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'High Court clarifies builders duty of care to developers and owners for economic loss'

Thursday October 30, 2014

The below article from 30 October 2014 has been provided by Jay Leary and Roger Allingham, Herbert Smith Freehills LLP

In brief

Earlier this month, the High Court of Australia delivered its judgement, unanimously overturning the NSW Court of Appeal, in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36. The High Court held that the builder of an apartment complex did not owe a common law duty of care to the Owners Corporation to avoid causing it economic loss resulting from latent defects in the building’s common property.

Background

Brookfield Multiplex Ltd (Builder) was engaged by a developer to design and construct an apartment complex on land in Chatswood, NSW, which the developer owned. The developer sold the lots in the building to various purchasers who, upon registration of the relevant strata plan, collectively became the Owners Corporation. Following formation of the Owners Corporation and sometime after the building was completed, latent defects were discovered in the common property.

The Owners Corporation brought a claim against the Builder in an effort to recover the losses it had incurred rectifying the various latent defects. Despite detailed provisions relating to quality and defects liability in the design and construct contract, the Builder’s liability for latent defects was excluded (following Final Completion). As such, the Owners Corporation confined its claim to common law negligence alleging that the Builder owed the Owners Corporation a duty to avoid causing it economic loss.

Almost a year ago, the NSW Court of Appeal found in favour of the Owners Corporation on the basis that the Builder owed a duty of care to avoid causing loss resulting from latent defects in the common property which were structural or constituted a danger to persons or property in the vicinity or made the apartments uninhabitable.

Decision

Earlier this month, the High Court overturned that decision. After highlighting the distinction between claims for economic loss (as in this case) and claims for damage to persons or property, French CJ noted that the relevant test for economic loss claims involves an assessment of whether the suing party was vulnerable to suffering the loss the subject of the claim.

French CJ held that the complex contractual arrangements (that clearly considered the risk of defects) between the Builder and developer as well as the developer and the purchasers (for whom the Owners Corporation acted) evinced a lack of vulnerability on the part of the developer and, consequently, the Owners Corporation. Hayne and Kiefel JJ reached a similar conclusion and further added that it was open to the purchasers (and, by extension, the Owners Corporation) to have bargained for contractual protections against loss caused by latent defects. The High Court held that the lack of vulnerability on the part of the Owners Corporation’s was fatal to its case and that the Builder did not owe the claimed duty of care.

Implications

While this decision is an important step towards clarifying this area of law, whether or not a particular relationship will give rise to a duty of care will depend on the salient features of the parties’ relationship, and in particular any contracts between the parties and any statutory overlay.

A fundamental reason for the High Court’s decision in this case was the fact that neither the developer nor the subsequent purchasers were vulnerable. They were able to protect their interests via their contractual arrangements and a failure to take that chance was not something to be repaired by the common law.

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