High Court corrects the error, but stops short of giving builders of commercial property unqualified comfort

The High Court of Australia has unanimously overturned the New South Wales Court of Appeal’s decision in The Owners – Strata Plan No 61288 v Brookfield Australia Investments Ltd (2013) 85 NSWLR 479 by holding that the builder of a strata-titled apartment complex does not owe a duty of care to the owners corporation to avoid causing it economic loss resulting from latent defects in the common property of the complex.

The decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor [2014] HCA 36 will come as welcome relief to builders following the Court of Appeal’s decision, which altered the generally accepted approach to the issue of ‘vulnerability’ in this context and, in doing so, materially expanded the circumstances in which a builder will owe the subsequent purchaser of a building a duty of care to prevent economic loss arising from latent defects.

While the decision is important for the reason that it corrected the Court of Appeal’s unorthodox approach to the issue of vulnerability, all but one of the members of the Court were careful to confine their judgements to the particular facts of the case, so the decision contains little in the way of new principles of general application. In particular, it cannot be said that the case is authority for the proposition that a builder can never owe the subsequent purchaser of a commercial building a duty of care to prevent economic loss arising from latent defects. However, it does establish that if there are detailed contractual mechanisms in place which deal with the allocation of risks with respect to latent defects this will go a long way to supporting a finding that no such duty exists at common law.

Facts

The appellant, Brookfield Multiplex Ltd (Brookfield), and a sophisticated and experienced property developer, Chelsea Apartments Pty Ltd (Chelsea), were parties to a Design & Construct Contract (D&C Contract) under which Brookfield built an apartment complex comprising serviced and residential apartments for Chelsea.  

Brookfield registered a strata plan for the serviced apartment complex after completion of construction in November 1999. Upon registration, the respondent, Owners Corporation Strata Plan 61288 (Corporation), was created and the common property in the serviced apartment complex was vested in the Corporation. Chelsea then proceeded to sell the serviced apartments to investors.

The D&C Contract contained detailed provisions setting out Chelsea’s rights against Brookfield in relation to defects in the complex, including each serviced apartment and the common property. 

The D&C Contract also contained a standard form contract pursuant to which the serviced apartments were sold to investors (Sale Contract). The Sale Contract conferred on each purchaser of a serviced apartment specific contractual rights in relation to defects in the apartment, including the common property. The rights in relation to defects in the common property were vested in the Corporation as the entity responsible for the repair and maintenance of the common property.

Some years after the expiry of the 12 month defects liability period under the D&C Contract, and the purchasers’ contractual rights to require Brookfield to remedy defects under the Sale Contract, alleged latent defects in the common property of the serviced apartment complex began to emerge. The Corporation commenced proceedings against Brookfield in respect of those defects in 2008.   

Material issues

The appeal was limited to the issue of whether Brookfield owed the Corporation a duty of care to avoid causing it economic loss resulting from latent defects in the common property. 

The loss was characterised as economic loss as the defects were not alleged to have caused any damage to person or property. 

This characterisation meant that in order for the Corporation to establish that Brookfield owed it the duty of care claimed, the Corporation had to demonstrate that not only was it reasonably foreseeable that the Corporation would suffer loss if Brookfield failed to take reasonable care in the construction of the common property, but that the Corporation was vulnerable to the economic consequences of such a failure by Brookfield.

Vulnerability

In this context, “vulnerability” refers to the plaintiff’s inability to take steps to protect itself from economic loss arising out of the plaintiff’s conduct. 

This was acknowledged in all four judgements handed down by the High Court and each of the judgements handed down by the Court of Appeal.  Where the High Court and the Court of Appeal differed was in determining whether the Corporation was vulnerable to Brookfield on the facts of this particular case. 

Court of Appeal’s approach

The Court of Appeal’s finding that the Corporation was vulnerable was based on a view that the Corporation was reliant on the “expertise, care and honesty” of Brookfield in performing its obligations under the D&C Contract. An example of this was the Corporation’s practical inability to identify and require the rectification of defects during the course of construction.

In the Court of Appeal’s view, the fact that the purchasers could have insisted upon broader contractual rights against Chelsea and/or Brookfield to protect themselves against defects in the common property was not relevant and, as Basten JA put it,“inconsistent with the concept of vulnerability”.

This last point represented a significant departure from the generally accepted understanding of what is required to establish (or negate) the existence of vulnerability in this context following the High Court’s prior decisions in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 (Woolcock) and Bryan v Maloney (1995) 182 CLR 609 (Bryan v Maloney).

If accepted, the Court of Appeal’s approach may have meant that builders would have owed a duty of care to most subsequent purchasers to avoid causing economic loss resulting from latent defects, as most subsequent purchasers would be reliant on the “expertise, care and honesty” of the builder in the sense described by the Court of Appeal.   

High Court’s decision

The High Court overturned the Court of Appeal’s decision by unanimously holding that the purchasers were sufficiently capable of protecting (and did protect) themselves by contract against, and therefore were not vulnerable to, the risk of defects in the common property arising from Brookfield’s failure to take reasonable care in its performance of the D&C Contract. In doing so, the Court rejected the Court of Appeal’s unorthodox approach to vulnerability.

Despite differences between the four judgements handed down by the Court, the basis for this finding was common among each; namely that defects in the complex, including the common property, were expressly addressed by the parties in detail in the Sale Contracts. In essence, the Court took this as evidence that the parties had turned their minds to the issue and consciously and deliberately decided to allocate the relevant risks between them in the manner set out in the contracts. There was no evidence presented to suggest otherwise.

