The High Court unanimously held that the builder of strata-titled apartments did not owe an owners corporation a duty of care to avoid pure economic loss caused by latent defects in common property.
This case involved a claim for pure economic loss by an owners corporation as a result of the construction of a 22-storey building complex in Chatswood, New South Wales. In 1997 the developer Chelsea Apartments Pty Ltd (Developer) entered into a master agreement with three companies in the Stockland Trust Group for the building of the complex (Stockland). The first 9 floors were to be serviced apartments and the next 13 floors were to be residential apartments. The serviced apartments were to be sold to investors and then to be leased to a subsidiary of Stockland, Park Hotel Management Pty Ltd. This company was to operate the serviced apartment business under the ‘Holiday Inn’ brand.
The Developer then entered into a design and construct agreement with Bookfield Multiplex Ltd (Brookfield), which also contemplated that the Developer would offer individual lots for sale to investors (D & C Contract). The D & C Contract contained detailed provisions in relation to the quality of work to be performed by Brookfield and required Brookfield to remedy defects and omissions in the work within a defined defects liability period. It also assigned liability to Brookfield for latent defects. Brookfield was required to register the serviced apartment strata plan. A standard form of contract of sale was annexed to the D & C Contract. It conferred on each purchaser specific contractual rights obliging the Developer to repair defects in the common property when notified by the owners corporation within a specified period of time.
In 1999 a certificate of final inspection was issued and Owners Corporation Strata Plan 61288 (Owners Corporation) was registered. The common property was vested in the Owners Corporation as manager of a strata scheme and as agent for the owners of the serviced apartments.
In early 2004 a number of alleged latent defects were identified within the common property of the Owners Corporation.
The Owners Corporation issued proceedings in the Supreme Court of New South Wales in November 2008. It alleged that the latent defects in the common property were caused by the defective design and/or construction of the building by Brookfield and that it had suffered economic loss as result. The Owners Corporation alleged that Brookfield had a duty to “take reasonable care to avoid a reasonably forseeable economic loss to the [Owners Corporation] in having to make good the consequences of latent defects caused by the buildings defective design and/or construction”. The Owners Corporation sought to recover damages, including the cost of repairing the latent defects in the common property. Justice McDougall held that no duty of care was owed.
On appeal the New South Wales Court of Appeal unanimously held that there was a duty of care. However the Court of Appeal restricted the scope of the duty of care to defects that were: structural; constituted a danger to persons or property; or made the apartments uninhabitable.
Brookfield was granted special leave to appeal to the High Court and the Owners Corporation was granted special leave to cross-appeal to extend the duty of care beyond the one found by the Court of Appeal.
The High Court, in four separate judgments, unanimously allowed Brookfield’s appeal. It held that Brookfield did not owe a duty of care to the Owners Corporation to avoid causing it economic loss resulting from latent defects in the common property. The High Court also dismissed the cross-appeal made by the Owner’s Corporation.
The High Court arrived at its decision for two main reasons. Firstly, if a duty of care was held to exist, this would supplement the limited rights bargained for in the contractual arrangements between the parties and would alter the allocation of risks agreed to by the parties. Secondly, neither the Developer, the Owners Corporation nor the purchasers were vulnerable in the sense necessary for the imposition of a duty of care. Damages for pure economic loss were only recoverable where a party was owed a duty of care because it was vulnerable, by reason of being unable to protect itself from the risk of loss. The Developer was not vulnerable as it was a sophisticated commercial entity with significant construction experience and had bargained for contractual protections in the D & C Contract. A number of the members of the Court said that the purchasers could have bargained for more extensive protections in their contracts of sale or instead chosen not to proceed with their purchases. Consequently the purchasers and therefore the Owners Corporation were not vulnerable in the relevant sense.
Significance of Decision
This decision confirms that a builder of a commercial building will not normally owe a duty of care to a subsequent purchaser to avoid pure economic loss for latent defects.
Such a duty is likely to only be found where a subsequent purchaser is not in a reasonable position to protect itself from the negligence of a builder. Where a building is a commercial development with contracts in place negotiated between commercial parties, it is far more likely that the parties will be seen by the Court to have been in a position to protect themselves and therefore no duty of care will be owed. For owners corporations in commercial properties in Victoria, this decision has substantially curtailed any rights to sue in negligence that they may have had against builders.