On Wednesday, 8 October 2014, the High Court handed down its decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 in which it found that a builder did not owe an Owners Corporation a common law duty to exercise reasonable care in the construction of an apartment complex, to avoid causing the Corporation to suffer pure economic loss resulting from latent defects in the common property.

This judgment is a significant clarification of the law relating to the concurrent existence of common law duties and contractual obligations for defect liability, and will come as a great relief to many in the construction industry. Additionally, the High Court’s reasoning regarding limitations on findings of ‘vulnerability’ and the concurrent existence of duties of care in the context of complex commercial contracts, which contain detailed provisions for the limitation of liability, have more general implications for other types of commercial arrangements, including, for example, procurement contracts.           

In handing down its decision, the High Court sounded a return to orthodoxy and overturned the previous decision of the NSW Court of Appeal in The Owners – Strata Plan No. 61288 v Brookfield Australia Investments Ltd (2013) NSWCA 317. The Court of Appeal previously found that the builder did owe the Owners Corporation a limited common law duty to exercise reasonable care in the construction of the apartment complex to avoid causing the Corporation to suffer loss, resulting from latent defects in the common property which were structural, dangerous to people or other property, or made the apartments uninhabitable.

The High Court held that the broad duty contended for by the Owners Corporation, and the more limited one found by the Court of Appeal, could not exist in circumstances where, amongst other things:

  1. the builder and the original owner/developer were sophisticated commercial parties, dealing at arms-length, who had entered into a design and construct contract which had detailed provisions dealing with and limiting defects liability, which were more limited than the broad scope of the common law duty sought to be imposed on the builder; and
  2. the contracts of sale for each apartment provided rights of recourse to the subsequent purchasers and the Owners Corporation against the developer to have defects or faults in the common property rectified within a specified period of time following the registration of the relevant strata plan.

The existence of these contractual protections, bargained for by each of the parties in their respective agreements, prevented a finding that the developer, the subsequent purchasers, or the Owners Corporation (as proxy for the owners) were ‘vulnerable’ in the sense that they could not protect themselves from a want of care by the builder in constructing the apartment complex.

Whilst unanimous in its ultimate decision, the High Court’s judgment consists of four separate sets of generally concurring reasons, each with some enlightening pieces of commentary on different aspects of the law in this area.

For example, French CJ remarks at [28] that the existence or non-existence of a duty of care between a builder and developer is not necessarily fatal to the existence of a duty of care between a builder and subsequent purchaser or Owners Corporation. It is simply an important matter for consideration. Likewise, Hayne and Kiefel JJ said that it was not necessary to conclude whether any disconformity between the duty said to be owed between the builder and the developer and that owed by the builder to a subsequent purchaser would deny the existence of the latter.

In contrast to that, Crennan, Bell and Keane JJ (at [69]) held that:

“This Court’s decision in Bryan v Maloney does not sustain the proposition that a builder that breaches its contractual obligations to the first owner of a building is to be held responsible for the consequence of what is really a bad bargain made by subsequent purchasers of the building. To impose upon a defendant builder a greater liability to a disappointed purchaser than to the party for whom the building was made and by whom the defendant was paid for its work would reduce the common law to incoherence.”

Crennan, Bell and Keane JJ also interestingly expressed the view that a claim for breach of a duty of care by an Owners Corporation, as a distinct legal entity, suffers from some threshold difficulties. First, the Owners Corporation was not in existence at the time that the impugned conduct (i.e. construction) was carried out, and therefore there could be no known reliance on, or assumption of responsibility by, the builder at that time giving rise to vulnerability of the Owners Corporation in the relevant sense. Secondly, the Owners Corporation does not pay anything for the common property which is vested in it, so there is a difficulty in asserting that it has suffered any damage from the existence of latent defects which it is required to rectify.

Their Honours then separately considered the position of the Owners Corporation acting as the alter ego for the individual lot owners and found that its position in those circumstances was no stronger, because of the protections the owners had bargained for in their respective contracts.

Interestingly, it can be seen that this sort of reasoning might be applied to other forms of commercial arrangements, outside of traditional categories of cases in which a duty is often found to be owed and in which the parties have negotiated detailed limitation of liability provisions which are more restrictive than a duty of care sought to be found by a prospective plaintiff.