It was not relevant that the purchasers’ rights under the Sale Contracts were limited (for example, it appears those rights may have expired only seven months after registration of the strata plan). As four members of the Court pointed out, if the purchasers were not satisfied with terms of the Sale Contracts, they were free not to enter into them and invest their money elsewhere. It was also noted that if this consideration was relevant, the purchasers could receive the benefit of expanded rights against Brookfield due to their own unfavourable bargains contrary to what was held by the Court in Woolcock.

Relevance of Brookfield’s obligations to Chelsea

The Court of Appeal proceeded to its decision on the assumption that in order for Brookfield to owe a duty of care to the Corporation, Brookfield had to owe an equivalent duty of care to Chelsea. The Corporation disputed this assumption in the High Court, but given the Court’s findings on the issue of vulnerability it was not necessary for the point to be addressed.

Nevertheless, Crennan, Bell and Keane JJ noted that any other approach would result in the imposition of a greater liability on the builder to a disappointed purchaser than the party for whom the building was made and by whom the builder was paid and that this would “reduce the common law to incoherence”. However, they stopped short of saying that an equivalent duty would always be necessary. 

French CJ stated that there is no reason to regard the existence, or non-existence, of an equivalent duty of care to the prior owner as anything more than an important factor relevant to the existence of a duty of care. 

Hayne and Kiefel JJ expressly refrained from offering a view on the issue and Gageler J did not refer to it.

Accordingly, while the absence of an equivalent duty of care to the prior owner is a strong indicator that a duty of care is not owed to a subsequent purchaser, it cannot be said that it is determinative.

The relevance of contractual duties to duties in tort

Crennan, Bell and Keane JJ placed some emphasis in their joint judgement on the fact that the imposition of the claimed duty of care on Brookfield in favour of the Corporation would alter the allocation of risks effected by Brookfield and the purchasers under the Sale Contracts. They did not go so far as to expressly say that such a duty of care could never be broader than a corresponding duty under contract, but this could be seen as implicit in their reasoning.

Hayne and Kiefel JJ took a different view and quoted McHugh J in Woolcock, where he said that a long line of authority makes it “difficult to argue that claims in negligence for pure economic loss should be excluded merely because such claims may outflank or undermine fundamental doctrines of the law of contract”.

Gageler J also noted that it has long been accepted that a common law duty of care can coexist with a duty in contract and that“legal taxonomy alone cannot assign such common law liability as a builder may have to a subsequent owner of a building to the province of contract to the exclusion of the province of tort”.

It follows that the existence of a contractual duty to take reasonable care does not, in and of itself, necessarily preclude the existence of a broader duty to take reasonable care in tort. 

However, in the context of the duty to take reasonable care to avoid economic loss, an agreement between sophisticated parties which narrows the defendant’s liability relative to the liability it would be exposed to if the duty of care was imposed may provide strong evidence that the plaintiff was not sufficiently vulnerable to the defendant to justify the imposition of the duty.            

The relevance of the commercial nature of the complex

In his judgement, Gageler J held that it should now be accepted that, subject to one exception, “a builder has no duty in tort to exercise reasonable care, in the execution of building work, to avoid a subsequent owner incurring the cost of repairing latent defects in the building.” Gageler J said that this is because “by virtue of the freedom they have to choose the price and non-price terms on which they are prepared to contract to purchase, there is no reason to consider that subsequent owners cannot ordinarily be expected to be able to protect themselves against incurring economic loss of that nature”.

The exception referred to by Gageler J was that upon which the decision in Bryan v Maloney was based. He described it as “a category of case in which the building is a dwelling house and in which the subsequent owner can be shown by the evidence to fall within a class of persons incapable of protecting themselves from the consequences of the builder’s want of reasonable care”.   

However, none of the other members of the Court were willing to make such a definitive statement about the application of the duty and were careful to confine their judgements to the facts of this particular case.

Crennan, Bell and Keane JJ cited with apparent approval two passages from the judgement of McHugh J in Woolcock which suggested that it should ordinarily be assumed that purchasers of commercial properties will have a degree of sophistication that will make it difficult, if not impossible, to find them vulnerable to the builder. These passages, and other reasoning of McHugh J in Woolcock, form the foundation of Gageler J’s position stated above, but Crennan, Bell and Keane JJ stopped short of making the generalisation Gageler J did.

Crennan, Bell and Keane JJ also said that the distinction between a dwelling house and a commercial property was not material“given the distinction between the purchasers of buildings for domestic and commercial purposes is an unstable one…because its application means that liability is apt to come and go depending on the use intended for a building by its successive purchasers”

French CJ and Hayne and Kiefel JJ did not address the issue, presumably because they too considered that it was not material. 

Accordingly, despite Gageler J’s judgement, it cannot be said that this case is authority for the proposition that a builder can never owe a subsequent purchaser a duty to take reasonable care to avoid economic loss caused by latent defects in a commercial building. 

Practical implications for builders and purchasers

So where does this case leave us? In our view, the High Court’s decision restores the position that was in effect prior to the Court of Appeal’s decision.

For builders, there is still a residual risk that they could be found to owe a duty to subsequent purchasers to take reasonable care to avoid causing economic loss resulting from latent defects, so it will continue to be important for builders to mitigate this risk through a combination of appropriate contractual arrangements with clients, subcontractors, suppliers and consultants, insurance and other practical means to reduce the risk of latent defects arising out of design or construction.

For subsequent purchasers, it is apparent that the category of case in which such a duty of care will be found to exist is still very narrow, so it will continue to be important for purchasers to guard against the risk of latent defects through a combination of appropriate warranty protections in sale and purchase contracts, physical inspections and other due diligence measures, insurance and, if the risk of latent defects is accepted, an appropriate purchase price which reflects the assumption of that risk.