Introduction

The Owners Corporation pursued a negligence claim against builder Brookfield Multiplex Ltd (Brookfield) for pure economic loss, alleging that Brookfield’s negligent construction of a high-rise building caused the common property to contain latent defects.  The Owners Corporation claimed the cost of rectifying the defects, diminution in the value of the building and consequential losses.

The Owners Corporation’s claim was unsuccessful at trial.  Justice McDougall of the NSW Supreme Court decided that Brookfield did not owe a duty of care to the Owners Corporation and dismissed the claim.  The Owners Corporation’s appeal to the NSW Court of Appeal was allowed.  The Court of Appeal decided that Brookfield owed the Owners Corporation a duty to exercise reasonable care in the construction of the building to avoid causing the Owners Corporation to suffer loss from latent defects which were structural, or constituted a danger to people or property, or made the apartments uninhabitable.

Brookfield appealed to the High Court.  The High Court allowed the appeal, deciding that Brookfield did not owe a duty of care to the Owners Corporation.  There was unanimous agreement among the seven High Court Justices concerning the disposition of the appeal but the Court was divided in its reasoning. 

Facts

In August 1997 a property developer, Chelsea Apartments Pty Ltd (Chelsea), entered into a Deed of Master Agreement (Master Agreement) with a property management company, Stockland Trust Group (Stockland), for the design, construction and operation of a 22-storey hotel and serviced apartment block in Chatswood, NSW.  The agreement provided that Chelsea would arrange for the design and construction of the building and would thereafter lease the hotel rooms and apartments to Park Hotel Management Pty Ltd (Park Hotel), a subsidiary of Stockland.  Chelsea would then sell the serviced apartments to investors, with the purchasers taking the apartments subject to the leases granted to Park Hotel.

Pursuant to the Master Agreement Chelsea warranted to Stockland and Park Hotel that the building would be properly constructed.  The Master Agreement also provided that Park Hotel acquired Chelsea’s rights to direct the operation of the Owners Corporation. The leases similarly required the purchasers to yield their voting rights in the Corporation to Park Hotel.

In November 1997 Chelsea engaged Brookfield to design and construct the building.  The D&C contract required Brookfield to design and construct the building for the fixed sum of $57.5m.  Brookfield gave warranties to Chelsea in the D&C contract that the building would be properly constructed.  The D&C contract created a 52-week defects liability period during which Brookfield was required to rectify defects, at its own cost, upon request by Chelsea. At the conclusion of the defects liability period Chelsea issued a “Final Certificate” to Brookfield that, pursuant to the terms of the D&C contract, released Brookfield from all liability for defects that could have been identified at the time the Certificate was issued.

The contracts of sale between Chelsea and the investors required Chelsea to cause the private and common property to be constructed in accordance with the approved design.  The contracts of sale gave purchasers the right to serve defects notices on Chelsea within 7 months after completion of the building works.  Chelsea was required to repair, at Chelsea’s expense, any defects in the common property identified in the purchasers’ defect notices.

There was no dispute in the proceeding that Brookfield constructed the building such that there were five categories of latent defects in the common property, the defects being non-compliant steel lintels and windows, defective external render, unsuitable cowlings to fire services shutters and inadequate waterproofing and waste connection to a communal spa.

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The decision

All High Court Justices in the Brookfield case approved of and applied the reasoning from the leading Australian cases of Bryan v Maloney and Woolcock Street Investments v CDG Pty Ltd, whereby a builder owes a duty of care to subsequent purchasers in respect of pure economic loss flowing from latent defects only where  the subsequent purchaser is vulnerable to or reliant upon the actions of the builder.  Under the established tests, the Court must weigh the “salient features” of the relationships between the parties involved to determine whether the subsequent purchaser was vulnerable.  The Court must look first at whether the builder owed a duty of care to the original owner.  If the first limb is satisfied then the Court must move on to consider whether the builder also owes a duty of care to the subsequent purchaser.  Bryan v Maloney is generally relied upon where the parties are unsophisticated and do not use contractual arrangements to modify common law risk allocations.  Woolcock Street Investments applies where the parties are commercially savvy and use contractual arrangements to allocate risk.

In affirming the reasoning in Bryan v Maloney and Woolcock Street Investments, the High Court in Brookfieldrejected the approaches taken in Canada and New Zealand where a limited duty of care has been recognised.

In Brookfield the High Court unanimously decided that the contractual arrangements between the various parties allocated risk in such a manner that the Owners Corporation was not vulnerable to or reliant upon Brookfield’s actions.

Justices Crennan, Bell and Keane, writing for the majority, considered that the contractual arrangements between Brookfield and Chelsea prevented the former from owing a duty of care to the latter and, as a result, the first limb of the Woolcock Street Investments test was not satisfied.  The Court stated: 

[Woolcock Street Investments] accord[s] with the primacy of the law of contract in the protection afforded by the common law against unintended harm to economic interests where the particular harm consists of disappointed expectations under a contract.  The common law has not developed with a view to altering the allocation of economic risks between parties to a contract by supplementing or supplanting the terms of the contract by duties imposed by the law of tort.

