In a recent High Court decision, it was held that a builder of a strata-titled apartment complex in New South Wales did not owe a duty of care to the Owners Corporation to avoid causing it economic loss resulting from latent defects in the common property, that is no cause of action in negligence arose.

On account of the nature of the development being serviced apartments, the Owners Corporation did not have recourse to statutory warranties or home owners warranty insurance pursuant to the relevant state domestic building legislation.

Practical Consequences

This decision confirms the Court's reluctance to impose upon a defendant builder a greater liability to a disappointed purchaser than the party for whom the building was constructed. It should be noted that the analysis below does not necessarily relate to domestic building contracts, which in some states, including Victoria, prevent a builder from contracting out of the legislation.

The result would most probably have been different if the apartments could be classified as intended for permanent habitation rather than serviced apartments, as the warranties under the applicable state domestic building legislation would become relevant. Generally, the effect of that legislation is that purchasers of dwellings have the benefit of broad warranties implied into the relevant building contract.

Background

  • In November 1997, the Builder entered into a Design and Construct Contract with the registered proprietor of the land and property developer, whereby it agreed to construct a serviced apartment complex.
  • All of the apartments were the subject of leases given by the Developer to a management entity which was intending to operate the serviced apartments under the 'Holiday Inn' brand.
  • The Design and Construct Contract contemplated the sale of the apartments to individual investors and annexed a standard form contract of sale to such investors, thereby conferring upon each purchaser specific contractual rights in relation to defects in the property, including the common property.
  • The Owners Corporation brought a claim against the Builder in relation to a number of latent defects. The main defects were incorrectly installed steel lintels and windows, cracked render to external façade and water leaks.

Proceedings

The Owners Corporation commenced proceedings against the Builder in the Supreme Court of New South Wales to recover damages including the cost of repairing latent defects in the common property of the apartment complex. At first instance, the Court held that the Owners Corporation had not established that the Builder owed it the duty of care alleged. This decision was then overturned by the Court of Appeal.

Issue

The main question raised from the decision of the Court of Appeal was whether the Builder owed the Owners Corporation a duty to exercise reasonable care in the construction of the building to avoid causing the Owners Corporation to suffer pure economic loss resulting from latent defects in the common property.Findings

The High Court found that there was no duty of care owed by the Builder to either the Developer or the Owners Corporation to prevent economic loss.  This was principally because:

  1. the purchasers of the apartments were not in a class of vulnerable persons.  The Design and Construct Contract and the Contracts of Sale were between sophisticated commercial parties who were involved in an arm's length transaction; and
  2. the Design and Construct Contract and Contracts of Sale included detailed provisions for dealing with and limiting defects liability, and provided the purchasers, and in turn the Owners Corporation with limited rights of recourse against the Builder to have defects in the common property rectified in an agreed time frame.

The Court's decision follows the decision of Woolcock Street Investments Pty Ltd v. CDG Pty Ltd (2004) 216 CLR 515 (Woolcock) in which the High Court found that an engineering company, which designed inadequate foundations for a warehouse and office complex resulting in subsequent structural damage, did not owe a duty of care in respect of economic loss suffered by the subsequent purchaser of the complex. The facts in Woolcock were held to be insufficient to demonstrate "vulnerability", the Court specifically noting there was no assignment to the subsequent purchaser by the prior owner of the prior owner's rights in respect of any claim for defects.