In brief – Economic loss to owners corporation due to latent construction defects

On 20 August 2013, the NSW Court of Appeal handed down an unexpected landmark decision in The Owners - Strata Plan No. 61288 v Brookfield Australia Investments Ltd [2013] NSWCA 317, when it found that a builder of mixed use apartments owed the subsequent owner, an owners corporation, a duty to take reasonable care to avoid economic loss arising from latent defects.

Developer contracts builder to construct 22 storey building in Chatswood

In August 1997 Chelsea Apartments Pty Ltd contracted with Multiplex Constructions Pty Ltd, now Brookfield Australia Investments Ltd ("the builder"), to carry out a $55 million development involving a 22 storey building in Chatswood. The first nine levels were to be serviced apartments and the next 12 levels were to be residential apartments.

In 1999 a certificate of final completion was issued, the strata plan for the serviced apartments was registered and The Owners - Strata Plan No 61288 ("the owners coporation") came into existence.

In November 2008 the owners corporation commenced proceedings against the builder for defective building works that were said to have been discovered in early 2004. By the time the case reached trial, the owners corporation had conceded that it was not entitled to the benefit of statutory warranties under the Home Building Act and, accordingly, its claim was brought in negligence under general law for pure economic loss.

At trial in The Owners - Strata Plan No. 61288 v Brookfield Australia Investments Ltd [2012] NSWSC 1219, McDougall J found in favour of the builder and ordered that the owners corporation pay its costs. The owners corporation appealed this decision.

A general law duty in the absence of statutory warranties?

In deciding whether the builder owed a duty of care to the owners corporation, McDougall J noted that he had addressed a similar claim in an earlier case, Owners Corporation Stata Plan 72535 v Brookfield Ltd [2012] NSWSC 712, involving a building known as "The Star of the Sea".

However, his Honour observed that "The Star of the Sea" case was slightly different in that the owners corporation had the benefit of statutory warranties and thus the question was whether there was a general law duty which operated in the absence of the statutory warranties. (For more information about this case please see our earlier article Resort hotel owners corporation entitled to benefit from residential statutory warranties.)

Avoiding reasonably foreseeable economic loss to owners corporation

As noted by McDougall J, the duty of care relied upon in this case was one to take reasonable care to avoid a reasonably foreseeable economic loss to the owners corporation in having to make good the consequences of latent (non-obvious) defects caused by the building's defective design and/or construction.

The builder conceded that at the time of construction, it was reasonably foreseeable that if there were defects in the building, some of those defects might be latent at the time of registration.

Supreme Court finds builder did not owe general law duty of care to subsequent owner

In concluding that the builder did not owe a general law duty of care to the owners corporation, McDougall J based his reasoning upon three points:

  1. There was no room for a tortious duty of care because the building contract was negotiated "at arm's length between parties of equal standing, who are able to bargain for and obtain the benefits that they seek, and to pay the price that they think appropriate."
  2. The existence of statutory warranties under the Home Building Act, although not applicable to this case, implied the conferral of a benefit "that the legislature appears to have withheld as a matter of deliberate policy choice."
  3. There was no authority that extended to such a case and it was not appropriate for a judge at first instance to expand the obligations of a builder under general law.

NSW Court of Appeal overturns Supreme Court decision

The Court of Appeal evaluated each of the points sequentially.

  1. Was there room for a tortious duty of care?

A pivotal point of the reasoning that there was no room for a tortious duty owed by the builder to the original owner, Chelsea Apartments, rested upon the fact that there was a contractual arrangement between the builder and Chelsea that dealt comprehensively with their relationship.

In coming to his conclusion, the primary judge placed significant weight on a passage from Astley v Austrust Ltd [1999] HCA 6; 197 CLR 1 which posited that the law of negligence should not regulate the relationship of parties to a contract because the contract defined the relationship of the parties (at [47]).

The Court of Appeal noted that not only did this passage not support McDougall J's conclusion, but that it was premised on an assumption which is inconsistent with it. (In Astley, the High Court went on to find that there were concurrent duties.)

Furthermore, their Honours found that that view would be inconsistent, in the present context, with the reasoning in Bryan v Maloney [1995] 182 CLR 609 and Voli v Inglewood Shire Council [1963] HCA 15; 110 CLR 74 and 84.

However, the Court of Appeal stated that the conclusion that there can be concurrent duties does not preclude a finding that, in a particular case, the general law duty has been excluded or limited by a contract between the parties.

Their Honours noted that in order to determine whether the general law duty has been excluded, it is necessary to consider the terms of the agreement. In this instance, their Honours found that the terms of agreement did not preclude the common law duty of care in tort.

  1. Expanding the statutory scheme?

McDougall J held that to consider whether the builder owed a duty of care to the subsequent owner "is inviting the courts to go where the legislature did not." The Court of Appeal found that support of this conclusion depended upon whether theHome Building Act and the Home Building Regulation excluded dwellings used for the purpose of overnight accommodation from the regime of protection.

In determining the statutory intention underlying the Home Building Act, the Court of Appeal reiterated the fact that it cannot be construed based on delegated legislation, in this instance the Home Building Regulation. After examination of part 2C of the Home Building Act, their Honours concluded that "[i]t is undoubtedly the case that these changes were deliberately not introduced with respect of building work other than ‘residential building work’."

  1. Imposition of a novel duty of care?

The third basis that McDougall J relied upon in rejecting the notion that the builder owed a duty of care was that it "is not appropriate, at the trial level, to undertake the imposition of a novel duty of care." The Court of Appeal observed that McDougall J may have been overstating the expansion for which the appellant was contending.

Their Honours noted that similar claims have been upheld in other common law jurisdictions such as Canada, New Zealand and Singapore.

Whilst Basten JA and Macfarlan JA remained silent as to whether it was appropriate for a trial judge to find a novel duty of care, Leeming JA respectfully disagreed. His Honour opined that there is no reason why a "test case" cannot be run and won in the first instance (so long as binding authority does not preclude it).

Builders may be called to account for latent defects detected by owners corporations

This unexpected landmark decision means that builders of commercial premises in NSW may, in some circumstances, owe a duty of care to owners corporations with responsibility for the common property of commercial premises. This means that:

  • The contract that the builder and original owner entered into may not displace the general law duty of care
  • Builders may be called to account for latent defects detected by owners corporations with responsibility for the common property of commercial premises, someone with whom they have no contractual relationship
  • Builders may be found to owe a duty of care to an owners corporation in circumstances where protection is not afforded by the Home Building Act

Builder appeals to High Court

The builder has appealed to the High Court so the current position might be reversed. We will publish further updates as new information comes to light.