The majority went on to state:

In the present case, the liability of the appellant [Brookfield] to the developer [Chelsea] was the subject of detailed provisions [in the D&C contract] relating to the risk of latent defects in the appellant’s work...These detailed provisions were apt to secure performance of clause 55 of the D&C contract which required that the construction be completed in accordance with detailed specifications.  [The D&C contract provisions] set out the extent of the appellant’s obligations to ensure that the developer should ‘get what it paid for’.  To supplement them with an obligation to take reasonable care to avoid a reasonably foreseeable economic  loss to the developer in having to make good the consequences of latent defects caused by the appellants’ defective work would be to alter the allocation of risks effected by the parties’ contract.”

The High Court was also asked to decide whether Brookfield could owe a duty of care to the Owners Corporation independently of any duty of care owed by Brookfield to Chelesea.  The majority decided that Brookfield did not owe an independent duty of care to the subsequent purchaser in the circumstances of the case before it, stating:

Clause 32.7 [of the contracts of purchase and sale] expressly obliged the developer [Chelsea] to repair defects brought to its attention within a specified period.  The purchasers had contractual rights against the developer which could have protected them against the risk of which the respondent [Owners Corporation] now complains had those rights been pursued in accordance with their terms...[T]he very existence of the provision reflects an awareness of the relevant risk as well as a means of dealing with it.   

The majority did not consider or decide whether the Woolcock Street Investments reasoning prevented, in all cases, a builder from owing a duty of care to a subsequent purchaser in the absence of any underlying duty of care owed to the original owner.

Justices Hayne and Kiefel also decided that because of the contractual arrangements there was no duty of care .  The Justices made the following noteworthy comments about the test for vulnerability:

It may be assumed, without deciding, that the developer and the purchaser of a lot relied on the builder to do its work properly...Because these parties could not check the quality of what the builder was doing, it can easily be said that each relied on the builder to do its work properly.

Reliance, in the sense just described, may be a necessary element in demonstrating vulnerability, but it is not a sufficient element...[V]ulnerability is concerned with a plaintiff’s inability to protect itself from the defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant.

It is neither necessary nor profitable to attempt to define what would or would not constitute vulnerability.  It is enough to observe that both the developer and the original purchasers made contracts...which gave rights to have remedied defects in the common property vested in the Owners Corporation.  The making of contracts which expressly provided for what quality of work was promised demonstrates the ability of the parties to protect against, and denies their vulnerability to, any lack of care by the builder in performance of its contractual obligations.

Chief Justice French decided that because of the contractual arrangements there was no duty of care .  However, the Chief Justice considered that an anterior duty of care owed by the builder to the original owner was not always a necessary precondition to a builder’s liability to the subsequent purchaser.  The Chief Justice stated:

In Bryan v Maloney, the existence of an anterior duty of care to the prior owner was supportive of a duty of care to the subsequent purchaser. Its existence overcame a ‘policy’ concern that liability to the subsequent purchaser would be inconsistent with the defendant's legitimate pursuit of its freedom to protect its own financial interests by limiting its liability to the prior owner. The building contract had left the way open for concurrent tortious liability to the prior owner. There was no disconformity, therefore, between the duty owed by the builder to the first owner and the duty asserted by the subsequent purchaser. This Court in Woolcock did not decide whether such a disconformity would always deny the existence of a duty of care to a subsequent purchaser. There is no reason to regard the existence, or non-existence, of an anterior duty of care to a prior owner as more than an important factor relevant to the existence of a duty of care in respect of pure economic loss to a subsequent purchaser… 

The present appeal falls for decision against a background of prior decisions about classes of case in which a person performing a contract may have a concurrent duty of care to another contracting party, classes of case in which a party to a contract may owe a duty of care to a person who is not a party to the contract, classes of case involving pure economic loss, and classes of case in which the careless performance of a building contract has left latent defects in the building and thereby caused economic loss to a subsequent purchaser. Those decisions interact with each other but none is precisely applicable in this case. Consistently with the approach taken in Woolcock and, before that, in Bryan v Maloney, the determination of this appeal requires consideration of the salient features of the relationship between the Corporation and Brookfield, including whether Brookfield owed Chelsea a relevant duty of care and whether the Corporation was vulnerable in the sense discussed above.

Justice Gageler gave a decision that essentially concurred with the Chief Justice’s reasoning.

The decision of the High Court provides parties with clarity as to the circumstances which differentiate Bryan v Maloney from the ratio in Woolcock and provides greater clarity in respect of those circumstances in which the court will not seek to impose a greater financial liability than would otherwise exist under contract.  Brookfield particularly makes clear where the line will be drawn in expanding a party’s liability at law when sophisticated commercial agreements have been entered into by parties.  It again emphasises the importance of the salient features of the relationship between a claimant and defendant before a duty of care will be imposed.