In Brookfield Multiplex Ltd v Owners Corporation Strata Plan 6R288 [2014] HCA 36, the High Court considered whether a builder of a strata block, pursuant to a contract with a developer, owed a duty of care to a subsequent owners corporation (Corporation), to avoid them suffering pure economic loss.

The High Court unanimously held that Brookfield did not owe such a duty. This was because the Corporation had rights under various contracts which entitled them to have the defects remedied, and as such they were not ‘vulnerable’ to Brookfield’s negligence. The Corporation had the benefit of a contractually agreed risk allocation, to protect themselves from suffering loss.

The case highlights that, when determining whether a duty to take reasonable care to avoid causing pure economic loss exists, courts will focus on the ‘vulnerability’ of the plaintiff, which will be informed by its sophistication, the nature of the relevant contractual arrangements, and whether the parties have already agreed a liability regime.

Facts

Brookfield entered a contract with the registered proprietor of the land and property developer, Chelsea Apartments Pty Ltd (Chelsea), to build apartments. In accordance with the relevant statutory scheme, the Corporation was created, and the common property of the apartments was vested in the Corporation as manager and agent for the owners . Chelsea had the rights to direct the operation of the Corporation. The Corporation had no contractual relationship with Brookfield. The Act imposed a statutory duty upon the Corporation to properly maintain the common property and keep it in a state of good and serviceable repair. This duty did not depend on whether someone else was to blame for the common property being other than in a state of good and serviceable repair.

Subsequently, Chelsea entered a Master Agreement with the Stockland Group, pursuant to which the apartments were to be leased to Park Hotel and operate collectively as a serviced apartment hotel under the “Holiday Inn” brand. Under the leases, Park Hotel was to acquire Chelsea’s rights to direct the operation of the Corporation.

The Corporation subsequently identified latent defects in the building. The Corporation claimed that, notwithstanding any duty of care owed to Chelsea, Brookfield was also obliged to take reasonable care to avoid the Corporation suffering economic loss. The Corporation claimed that Brookfield breached this duty, and sued for the cost of rectifying the latent defects

Decision

The Court confirmed that, in determining whether there is liability for pure economic loss arising from negligence, the correct approach is to consider whether the relationship between the parties warrants the imposition of a duty of care. Such a duty will be limited to circumstances where the relationship between the parties can be characterised as one of close proximity, reliance and assumption of risk. Central to the imposition of such a duty is the notion of one party being vulnerable to another: Perre v Apand Pty Ltd [1999] HCA 36; Hedley Byrne & Co v Heller & Partners Ltd [1964] AC 465; Wyong Shire Council v Shirt [1980] HCA 12.

The High Court acknowledged that the Corporation relied on the builder to do its work properly and could not check the quality of the builder’s work. However, it emphasised that the notion of vulnerability (essential to establishing a duty of care) is concerned with whether the plaintiff is able to protect itself from the defendant’s want of reasonable care.

The developer, and the apartment purchasers, had the benefit of contracts that entitled them to have defects in the building remedied. Thus, French CJ (with whom the court agreed) concluded that they were able to protect themselves against any lack of care by Brookfield. Accordingly, Brookfield did not owe a duty to the Corporation to avoid causing it pure economic loss. To impose such a duty would have been to modify the contractually agreed liability regime.

The High Court’s decision highlights the importance of ensuring construction contracts are drafted clearly and comprehensively. As the scope to impose common law duties to avoid causing pure economic loss is limited, parties to contracts must ensure they are adequately protected by their contractual arrangements.