In a landmark decision, the NSW Supreme Court last Friday held that a builder and a developer of a residential resort complex did not owe a common law duty of care to an owners’ corporation for alleged defects in design and construction. The decision is set to curb the number of claims brought against builders for negligence.

The facts of the dispute

Owners Corporation Strata Plan 72535 v Brookfield [2012] NSWSC 712 involved a resort-style development known as the “Star of the Sea”, consisting of 52 units in four low rise buildings in Terrigal. The development was designed and constructed by Brookfield, the first defendant, in accordance with a contract entered into with the developer, Hiltan, the second defendant.

The plaintiff owners’ corporation brought an action claiming both Brookfield and Hiltan owed it (and had breached):

  1. the statutory warranties contained in section 18B of the Home Building Act 1989 (NSW);
  2. a common law duty of care.

Brookfield filed a notice of motion in the Supreme Court seeking to have the following questions separately determined under rule 28.2 of the Uniform Civil Procedure Rules 2005 (NSW):

  1. Whether the owners’ corporation was entitled to the statutory warranties under the Home Building Act. (Brookfield argued that regulation 6(f) of the Home Building Regulation 1997 (NSW) excluded the operation of the Home Building Act warranties because the complex was designed, constructed or adapted for commercial use as tourist, holiday or overnight accommodation).
  2. Whether Brookfield owed the owners’ corporation a duty of care.

Hiltan also filed a notice of motion seeking to have the Court determine whether it owed the owners’ corporation a duty of care.

The hearing of a formulation of those separate questions identifying the relevant paragraphs in the pleadings took place in June 2012 before McDougall J.

Duty of care – state of the law

The High Court of Australia has previously considered whether a duty of care arises in the context of a builder and a subsequent owner of property with whom the builder has no contractual relationship.

Purchasers of residential premises

Bryan v Maloney1 recognised the existence of a duty of care for recovery of pure economic loss between a builder and subsequent owner of residential premises because sufficient proximity existed between the builder and the subsequent owner arising from the:

  1. nature of residential premises, including being a significant investment by a residential purchaser;
  2. foreseeability that the negligent construction was likely to cause economic loss; and
  3. causal link between the builder’s negligence and the economic loss suffered.

Bryan v Maloney has been extensively criticised and not widely followed. 

Purchasers of commercial premises

Perre v Apand Pty Limited2 subsequently introduced the concept of vulnerability as one of the key principles relevant to determining whether a duty of care exists in cases of liability for pure economic loss. 

The High Court in Woolcock Street Investments Pty Ltd v CDG Pty Ltd3 revisited Bryan v Maloney.  It unanimously held that the duty of care owed by the builder in Bryan v Maloney did not extend to commercial premises.4  The High Court addressed specific policy concerns associated with extending a duty of care in such circumstances.5  

Woolcock questioned Bryan v Maloney, and held that proximity is no longer the “conceptual determinant” of whether a duty of care will be imposed.6  McHugh J, relying on Perre v Apand, identified factors relevant to establishing a duty of care, including:

  1. reasonable foreseeability of loss;
  2. indeterminacy of liability;
  3. individual autonomy;
  4. vulnerability; and
  5. knowledge of the risk and magnitude of the risk.7

In general, both Bryan v Maloney and Woolcock make it clear that an analysis of the relationship between the builder and the original owner must first be carried out.  Where no duty of care exists between builder and original owner, a subsequent purchaser is unable to apply the reasoning in Bryan v Maloney to establish a duty of care owed to it by a builder.8

Other jurisdictions

The owners’ corporation relied on the New Zealand Court of Appeal decision in Mount Albert Borough Council v Johnson,9 with respect to the duty of care alleged against Hiltan.  It submitted that residential or commercial developers owe a non-delegable duty to a subsequent owner to ensure that proper care and skill is taken by the builder or designer to prevent economic loss.  Mount Albert was not followed by the House of Lords in D. & F. Estates v Church Commissioners for England.10  It was doubted in the Australian case Zumpano v Montagnese,11 particularly with respect to a builder’s liability to a subsequent owner.  McDougall J distinguished this case on its facts as Brookfield and Hiltan did not share the same close relationship that existed between the builder and developer in Mount Albert.

The owners’ corporation also referred to Moorabool Shire Council v Taitapanui,12 where the Victorian Court of Appeal held that a duty of care was owed notwithstanding the statutory warranties contained in the Domestic Building Contracts Act 1995 (Vic).  The owners’ corporation submitted that vulnerability could still be established despite the presence of statutory warranties to protect purchasers.

Vulnerability

The owners’ corporation submitted that it was vulnerable because the ownership of the common property was vested in it by statute, it has limited opportunity to protect itself, and it is charged with the burden of repairing and maintaining the common property.

Judgment of Justice McDougall

His Honour held neither a builder nor a developer owe a duty of care to an owners’ corporation for a residential apartment building.  He based his reasoning on three main points.

  1. Application of the statutory warranties

Justice McDougall considered the legislature had provided a comprehensive warranty scheme.13  He considered that it is, therefore, not open to a trial judge to impose an additional common law duty of care.

“In circumstances where the legislature has considered, and made clear provision for, the extent to which a builder is liable to a subsequent owner, I think that the courts should be slow to substitute their own judgment for that of the legislature.”14

He described the alleged vulnerability of the owners’ corporation as “questionable” given the statutory warranty regime.15

  1. Proximity

Consistent with the High Court in Woolcock, his Honour found that the concept of proximity has been discarded as the basis for imposing a duty of care.

  1. Brookfield did not owe Hiltan a duty of care

His Honour concluded that Brookfield did not owe Hiltan a duty of care because their relationship was defined by a detailed contract negotiated between the parties, on what appeared to be equal footing.  In these circumstances, the Court should not interfere with the contract bargained for.

Where Brookfield did not owe Hiltan a common law duty of care, there could be no anterior conclusion that Brookfield owed the owners’ corporation a duty of care.