High Court reinforces test of vulnerability for pure economic loss claims in tort

Introduction

On 8 October 2014, in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor [2014] HCA 36 the High Court unanimously allowed an appeal from a decision of the Court of Appeal of New South Wales by holding that Brookfield, which was the builder of a strata titled apartment complex, did not owe a duty of care to the Owners Corporation to avoid causing economic loss resulting from defects in the common property.

Factual Summary

Brookfield and the developer (Chelsea) entered into a design and construct contract (D&C contract)  to build a “mixed use retail, restaurant, residential and serviced apartments building”¹.

Chelsea intended to sell the serviced apartment strata title lots to investors.  The standard contract of sale form was annexed to the D&C contract between Brookfield and Chelsea.

The D&C contract provided detailed provisions governing Brookfield’s obligations to Chelsea in relation to latent defects liability, whereas the annexed standard contract for sale conferred upon the buyers of the serviced apartments specific contractual rights in relation to defects in the property, including the common property.   The common property was vested in the Owners Corporation as manager of the strata scheme and as agent of the owners of the serviced apartments.

The Owners Corporation claimed that Brookfield was liable in negligence for breach of a duty to take reasonable care to avoid reasonably foreseeable economic loss to the Owners Corporation to make good the defects caused by the building's defective design or construction or both.

The High Court overruled the Court of Appeal’s finding that Brookfield did owe a duty of care to avoid loss resulting from latent defects which were structural or dangerous or which made the serviced apartments uninhabitable and held that Brookfield did not owe the Owners Corporation a duty of care and dismissed a cross appeal by the Owners Corporation who contended for a wider scope of care than allowed by the Court of Appeal.

Why Brookfield did not owe a duty of care

The High Court found that neither the Owners Corporation nor the purchasers were “vulnerable” in the requisite Maloney² sense. In this context, vulnerability refers to an identified element of known reliance or dependence on the part of the plaintiff or the assumption of responsibility by the defendant or a combination of the two.  It refers to the plaintiff's inability to protect itself from the defendant’s want of reasonable care which would cast the consequences of loss on the defendant³.

In Maloney, the lack of terms of contract and the subsequent  purchaser’s inability to self-protect were both relevant to the finding of a duty of care⁴.  In contrast, the High Court noted Brookfield standard sale contracts, which each serviced apartment purchaser had entered into, had included provisions providing each purchaser with rights to have defects remedied in the common property which vested in the Owners Corporation⁵.

The High Court held that the existence of contracts which expressly set out the standard of work expected was indicative of the parties’ ability to protect their own interests. This denied their vulnerability to any lack of care by Brookfield in the performance of its contractual obligations⁶.    The purchasers could have negotiated for other terms or, indeed, have walked away from the negotiations.

The High Court identified “vulnerability” as the keystone factor when assessing whether a duty of care not to cause economic loss resulting from latent defects was owed by a builder to subsequent purchasers.

Conclusion

The High Court’s emphasis on “vulnerability” in the context of complex commercial transactions, where the parties respective rights and liabilities are set out in contract will have more general implications for other types of commercial arrangements. As French CJ stated:

“This decision falls against a background of prior decisions about classes of case in which a person performing a contract may have a concurrent duty of care to another contracting party, classes of case in which a party to a contract may owe a duty of care to a person who is not a party to the contract, classes of case involving pure economic loss, and classes of case in which the careless performance of a building contract has left latent defects in the building and thereby caused economic loss to a subsequent purchaser… Those decisions interact with each other but none is precisely applicable in this case.”