Owners Corporation Strata Plan 72535 v Brookfield [2012] NSWSC 712

Introduction

In the recent decision, Owners Corporation Strata Plan 72535 v Brookfield (Brookfield),1 the NSW Supreme Court provided further guidance on the common law duty of care, with Justice McDougall determining that builders and developers of residential premises do not owe a duty of care to an owners corporation where the statutory warranties provided by section 18B of the Home Building Act 1989 (NSW) (HB Act) apply.

The decision should provide some comfort for builders and developers in NSW and, if followed, elsewhere across Australia. However, there may be implication for Home Owners Warranty insurers considering any subrogated recovery actions.

Background

The “Star of the Sea” is a resort-style strata development at Terrigal, New South Wales, comprising 52 residential lots, only three of which were permanently occupied by their owners. The development was designed and constructed by Brookfield Australia Investments Pty Limited (Brookfield) pursuant to a D&C contract with the developer, Hiltan Pty Limited (Hiltan).

In an all-too common scenario, the Owners Corporation alleged that there were defects in the common property and commenced proceedings against both Brookfield and Hiltan for breaches of the statutory warranties contained in section 18B of the HB Act. The Owners Corporation also claimed that Brookfield and Hiltan breached their common law duties of care.

McDougall J was asked to determine two preliminary questions:

  1. Whether the Owners Corporation was entitled to the statutory warranties contained in section 18B of the HB Act; and
  2. Whether Brookfield and Hiltan owed the Owners Corporation a duty of care.

Decision

Although this article focuses on the question of whether a duty of care was owed, for completeness’ sake we note that his Honour decided that, although marketed as a resort, the purpose of the development when the D&C contract was made could properly be described as one “to do residential building work2 and, therefore, the section 18B warranties applied. By virtue of sections 18C and 18D of the HB Act, as successors in title to Hiltan, the Owners Corporation was entitled to enforce those warranties against both Brookfield and Hiltan.

When turning to duties of care, his Honour immediately recognised the complex nature of the issue by commenting:3

For reasons that will become apparent, I think that the question of imposition of a duty of care is one for consideration either at the final appeal level or by the legislature.

That said, his Honour was prepared to make a decision, finding that no common law duty existed. In doing so, his Honour trailed through a number of seminal High Court decisions considering whether a duty of care is owed by a builder to a subsequent owner of a property in the absence of any contractual relationship. He examined the following:

  • In Bryan v Maloney (Maloney)4, the High Court focussed on the concept of proximity when determining the existence of such a duty of care.
  • Shortly thereafter, in Perre v Apand Pty Ltd5, the High Court identified that a relationship of vulnerability was a necessary requirement for the duty to exist.
  • However, Maloney has been widely criticised and, since the High Court’s decision in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (Woolcock)6, proximity has effectively been discarded as the basis for the imposition of a duty of care.

In Brookfield, the Owners Corporation submitted that, by virtue of the operation of the strata schemes legislation, which placed a burden on the Owners Corporation without any opportunity to consider whether it accepted the burden, it was in a position of vulnerability such that common law recognised the duties of care alleged.

McDougall J decided that neither Brookfield nor Hiltan owed the Owners Corporation a duty of care for the following reasons:

  1. The Owners Corporation had the benefit of warranties contained in s 18B of the HB Act. In circumstances where the legislature had provided such a comprehensive warranty scheme to determine the extent builders are liable to subsequent purchasers, “the courts should be slow to substitute their own judgment for that of the legislature.”7
  2. Not only has the concept of proximity been discarded as the basis of an imposition of a duty of care, but the decision of the majority in Maloney depended on there first being a conclusion that the builder owed a duty of care to the original owner.8 Accordingly, only when a duty of care is owed in that relationship will a subsequent purchaser be able to apply the reasoning in Maloney. In the present circumstances, Brookfield did not owe any duty of care to Hiltan when they had negotiated, on an equal footing a detailed contract. As a result, if Brookfield did not owe Hiltan a duty of care, there could be no finding that Brookfield owed the Owners Corporation a duty either.
  3. If a duty of care is to be imposed on Brookfield for the benefit of the Owners Corporation, it would require consideration of the concept of vulnerability. The vulnerability of the Owners Corporation was “questionable” in light of the warranties provided by statute.9

Turning to the question of whether Hiltan owed the Owners Corporation a duty of care, his Honour again noted that the legislature had afforded successors in title in the position of the Owners Corporation a remedy against developers was “sufficient to dispose of the claim that Hiltan owed to the Owners Corporation the duty of care alleged.”10 In light of this finding, his Honour did not see the need address the questions of vulnerability and duty of care in such circumstances. This is unfortunate, as the decision leaves open the question of whether a developer owes a duty of care to a subsequent purchaser in circumstances when the statutory warranties do not exist. However, his Honour did, albeit in obiter, observe that to impose a duty of care on a developer or principal under a D&C contract, would require the principal to:11

“…retain a small army of professional and otherwise qualified staff to supervise every aspect of the design and construction work undertaken by the builder. To [his Honour’s] mind, the law should be slow to impose such an onerous and expensive requirement on developers.”

Comment

Although this decision will be welcomed by builders and developers alike, McDougall J clearly expected that these issues will be revisited by the appellate courts. It is likely there will be a challenge seeking to clarify his Honour’s decision that, effectively, a concurrent duty of care in tort is not owed when the relationship between the parties is governed by a detailed contract.

Further, the decision turns on the existence of the statutory warranties contained in s18B of the HB Act. It remains to be seen what the outcome will be in situations where, for whatever reason, those warranties are unavailable – in which case, we would expect the concept of vulnerability to come squarely to the forefront of any argument.

The decision may also have an immediate impact on Home Owners Warranty insurers. For example, it is not uncommon for a Home Owners Warranty insurer who pays out on a claim to look to bring a subrogated recovery action against either the builder or the developer in the name of the Owners Corporation. Such a claim may now not be feasible.