A win for builders, yet another blow for owners

The High Court has found that there is no duty of care owed by a builder to an owners corporation in respect of pure economic loss flowing from latent defects in construction work: Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 (8 October 2014).

The building in question was a mix of retail, restaurant, residential and serviced apartments, constructed pursuant to a contract made in 1997 between Brookfield Multiplex (“Builder”) and Chelsea Apartments (“Developer”). The building was completed in 1999.

The Owners Corporation sued the builder in 2008 in negligence, seeking the cost of rectifying alleged defects in the building.

The part of the dispute which related to the residential section of the building was settled between the parties early on. The Owners Corporation continued to press its claim in relation to the serviced apartments.

In 2012, the Supreme Court dismissed the Owners Corporation’s claim, holding that it was not appropriate for a judge at trial level to impose the novel duty of care which the Owners Corporation was seeking.

In September 2013, the NSW Court of Appeal unanimously allowed the Owners Corporation’s appeal, finding that the Builder’s duty of care to the Developer extended to the Owners Corporation as agent for the lot owners, who were found to be in a “vulnerable” position. The Court of Appeal confined the duty to loss resulting from latent defects which were structural, dangerous or made the serviced apartments uninhabitable. Our summary of that case is here.

Yesterday, in a unanimous decision, the High Court overturned the NSW Court of Appeal’s decision, upholding the Builder’s appeal.

In the particular circumstances of this case, the High Court came to its conclusions because:-

  • the Owners Corporation was claiming for pure economic loss only. That is to say, the defects which the Owners Corporation identified in the common property were not alleged to have caused any damage to person or property. Rather, it was claimed that the ultimate purchasers of the lots had failed to get “value for money” from the Developer.

 

  • In cases of pure economic loss, the plaintiff must prove that it suffered from some form of “vulnerability” – which can include that it was “reliant” or “dependent” upon the defendant. In this case, the Owners Corporation was not able to prove the necessary vulnerability, because:

(a) the Builder and the Developer made contracts for the construction of the building and, later, the Developer and the subsequent lot owners made contracts for the sale of the lots. The contracts contained provisions regulating the quality of what was to be received in return for payment of the price. The way in which those contracts were drafted denied any vulnerability.
(b) a distinction was drawn between “consumers” who purchase residential units and are granted protection under the Home Building Act and more sophisticated “investors” who purchase commercial properties such as serviced apartments. Greater protection is afforded to the consumer than the investor.
(c) the Owners Corporation could not have relied or depended upon the Builder, because the Owners Corporation did not exist at the time the work was being carried out. It only came into existence upon registration of the strata plan, which occurred after completion of the work. That is also a reason why it cannot be said to have suffered any real ‘loss’. The Owners Corporation acquired the common property without any outlay on its part, and the common property will always be worth more than the cost of repair.

 

Whilst specific to its own facts, this case narrows again the avenues for owners corporations – particularly in non-residential buildings – to seek redress and compensation for defective building work. In delivering his part of the judgment, Justice Gageler noted: “If legal protection is now to be extended, it is best done by legislative extension of…statutory forms of protection.” It is a pity that in NSW, the legislature is currently doing the exact opposite, at least when it comes to residential buildings. See our summary of the proposed Home Building Act amendments here.

 

The information contained in this article is not legal advice. This article is intended to provide general information in summary form only. You should not rely on the content of this article as legal advice. If you would like advice specific to you and your situation, please contact us.

Posted in LCOR