In the decision of Owners Corporation Strata Plan 61288 v Brookfield Multiplex Limited [2012] NSWSC 1219 (Chelsea Decision) delivered on 10 October 2012. 

Key Outcome

The Chelsea Decision stands for the proposition that where a builder and developer have contracted for the construction of a commercial property, the builder does not owe any duty of care to avoid economic loss to:

  • the developer;
  • a subsequent commercial owners corporation; or  
  • a subsequent purchaser of commercial property; 

in circumstances where the contract sets out the rights and obligations of the parties to that contract. 

The decision confirms that the case of Bryan v Maloney (1995) 182 CLR 609 does not stand for the proposition that a builder of commercial property owes a duty of care to avoid causing economic loss to a commercial owners corporation. 

The NSW legislature has provided protection to purchasers of residential property, but has excluded from that protection purchasers of commercial property.  The decision of Owners Corporation Strata Plan 72535 v Brookfield Australia Investments Limited [2012] NSWSC 712 (Star of the Sea Decision) previously held that no such duty was owed to a residential owners corporation.  The law does not recognise any additional or novel duty to avoid causing economic loss owed by the builder to that subsequent purchaser.

Background

Chelsea Apartments Pty Ltd (Chelsea) was the registered proprietor of land on which the relevant strata title development has been constructed.  Chelsea entered into two agreements.  One was a master agreement with Stockland Trust Group and the other was a design and construct contract with Brookfield.

The master agreement provided that Chelsea was to design and construct multi level serviced apartments.  Each lot in the Chelsea development was to be leased to Park Hotel Management Pty Limited (Park Hotel), a related Stockland entity and would be operated as serviced apartments under the “Holiday Inn” brand.  By each of the leases, Park Hotel acquired the right to direct the affairs of the owners corporation.  Stockland bargained for and obtained from Chelsea detailed contractual warranties with respect to the quality of the building work.  A related Brookfield entity held 40% interest in Chelsea with the remaining 60% held by a well known and unrelated Queensland developer.

The design and construct contract was entered approximately three months after the master agreement and numerous of the clauses of the master agreement are repeated back to back in the design and construct contract and gave effect to Chelsea’s obligation to design and construct the multi-level serviced apartments property.  Again, the contract contained detailed contractual provisions relating to the quality of the services Brookfield was to provide as the builder.

Chelsea was to market and sell the individual serviced apartments to investors subject to the lease to Park Hotel.  This occurred.  The Owners Corporation originally brought both a claim in negligence for economic loss and a claim for breach of statutory warranties under section 18D of the Home Building Act 1989 (NSW) but abandoned the latter claim prior to the hearing.  It was agreed between the parties that clause 6(f) of the Home Building Regulation 2004 (NSW) excluded the operation of section 18D.

The Decision

Justice McDougall held that the duty of care alleged was novel, in the sense that it did not fall within any established category of duty of care shown in the authorities and that the decision of Bryan v Maloney was not authority for the existence of the alleged duty of care because:

  1. the conclusion in that case that the builder owed a duty of care to a successor in title to the person for whom the house had been constructed depended on the anterior conclusion that the builder owed a duty of care to that earlier proprietor;
  2. in circumstances where Brookfield and Chelsea had carefully negotiated out, in detail, the terms of their bargain, there was no reason for imposing some separate duty of care as between Brookfield and Chelsea; and
  3. in any event, the conclusion in Bryan depended on the proposition that there was a relationship of proximity between the builder and the subsequent owner; and the concept of proximity as a determinate of the existence of a duty of care has since been “discarded”.

His Honour also observed that the legislature had put in place a regime for the protection of those who buy residential property.  That regime excluded commercial developments including the Chelsea development.  The invitation by the Owners Corporation was thus not only for his Honour to identify and impose a novel duty of care as a judge at first instance, but for his Honour to go where the legislature had decided, as a matter of policy, it would not.

McDougall J had previously decided the Star of the Sea Decision, in which his Honour determined that the Courts should not impose some additional common law duty where an owners corporation enjoyed the benefit of the statutory warranties under the Home Building Act 1989 (NSW).