The recent decision of the full bench of the High Court of Australia in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 612881 unanimously held that a builder does not owe a duty of care to an owners corporation of apartments for the rectification of latent defects in common property.

A critical factor underlying the decision was that the court held that neither the developers, nor the owners corporation were “vulnerable”. No duty arose, as the parties had the ability to protect themselves from the risks of latent conditions through the detailed contractual provisions of their respective contracts.

Background

A 22 apartment building was constructed by the builder, Brookfield Multiplex Ltd, pursuant to a design and construct contract (Contract) with the developer, Chelsea Apartments Pty Ltd. The Contract (an AS 4300/1995 form) provided detailed provisions concerning quality, defects liability, insurance and specified standard form sale contracts (which the purchasers entered into with the developer) that required the developer to repair certain defects in the common property.

The building was developed into residential apartments (floors 10 – 22), sold to individual purchasers, and serviced apartments (floors 1 – 9), sold to investors. The case related only to the serviced apartments, as the owners of the residential apartments settled their claims.

Claim

The investor owners of the serviced apartments, via the building’s owners corporation, brought an action in negligence against the builder, on the basis that the builder owed it a duty to take reasonable care to avoid reasonably foreseeable economic loss due to rectification as a result of latent defects flowing from defective design or construction.

The claim was brought in negligence, as there was no recourse to statutory warranties under the Home Building Act 1989 and the owners corporation was not a party to the D&C Contract.

It was unanimously held that the builder owed no duty of care to the owners corporation to avoid pure economic loss from latent defects, as that duty only arises in circumstances where the person to whom a duty is owed is of a class of persons who are “vulnerable” to suffering the loss being sued for.

The court held that “vulnerability” in this context was the incapacity of the plaintiff to protect itself from the defendant’s conduct and that the ability of a developer, or a subsequent investor purchaser (not including a residential purchaser), to enter into a detailed contract, with the builder or developer respectively, was evidence of an ability to protect oneself via the terms of the contract. Developers and investors are not “vulnerable” persons.

It was further held that the terms of a contract should not be altered by an implied duty in tort, in circumstances where the terms of the contract have been agreed and those terms allocated risk to certain parties which was taken into account by them in the price paid under the contract.

Who is impacted?

Investors purchasing from developers need to ensure they obtain adequate protection from the terms of the purchase contract against losses due to latent defects. This may require accessing and reviewing the terms of the contract between the developer and the builder, to ascertain the scope of any rights/protections regarding latent defects and the obligations to rectify.

As residential purchasers are becoming more sophisticated and, as a consequence, less vulnerable, the current position that builders will owe residential purchasers a duty not to cause loss from latent defects may eventually be eroded.

Purchasers are likely to pursue greater contractual protection against defects. In order to respond to these demands, developers and builders will need to negotiate their respective risk profiles (including latent defects) and “price in” those changes accordingly.

This authority will have an impact for industry and investors, foreign and domestic alike.