In a recent decision, the High Court of Australia has ruled that the owners corporation of a 22 storey apartment building could not sue the builder, Brookfield Multiplex (Brookfield), for the costs of fixing latent defects in common areas. The court’s decision, in summary, was that the owners corporation did not have a contractual relationship with the builder, and there was found to be no separate duty of care outside of the terms of the construction contract.

Facts:

Brookfield designed and constructed the apartments in Chatswood, NSW under a contract with the developer and owner, Chelsea Apartments (Chelsea). Chelsea leased the apartments to a subsidiary of the Stockland Group, to operate the apartments as a serviced apartment hotel under the “Holiday Inn” brand.

Chelsea remained the owner of the land at Chatswood until it was subdivided into lots and common property when Brookfield registered the strata plan. Upon registration, the owners corporation came into existence and it became the legal owner of the common property. It had no contractual relationship with Brookfield or Chelsea – a salient point in the dispute.

The design and construct contract between Brookfield and Chelsea included a 52 week defect liability period, and required Brookfield to maintain professional indemnity insurance for a run-off period of four years after the final certificate was issued. The design and construct contract attached a copy of the standard form contract of sale for buyers of the apartments. The buyer’s contract required Chelsea to repair any defects in common property upon written notice from the owners corporation within seven months after registration of the strata plan.

Latent defects were discovered in common areas which were beyond the limits of Brookfield’s responsibility under the design and construct contract. The owners corporation sued Brookfield for economic loss, for the diminished value to the building, rectification costs, and the loss of income and rent during the rectification period.

Decision:

The High Court found that the contracts for the construction and sale of the apartments set out the circumstances in which the builder was liable to rectify defects. It concluded that Brookfield did not owe Chelsea, or the buyers, any separate duty of care under the law of negligence to avoid causing economic loss for defects in common areas.

This overturned the decision of the Supreme Court of New South Wales Court of Appeal, which found that Brookfield did owe a duty of care to avoid causing pure economic loss to both Chelsea, and to the owners corporation as successor in title.

The court’s decision is good news for construction companies in terms of clarifying the extent of their duty of care in the case of economic loss in non-residential apartment complexes. However, where residential lots are involved or in cases where the builder and developer are the same party, contracts should clearly state the extent of liability of all parties in the case of rectification works. It’s always best to consult an experienced lawyer before entering into any contract. If you have concerns, Rockwell Olivier’s building and construction lawyers can assist.

Click here to read the full judgment: Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 (8 October 2014)