In a decision that is highly relevant to sophisticated owners, developers and builders of commercial property, the High Court has unanimously allowed an appeal by Brookfield Multiplex Ltd ("Brookfield") from a decision of the Court of Appeal of the Supreme Court of New South Wales.
The High Court found that Brookfield, as the builder of a strata-titled apartment complex, did not owe a duty of care to the owners of the complex, Owners Corporation Strata Plan 61288 ("the OC"), to avoid causing the OC economic loss resulting from latent defects in the common property.
The decision hinged on the reasoning that the OC was not "vulnerable" with respect to economic loss arising from latent defects in the common property caused by Brookfield's alleged lack of care.
Brookfield entered into a design and construct contract with Chelsea Apartments ("the Developer") to build a 22 storey complex featuring a mix of serviced and residential apartments. The developer sold the serviced apartments to a number of individual owners pursuant to standard form contracts, each containing the original design and construct contract. The OC was formed in respect of the serviced apartments within the complex. There was no contractual relationship between the OC and Brookfield.
A number of latent defects were subsequently identified within the common property, which were caused by the defective design and/or construction of the building. As a result, the OC incurred costs to undertake rectification works. The OC brought proceedings against Brookfield on the basis of a claim for pure economic loss for the costs incurred to rectify the defects.
At trial, the Supreme Court of New South Wales held that Brookfield did not owe a duty to take reasonable care to avoid a reasonably foreseeable economic loss suffered by the OC in having to make good the consequences of latent defects.
The basis for the decision not to impose a duty of care was that the parties to the original contract, Brookfield and the Developer, were of equal bargaining power and had defined their relationship within the terms of the contract. The Court concluded that as no duty of care arose in respect to the Developer, no duty passed to the successive title owners such as the OC.
The Court of Appeal of New South Wales overturned the decision at trial, finding that a duty of care did arise on the part of Brookfield to avoid causing the OC (the subsequent owner) economic loss through latent defects in the common property which were structural, dangerous, or caused the serviced apartments to become uninhabitable. This duty had passed to the OC as the successor in title to the Developer, who displayed sufficient vulnerability due to its reliance on the expertise of Brookfield.
THE HIGH COURT DECISION
Brookfield was granted special leave to appeal the decision of the Court of Appeal, whilst the OC was granted special leave to make a cross-appeal to extend the duty of care beyond the one found by the Court of Appeal.
The High Court allowed Brookfield's appeal, rejecting the application of any duty of care on the ground that the original design and construct contract had addressed the issue of defects liability at length (with a limited scope for liability being agreed upon by the parties). The Court was further swayed by the fact the original parties to the contract, Brookfield and the Developer, were both sophisticated commercial parties.
As no duty of care arose between Brookfield and the original owner, it followed that there could be no duty of care between Brookfield and the OC or any other subsequent owners.
The Court also noted that rights of recourse were provided under the individual contracts of sale to the apartment owners (and any subsequent purchasers) against the Developer for any defects or faults in the common area to be rectified within a specified period of time.
It was the sum of the contractual provisions which provided protection against any defects that swayed the High Court to determine that the OC, as proxy for the relevant owners, was not "vulnerable" and unable to protect itself from any lack of care by Brookfield in constructing the apartments.
Previous authority holding that a duty of care could arise for owners incapable of protecting themselves from the consequences of a builder's lack of reasonable case was distinguished on the ground that the OC, as a sophisticated owner, did not fall within such a class of owners, and that the original contract governed the quality of Brookfield's work. The Court noted that sophisticated purchasers had the ability to seek further warranties for the quality of the work provided by builders, but in this instance had failed to do so.
This High Court judgment provides welcome clarification to builders, developers and owners of apartment complexes. It underlines how legal protection for sophisticated owners for any latent defects predominantly lies in the contract itself, with purchasers put on notice that any breach of duty of care claims for latent defects will be confined to "vulnerable" purchasers.
It is, however, important to bear in mind that the High Court emphasised that their decision related to the specific facts in question, and is not a blanket authority to apply in all building defect liability cases. Particularly, this decision is relevant to sophisticated owners, such as owners corporations and large-scale property investors.
Disclaimer: The information contained in this e-alert/update is not advice and should not be relied upon as legal advice. Hunt & Hunt recommends that if you have a matter that is legal, or has legal implications, you consult with your legal adviser.