In a judgment dated 25 September 2013 in The Owners – Strata Plan No. 61288 v. Brookfield Australia Investments Ltd (2013) NSWCA 317, the NSW Court of Appeal has found that a builder owed a duty to exercise reasonable care in the construction of a building, to avoid causing an Owners’ Corporation to suffer loss resulting from latent defects in the common property which were structural, constituted a danger to persons or property in the vicinity or made those apartments uninhabitable. Along the way, the Court found the builder owed a concurrent duty in tort to a developer with whom it had a detailed written building contract, although both were major, sophisticated corporations.

This is a surprising judgment which will rightly concern the construction industry.

Background

In Star of the Sea [2012] NSWSC 712, McDougall J had found that a builder did not owe a duty of care to an Owners’ Corporation in constructing a residential apartment block. At least part of the reasoning in Star of the Sea was that Parliament had legislated in the Home Building Act for a system of warranties to protect residential owners from defects.

In the present case, the building involved was a serviced apartment block, and was accordingly outside the protection afforded by the Home Building Act. McDougall J had held, following his decision in Star of the Sea, that the builder did not owe a duty of care to the Owners’ Corporation and dismissed the Owners’ Corporation claim. The Owners’ Corporation appealed.

The Court of Appeal Judgment

The Court of Appeal judgment overturns the reasoning of McDougall J. It is troubling in several respects including:

  1. The legislature has imposed a statutory protection regime for defects in residential dwellings but has chosen not to impose such a scheme on serviced apartment or commercial buildings.
  2. The Court of Appeal relies heavily on the High Court’s judgment in Bryan v. Maloney which has been trenchantly and appropriately criticised. Courts have avoided following Bryan v. Maloney and have distinguished it.
  3. The Court of Appeal acknowledges that the High Court in Perre v. Apand Pty Ltd (1999) 198 CLR 180 has held that vulnerability is now a key indicia of whether a duty of care exists. However, at para 120 the Court of Appeal finds that a builder owes a duty of care to a developer in circumstances where both are major sophisticated commercial parties who have entered into a detailed written building contract which regulates, among other things, how defects are to be dealt with.
  4. That finding, that a commercial developer who lets a detailed contract to a builder, is owed a concurrent duty of care by the builder is surprising in the face of concepts of vulnerability and is a necessary springboard for the Court of Appeal’s ultimate finding that the builder owes a duty of care to the Owners’ Corporation – the successor in title to the developer.

One anticipates that the builder will give very serious consideration to an appeal to the High Court of Australia over this decision. In the interim, builders should note that there will be a concurrent duty in contract and tort in design and construct contracts unless the duty is expressly excluded. One anticipates that until the High Court has an opportunity to deal with the Court of Appeal’s judgment, there will be an increase in claims in tort and concurrent claims in tort and contract, concerning defects in both residential and non-residential buildings.