A recent decision of the High Court of Australia means that builders of strata-titled schemes do not owe a duty of care to owners’ corporations for economic loss caused by latent building defects in their common property – even where those building defects are structural in nature and may render common areas dangerous or uninhabitable. Partner, Warren Jiear and Senior Associate, Mario Esera, look at this case and its likely implications for Bodies Corporate in Queensland dealing with building defects.

Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 (8 October 2014)

Background

Chelsea Apartments Pty Ltd (Chelsea) owned a parcel of land at Chatswood (Site).

On 11 August 1997, Chelsea entered into an agreement with Park Hotel Management Pty Ltd (Park Hotel) to build apartments on the Site that would be sold to investors subject to leases granted by Park Hotel who would service the apartments.

On 5 November 1997, Chelsea entered into an agreement with Brookfield Multiplex Ltd (Brookfield) to design and construct a 22-story apartment complex on the Site (D&C Contract).Approximately two years later, the apartment complex was completed (Building).  Chelsea leased the Building to Park Hotel who operated a serviced apartment hotel at the Building under the brand “Holiday Inn”.

On 11 November 1999, the owners corporation for the Building was registered (Owners Corporation). Initially, the Owners Corporation was run by Chelsea and Park Hotel, upon the basis that Chelsea owned all of the apartments. Eventually, however, Chelsea commenced selling apartments to investors subject to leases with Park Hotel using a standard form contract of sale (Sale Contract).Unfortunately, the common property of the Building suffered from a myriad of latent building defects (Defects). As a result of the Defects, the Owners Corporation claimed they suffered economic loss – specifically:

  • the cost of rectifying the Defects
  • the diminished value of the Building
  • loss of rental income – primarily whilst rectification works were being carried out.

The Owners Corporation claimed (amongst other things) that the Defects demonstrated that Brookfield had breached a duty of care they owed them to “take reasonable care to avoid a reasonably foreseeable economic loss to the [Owners Corporation] in having to make good the consequences of latent defects caused by the building's defective design and/or construction”.

Court Proceedings

In November 2008, the Owners Corporation commenced proceedings in the Supreme Court of New South Wales. On 10 October 2012, Justice McDougall held that the Brookfield did not owe the Owners Corporation a duty of care in relation to economic loss suffered by them arising out of the Defects. The Owners Corporation appealed to the Court of Appeal.

On 25 September 2013, the Court of Appeal overturned the earlier decision and held that the Brookfield did owe the Owners Corporation a duty of care in certain situations – specifically:

"a duty to exercise reasonable care in the construction of the building to avoid causing [the Owners Corporation] to suffer loss resulting from latent defects in the common property vested in [the Owners Corporation], which defects (a) were structural, or (b) constituted a danger to persons or property in, or in the vicinity of, the serviced apartments, or (c) made those apartments uninhabitable".

Brookfield was granted special leave to appeal to the High Court. On 8 October 2014, the High Court allowed Brookfield’s appeal, overturning the decision of the NSW Court of Appeal, and ordered the Owners Corporation to pay Brookfield’s costs.

The Importance of Contractual Arrangements

To properly understand the decision of the High Court, it is important to understand the contractual arrangements entered into between the parties – the most significant contracts being:

  • the D&C Contract between Chelsea and Brookfield
  • the Sale Contracts between Chelsea and investors.

The D&C Contract was important because it comprehensively set out the obligations as between Chelsea and Brookfield. Notably, it contained a 52 week defects liability period which commenced upon practical completion of the Building. During that period, Brookfield was obliged to rectify any building defects, after which a Final Certificate was issued as evidence that all works had been completed in accordance with the D&C Contract.

Under the terms of the Sale Contracts, there was also a defects liability period of sorts which ran for seven months following the registration of the Building. If any defects in the common property were discovered during this time, investors or the Owners Corporation could serve a written notice on Chelsea. Chelsea was then obliged to rectify those defects. In practicality, however, if defects were discovered during this time, Chelsea likely passed them on to Brookfield to rectify under the terms of the defects liability period contained in D&C Contract.

According to Chief Justice French in his judgment:

“The nature and content of the contractual arrangements, including detailed provisions for dealing with and limiting defects liability, the sophistication of the parties and the relationship of Chelsea to the [Owners] Corporation all militate against the existence of the asserted duty of care to either Chelsea or the [Owners] Corporation.”

In other words, because the relationship and obligations between the parties was so comprehensively defined under the terms and conditions of their respective contracts, the Court would not intervene to impose a duty of care as between Brookfield and the Owners Corporation – particularly when:

  • Brookfield had no contractual relationship with the Owners Corporation at all
  • under the terms of the D&C Contract, Brookfield did not owe Chelsea a duty of care.

To underline the Court’s finding, the judgment of Justices Crennan, Bell and Keane JJ states:

“…it should now be acknowledged that a builder has no duty in tort to exercise reasonable care, in the execution of building work, to avoid a subsequent owner incurring the cost of repairing latent defects in the building. That is because, by virtue of the freedom they have to choose the price and non-price terms on which they are prepared to contract to purchase, there is no reason to consider that subsequent owners cannot ordinarily be expected to be able to protect themselves against incurring economic loss of that nature.”  

Comments

The High Court’s decision in this case may have far reaching effects for Bodies Corporate dealing with a building defect claim against the builder of their common property – particularly a claim in negligence. However, as with any case, this matter was decided against its own particular facts and a statutory regime that is particular to NSW. The factors that appeared to carry the most weight with the Court were:

  • the contractual arrangements between the parties
  • that Brookfield and Chelsea were sophisticated and experienced parties who entered into the D&C Contract at arms’ length and on equal footing
  • the Owners Corporation suffered economic loss only – meaning the Defects in the common property were not alleged to have caused any damage to person or property
  • the economic loss suffered by the Owners Corporation in repairing the common property was not greater than the value of the common property.

Therefore, where these factors are not present or materially different, it may be open to Courts in Queensland to reach a different decision to the High Court in this case. If your Body Corporate is experiencing defects in your common property that may be attributable to some fault in its design or construction, it is important that you act quickly.