 the High Court of Australia has reaffirmed the current law relating to claims against builders for latent defects. In short, with the exception of owners of dwelling houses that fall into a class of persons incapable of protecting themselves from the consequences of the builder's lack of reasonable care, the general rule is that a builder owes no duty of care in negligence to protect a subsequent owner from incurring the cost of repairing latent defects. Justice Gageler explained that: "[This] is because, by virtue of the freedom they have to choose the price and non-price terms on which they are prepared to contract to purchase, there is no reason to consider that subsequent owners cannot ordinarily be expected to be able to protect themselves."

Where the current owner of a commercial building is the party that engaged the builder, their only recourse is to pursue contractual rights under the building contract. This may include specific rights in relation to defective works identified during a specified defect liability period (typically 12 months), and possibly other rights for breach of contract.

Where commercial building works were commissioned by a prior owner, the new owner will have no rights at all against the builder unless contractual rights continue to exist in favour of the prior owner, and those rights have been effectively assigned to the new owner.

Facts

In the Brookfield Multiplex case a design and construct contract was entered by the developer of an apartment complex. The apartments were purchased by investors and leased to a management entity who was to operate a business of servicing those apartments. The Owners Corporation was created upon registration of the strata plan, pursuant to a statutory scheme. Under this scheme, the Owners Corporation held title to the common property on behalf of the investors.

After discovering defects in the building works affecting the common property, the Owners Corporation sued the builder for negligence.

The decision of the High Court

Whilst distinctions exist in the reasoning delivered by various members of the High Court, each judgement referred to the decision in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) with approval. That case also involved a claim for economic loss by a subsequent purchaser arising from defective construction of commercial premises. That case was also dismissed because the requisite duty was held not to be owed to the subsequent purchasers.

The decision of the High Court in that case was based on the court's assessment that neither the developer nor the subsequent owners were sufficiently "vulnerable" in their relationship with the builder to give rise to a duty of care.

All judges hearing the Multiplex Brookfield case made reference to the detailed contractual arrangements between the builder and the developer in finding that the builder owed no common law duty to the developer. Of primary importance was that the builder had a commercially negotiated contract which contained detailed provisions dealing with the allocation of risk for economic loss flowing from any defective work and provisions limiting liability. The Court noted that the builder and developer were sophisticated commercial parties capable of protecting themselves and therefore the developer was not vulnerable in the sense required for a duty of care to exist.

The building contract made reference to the standard contract of sale between the developer and the investors for each apartment. The contracts of sale gave the purchasers a right to require the developer to rectify defects in the common property, within a specified period following registration of the strata plan.

Therefore the High Court held that the existence of these protections, bargained by each of the parties in their individual agreements against the risk of certain defects, mitigated against a finding that the subsequent purchasers were vulnerable in the sense that they could not protect themselves from the builder's lack of reasonable care. It followed that the Owners Corporation which held the common property on the investors' behalf was also not vulnerable.

This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.

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