The Court of Appeal decision in The Owners – Strata Plan 61288 v Brookfield Australia Investments Ltd[1] delivered on 25 September 2013 considered a claim by a successor in title for the cost of rectifying defective building works, finding in its favour despite it not being a party to the contract and the works not being residential building works under the Home Building Act 1989 (NSW) ("Act").

The decision provides a useful guide as to the pertinent factors to be considered when ascertaining if a builder owes a duty of care and an indication of the weighting likely to be given to such factors.

Facts

The development achieved practical completion in 1999, when The Owners - Strata Plan 61288 ("OC") came into existence, upon registration of the strata plan.

It was common ground between the OC and Brookfield Australia Investments Ltd ("Brookfield") that, due to the exclusion in the Home Building Regulation 2004 (NSW) for certain types of buildings, the works were not ‘residential building works’ and did not attract the operation of the statutory warranties under Part 2C of the Act but even if they had, the claim would have been well out of time.  This meant that the OC was restricted to a claim in negligence for pure economic loss in respect of defects at the property.

The defects in question were latent and not readily discoverable upon reasonable inspection until well after completion of the works.

The decision

The Court confirmed that vis a vis successors in title.

  1. There can be concurrent liability under contract and in tort and the existence of contract does not preclude a claim for negligence: “the presence or absence of a claim in contract would not be determinative of a claim in tort[2]". 
  2. No general law duty of care can arise with respect to successive owners unless there was a general law duty owed to the original owner with whom the builder contracted to construct the building[3]. 

The Court questioned the reliability of the Supreme Court’s recent findings that, by not extending statutory warranties to commercial buildings (including accomodation such as hotels or serviced apartments) under the Act and the Home Building Regulation 2004 (NSW), there was parliamentary intention that no duty of care should apply: “Whether general law principles in tort are in any way affected by the operation of Pt 2C may be doubted.”

The Court considered whether the OC was sufficiently ‘vulnerable’ to warrant the imposition of a duty of care owed to them by Brookfield.  The Court found: 

  1. Chelsea Apartments Pty Ltd ("Developer") was vulnerable to Brookfield because it relied on Brookfield’s expertise, care and honesty in performing its obligations under the contract; 
  2. Brookfield’s duty of care to the Developer did not cease upon the OC coming into existence;
  3. no physical inspection of the property was available to the OC prior to it acquiring the common property from the Developer; 
  4. the OC was at least as vulnerable to latent defects as the Developer; and 
  5. it was inconsistent with the concept of vulnerability to suggest that the individual purchasers (forming the OC) were not vulnerable because they could have negotiated a term in their respective purchase contracts that Brookfield would owe them a duty of care.

The Court held that Brookfield owed a duty of care to the OC, the scope of which included liability for pure economic loss, ie the cost of steps reasonably taken to mitigate the risk of physical damage to property or personal injury incurred as a result of defective building works.

Implications

This decision does not only benefit owners corporations. It could also assist other successors in title.  However, to establish a duty of care, the claimant will have to establish that there are a sufficient number of ‘salient features’ to warrant the imposition of a duty of care, with vulnerability seemingly the preeminent.

An owners corporation has very little bargaining power (if any) before it comes into existence (save for conscientious purchasers prudently negotiating sale contracts that preserve the right to claim for economic loss against the Developer) and therefore is arguably particularly vulnerable.  A duty of care might be more readily established by an owners corporation as opposed to, say a commercial purchaser.

Notwithstanding the unique position of owners corporations, the decision widens the scope for claims against builders for pure economic loss by successors in title.  Although, “there remains no simple formula which can mask the necessity for examination of the particular facts[4]". 

Vulnerability of the successor in title is certainly at the fore.