Builders let out a sigh of relief today as the High Court of Australia granted Brookfield special leave to appeal a decision of the NSW Court of Appeal in The Owners – Strata Plan No 61288 v Brookfield Australia Investments Ltd [2013] NSWCA 317. 

Brookfield is now able to challenge the decision that surprised many within the construction industry last year, finding that a builder owed a duty of care to an owner’s corporation in constructing a commercial serviced apartment block.

Background – Supreme Court decisions

In Star of the Sea [2012] NSWSC 712, an earlier case also involving Brookfield, the NSW Supreme Court found that a builder did not owe a duty of care to an owner’s corporation in constructing a residential apartment block. Key to that decision was that the owner’s corporation could rely on warranties contained in the Home Building Act (NSW) that were designed by Parliament to protect residential owners from defects.

In the case before the High Court today, the building in question was for commercial purposes. The NSW Supreme Court at first instance (McDougall J) found that it fell outside of the protection for residential owners in the Home Building Act (NSW). This appeared to be a “deliberate policy choice” not to protect commercial owners. Further, as the developer and the builder had negotiated a detailed and precise contract at arm’s length with equal bargaining power and the ability to price in risk, there was no room to impose a duty of care outside of that contract. The owner’s corporation appealed.

Court of Appeal surprise

The NSW Court of Appeal overturned the decision of the Supreme Court, finding that a builder owed a duty of care in constructing a commercial services apartment block, to avoid causing an owner’s corporation to suffer loss resulting from latent defects. It limited the scope of that duty to defects in common property which (1) were structural, (2) were a danger to persons or property nearby, or (3) made the apartments uninhabitable.

The Court of Appeal acknowledged that vulnerability is a key sign of whether a duty of care exists. However, despite accepting that the builder and developer were “sophisticated commercial entities” with “detailed and precise” contractual arrangements, the Court of Appeal found that the developer was vulnerable in that it relied upon the expertise, care and honesty of the builder in constructing the building according to the contract. The owner’s corporation was then found to be more vulnerable than the developer.

Leave to appeal to the High Court

Builders will no doubt be following this case closely as Brookfield prepares its appeal to the High Court.