The High Court decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor [2014] HCA 36 is good news for builders and their insurers. The Court has confirmed that builders will not generally be liable to the ultimate owners of commercial premises for latent defects. The Court held that a builder did not owe the ultimate owners of commercial premises the requisite duty of care.

The High Court decision overturned the earlier decision of the New South Wales Court of Appeal which, somewhat surprisingly, permitted the ultimate owners to recover against the original builder for pure economic loss due to latent defects. 

The High Court has placed the burden of risk squarely back onto subsequent owners of non-residential strata title lots. Such owners, when faced with latent defects, will look to any contractual right they may have under their purchase contract or otherwise. 

Purchasers of commercial property are considered to be sophisticated and in a position to control their risk through the terms of their purchase contract. They can hardly be said to have the "vulnerability" which the High Court said in earlier judgments was required to sustain a claim in negligence.

The position is different in relation to residential developments, where subsequent purchasers may still be afforded rights under statute (eg Home Building Act in New South Wales) or at common law.

Background

Brookfield constructed a 22 storey development for a property developer (Chelsea). Chelsea then leased some of the lots to a serviced apartment management company and sold those lots to investors who essentially invested in the latter company.

The owners corporation (the Corporation) held the common property of the serviced apartment lots as statutory agent for the investors. Under legislative provisions throughout Australia, owners corporations are required to maintain the common property in a state of good repair.

When latent defects were discovered in the common property areas, the Corporation sued Brookfield alleging a breach of duty to take reasonable care to avoid reasonably foreseeable economic loss to the Corporation from latent defects in the building's design and construction.

In short, the Corporation was irked that it had to pay significant amounts to rectify latent defects in the common property. 

The Corporation failed at first instance but won in the Court of Appeal, by contending that Chelsea was vulnerable, as it relied on Brookfield's expertise and care in performing its obligations under the contract, and that vulnerability extended to the Corporation as a subsequent purchaser.

No duty of care in the High Court

The High Court held, firstly, that Chelsea was not vulnerable. The contract amply regulated Brookfield's and Chelsea's relationship and the allocation of risk for defects. For Brookfield to be burdened by the economic loss claimed would be to impermissibly alter the contractual allocation of risk. A subsequent purchaser of a commercial property is sufficiently sophisticated enough to make provision for risk of latent defects in the purchase price as well as the terms of the purchase contract.

Secondly, under the standard form contract of sale, Chelsea was required to cause the common property to be completed in a proper and workmanlike manner. Chelsea also had to repair defects caused by faulty materials or workmanship within seven months of the registration of the strata plan if written notice was given by the Corporation.

This period expired before the Corporation gave notice. 

The case did not fit into any existing duty of care relationship so the court approached the matter as a novel situation. Although no single test exists, an element of vulnerability is a key requirement for establishing a duty of care. 

"Vulnerability" generally refers to an inability to protect oneself from a defendant's want of reasonable care.

It was not Brookfield's fault that the investors failed to protect themselves. The investors could have negotiated the contractual scope of Chelsea's obligation on better terms or availed themselves of the contractual protection. Therefore, the investors were not vulnerable. They had the ability to protect themselves even though they failed to do so. It was also noted by the justices, although not considered decisive, that the duty of care asserted by the Corporation as purchaser would have imposed significantly different obligations on Brookfield regarding latent defects, than had been in the building contract which Chelsea as the developer and original owner had negotiated with Brookfield.

Justices Crennan, Bell and Keane summed it up best stating that Brookfield was not to be "held responsible for the consequences of what is really a bad bargain made by subsequent purchasers of the building". 

Certain judges also made it clear that they were not making any assumptions about the interaction of contract law and the law of tort. Nonetheless, the decision shows the importance of contractual allocations of risk as a mechanism for averting the existence of a duty of care in appropriate circumstances.

Points to take away

In summary:

  1. the High Court has re-affirmed the previously accepted position in relation to claims for pure economic loss following latent building defect claims;
  2. purchasers of commercial premises need to understand their contractual rights to seek redress from the vendor for defects in the building, as they may not have any recourse to claim from the builder for negligence.
  3. building contractors and their insurers can breathe a sigh of relief.  Where commercial, rather than residential, premises are involved, a builder's liability is governed by the terms of the building contract and the builder has no liability to ultimate purchasers for any pure economic loss caused by latent defects; and
  4. building contractors should ensure their contracts are carefully drafted, as clear limitations of liability will militate against the creation of a common law duty of care to subsequent owners in respect of latent defects.