Earlier this month, the High Court delivered the judgment in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36.

This much anticipated decision confirmed that the question of whether a builder is liable to subsequent purchasers will depend on the ‘vulnerability’ of the party suffering the loss as determined by the facts and contributing factors of each case.

Background

In 1997, Brookfield Multiplex Pty Ltd (Brookfield) constructed a $57 million, 22 storey mixed-use development for Chelsea Apartments Pty Ltd (Developer). Nine levels of the development comprised of apartments which were sold to investors (Purchasers) as part of an arrangement to operate as a Holiday Inn serviced apartment hotel, and a strata scheme was established for these levels.

Latent defects became evident in the common property of the strata scheme, and in 2008 the Owners Corporation (body corporate) for the strata plan commenced an action for economic loss, namely the cost of rectifying the defects in accordance with the Owners Corporation’s statutory duty.

The Owners Corporation argued that Brookfield was liable in negligence on two bases:

  • derivative liability based on a breach of a duty of care to the Developer (because the Owners Corporation stands in the shoes of the Developer under the strata legislation); and/or
  • primary liability, independent of any liability to the Developer, based on a breach of a duty of care to the Owners Corporation itself.

The New South Wales Court of Appeal upheld the trial judge’s finding that Brookfield had a duty of care to prevent economic loss to the Owners Corporation for a serviced apartment development arising from latent defects in the common property which were: (a) structural; (b) posed a risk of personal injury or property damage; or (c) made the apartments uninhabitable.

The New South Wales Court of Appeal found that the Developer was “vulnerable in the relevant sense” to Brookfield, because the Developer relied “on the exercise of responsibility” by Brookfield.

‘Vulnerability’ turns on the facts of the case

The High Court confirmed that ‘vulnerability’ is the relevant standard, but found that the facts of the case fell short of establishing this required vulnerability.

Rather than establishing clear guidelines for negligence in building cases, the Court reaffirmed that each case ultimately turns on its facts, and a matrix of contributing factors must be taken into account.

Chief Justice French noted that vulnerability will generally entail either:

  • “known reliance or dependence on the part of the plaintiff, or the assumption of responsibility by the defendant, or a combination of the two”; or
  • “the plaintiff's incapacity or limited capacity to take steps to protect itself from economic loss arising out of the defendant's conduct”.

Comparison against previous High Court decisions on builders’ liability

It is worth considering the Brookfield Multiplex decision against previous landmark builders’ liability decisions of the High Court.

In the 1995 decision of Bryan v Maloney, the High Court found that vulnerability of the first kind was present where there was no contractual limitation of liability for latent defects, as any subsequent owner of the dwelling would ordinarily be unskilled in building matters and inexperienced in real property investment. Accordingly, the court considered that the builder should be aware that such a subsequent owner would be likely to assume that the building had been competently built and that the footings were adequate.

In the 2004 decision of Woolcock Street Investments Pty Ltd v CDG Pty Ltd, the High Court found that neither category of vulnerability applied to a subsequent sophisticated purchaser of commercial premises; in an action against the engineers who designed the footings.

Contractual allocation of risk excludes vulnerability

Ultimately, the facts of Brookfield Multiplex were sufficiently different to both earlier cases as to preclude direct reliance on either Bryan v Maloney or Woolcock Street Investments. Instead, the contractual provisions were decisive in determining that the Owners Corporation was not vulnerable in the relevant sense.

Both the contract between Brookfield and the Developer (Construction Contract), and the standard  form contracts between the Developer and the Purchasers (Sales Contracts), contained specific provisions regarding the rectification of defects.

The Owners Corporation, as agent of the Purchasers, was empowered under the Sales Contracts to issue defect notices to the Developer, insofar as the defects related to common property of the scheme.

Justices Crennan, Bell and Keane referred to the detailed provisions of the Construction Contract regarding defects, including latent defects, stating:

[The provisions] set out the extent of the appellant's obligations to ensure that the developer should "get what it paid for". To supplement them with an obligation to take reasonable care to avoid a reasonably foreseeable economic loss to the developer in having to make good the consequences of latent defects caused by the appellant's defective work would be to alter the allocation of risks effected by the parties' contract.

Likewise, because the Sale Contracts also gave the Purchasers limited rights in respect of defects as against the Developer (which were exercisable by the Owners Corporation as the owners’ agent) that did not extend to the latent defects in issue; the Purchasers were also not ‘vulnerable’ in the relevant sense.

Justices Crennan, Bell and Keane noted that there was no evidence that the Purchasers were unable to bargain for stronger protections against latent defects, and further that they could have simply walked away and invested elsewhere if a satisfactory warranty at an acceptable price was not forthcoming.

No clear line between residential and commercial building work

The decision also confirms that there is no clear-cut distinction between the construction of a residential and a commercial building for the purposes of liability in negligence causing pure economic loss.

Justices Crennan, Bell and Keane noted that neither party sought to distinguish Bryan v Maloney on the basis that that case concerned a dwelling house, and remarked that “the distinction between purchases of buildings for domestic and commercial purposes is an unstable one … because its application means that liability is apt to come and go depending on the use intended for a building by its successive purchasers.”

For example, in Brookfield Multiplex, the units had been constructed for sale to investors as a serviced apartment hotel, but it is not unforeseeable that the units might be repurposed as dwelling units at a later stage (indeed, other floors of the building were already being used in this way under a separate strata scheme).

Consequences for parties to building contracts

Despite leaving some questions unanswered, the decision in Brookfield Multiplex does provide helpful guidance for builders, developers and purchasers.

Purchasers of both commercial and residential property should be aware that the presence of detailed provisions pertaining to defects in a sale contract may have the effect of precluding the right to sue for latent defects, and should either seek amendments to these provisions, or price the risk accordingly.

Builders should be relieved that their liability to a developer for latent defects will generally not exceed that for which they bargain under contract, and hence have priced into their tender. However, given that primary liability of Builders to ultimate purchasers may still arise, it would be prudent for builders to do all they can to ensure that there are ‘back-to-back’ limitations of liability in sale contracts down the line.

Developers will likewise be advantaged by ‘back-to-back’ clauses limiting the right to claim for latent defects in sales contracts, as such terms will ensure that the developer has no greater liability to the purchaser than their own entitlement to claim against the builder.

Finally, both builders and purchasers should remember that the power of the Queensland Building and Construction Commission to direct rectification of building work within 6 years and 3 months of construction cannot be excluded by contract, and therefore even if a purchaser has no action in damages, they may still have an available remedy under the legislation.