In Insurable Interest Issue 34 we reported on a decision by the New South Wales Court of Appeal which has since been successfully appealed to the High Court. The High Court delivered a landmark ruling that a commercial builder does not owe an owners corporation or a subsequent purchaser of commercial property a duty of care to avoid pure economic loss.

In 1997, a commercial builder entered into a contract with a developer to design and construct a 22 storey mixed use retail, restaurant, residential apartment and serviced apartment complex.  The serviced apartments were contained on Levels 1 to 9.  On completion of the building and on registration of the strata title, the common property of the serviced apartment levels vested in an owners corporation.  The apartments were owned by individual lot owners who leased the apartments to a hotel chain.

The design and construction contract between the builder and the developer provided for certain warranties by the builder about the quality of the work and provided a defects liability period of 52 weeks which commenced upon practical completion.  After the expiry of the defects liability period, latent defects were discovered in the common property in the serviced apartment complex within Levels 1 to 9. 

The owners corporation sued the builder for the pure economic loss suffered by it in remedying the latent defects.  There was no contract between the builder and the owners corporation, so the claim was brought in negligence.  The key issue was whether the builder owed the owners corporation (and by extension the individual lot owners who purchased the apartments from the developer) a duty of care to avoid pure economic loss arising from latent defects.

The High Court has previously ruled that a builder of residential premises may owe a duty of care to a subsequent purchaser of a residential property for economic loss arising out of latent defects that could not be identified at the time of purchase. 

In the present case, the High Court rejected the idea that a duty of care to avoid pure economic loss should be imposed on a commercial property development which was itself governed by sophisticated contractual arrangements.

Vulnerability has traditionally been recognised as the touchstone for a finding of a duty of care in relation to pure economic loss. Clearly the developer and the subsequent individual lot owners relied on the builder to do its work properly and a subsequent lot owner could not check the quality of the work that was being done.  Reliance in this sense is a necessary element of establishing vulnerability but it is not sufficient in itself.  The Court stated that vulnerability in relation to pure economic loss claims is concerned with a plaintiff’s inability to protect itself from the defendant’s want of reasonable care. In this case the purchasers could have protected themselves by inserting warranties (about the quality of construction) in the sales contracts.

Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36

This case draws a clear distinction between duties of care owed by builders to subsequent purchasers of commercial premises and subsequent purchasers of residential premises.  It was clear from this decision that the element of vulnerability which is an essential criterion of establishing a duty of care for pure economic loss will not easily be made in the commercial sphere where the parties are generally sophisticated and well-advised. 

It also demonstrates that claims for pure economic loss remain at the margins of tort law and whether a duty of care in relation to pure economic loss will exist very much depends on the factual circumstances of each case.