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10 Oct 2013

A new class of tortious liability in New South Wales?

by Philip Dawson, Jennifer Ingram

The NSW Court of Appeal has opened the door for owners corporations for commercial buildings to bring claims of negligence for pure economic loss against builders – an action previously thought to be limited to subsequent purchasers of residential buildings.

Since the mid-1990s, the High Court has recognised the existence of a duty of care owed by a builder to a subsequent purchaser of residential premises for recovery of pure economic loss (Bryan v Maloney (1995) 182 CLR 609). It later refused, however, to extend this duty of care to a purchaser of a warehouse office building (Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515).

The NSW Court of Appeal, in The Owners – Strata Plan No. 61288 v Brookfield Australia Investments Ltd [2013] NSWCA 317, has found that the differences between the purchasers of residential and commercial properties are not as great as we might previously have thought. The key consideration for the court when establishing whether a builder owes a duty to a subsequent purchaser in respect of pure economic loss is the extent to which the purchaser is vulnerable.

The Owners – Strata Plan No. 61288 v Brookfield concerned the construction of a mixed-use retail, restaurant, residential and serviced apartments building in Chatswood, New South Wales by Multiplex (now Brookfield Australia Investments) in 1999. The appellant, the owners' corporation for the serviced apartments, came into existence after completion of the building work on registration of the strata plan for the serviced apartments. It discovered certain defects in the common property and, in November 2008, brought proceedings against the builder in negligence for pure economic loss.

The Court affirmed that the concept of vulnerability of the purchaser is a key factor in identifying the scope of the duty of care for pure economic loss. Vulnerability refers to the purchaser's inability to protect itself from the consequences of the builder's failure to use reasonable care; whether than be in a physical sense (controlling the physical events that gave rise to the loss) or a legal sense (negotiating a contractual arrangement imposing liability on the builder).

The appellant was found to be vulnerable in that:

1. the defects were latent and could not have been discovered by a purchaser exercising reasonable care; and

2. there was no submission that the appellant could in some way have protected itself by contract so as to impose liability on the respondent.

The Court did not agree with the builder's arguments that to find a duty of care in these circumstances would be an extension of the general law. It noted that Woolcock Street did not challenge the principles in Bryan v Maloney and indeed Woolcock Street rejected "a bright line between cases concerning the construction of dwellings and cases concerning the construction of other buildings". The plaintiff in Woolcock Street did not fail simply on the basis that it was purchaser of a commercial building, but rather because the plaintiff did not demonstrate that it was sufficiently vulnerable to bring itself within the principles established in Bryan v Maloney.

Similarly the Court did not agree with the builder's argument that it would be inappropriate for the Court to go beyond the statutory scheme under the Home Building Act 1989 (NSW), which creates statutory warranties in respect of defects for subsequent purchasers of residential buildings only, to expand builders' liability for pure economic loss to an area where the legislature did not intend it should operate.

The Court doubted that the legislature's intention, in enacting such legislation in respect of residential buildings, was to bar subsequent purchasers of commercial buildings from any general law rights they may have to recover pure economic loss resulting from defective work. It found that a consideration of the Home Building Act was irrelevant for the purposes of determining the question before it.

The Court commented that this case does not represent a radical change in the law, but is merely the application of existing principles to a novel case.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.