30 Oct 2014

High Court sets out duty of care for builders of commercial property

by Frank Bannon, Louise Dargan

In the commercial property sphere, investors will have to be diligent in protecting their interests and one way of doing so is by contract.

In a unanimous decision, the High Court has overturned a decision of the New South Wales Court of Appeal which had held that a builder owed and breached a duty of care to an Owners' Corporation and was liable in negligence for damages for pure economic loss.

The High Court has previously held that a builder may owe a duty of care to subsequent purchasers of residential premises in the context of claims for pure economic loss. However, this duty had not been extended to purchasers of commercial property.

Although no duty was found to exist on the facts of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61228 ([2014] HCA 36), the High Court has not closed the door on the possibility of such a duty arising, in different circumstances.

Commercial and factual background

The case concerned the construction of a mixed-use retail, restaurant, residential and serviced apartments complex at Chatswood. Floors 1-9 of the complex contain serviced apartment lots and floors 10-22 contain residential apartments. Chelsea Apartments Pty Ltd (Developer) was the registered proprietor and developer of the land. Pursuant to a Deed of Master Agreement in August 1997, the Developer agreed with Stockland to design and construct the building and then to lease the serviced apartment lots to Stockland's subsidiary (Manager). The Manager was to manage the serviced apartments as a hotel, on behalf of the owners of the apartment lots.

The Deed of Master Agreement contained warranties by the Developer in favour of the Manager as to the quality of the building work.

In November 1997, the Developer entered into a contract with Brookfield Multiplex Ltd (Builder) to design and construct the serviced apartments (D&C Contract). The D&C Contract contained a warranties and other contractual obligations owed by the Builder to the Developer concerning the quality of work.

The Owners' Corporation was brought into existence after completion of the works and upon registration of the strata plan. The Owners' Corporation became the registered proprietor of common property which it held under strata legislation as agent for the Developer and, later, for the investors who purchased the individual apartment lots. The Owners' Corporation was not a party to the D&C Contract or the Deed of Master Agreement, and could not have been as it was not in existence at the time the agreements were executed.

The Owners' Corporation discovered latent defects in the common property and brought proceedings against the Builder. The Owners' Corporation did not have the benefit of the warranties contained in the Home Building Act 1989 (NSW) that apply to residential building works (a matter that was accepted at trial). As noted above, the Owners' Corporation was not a party to the relevant agreements and so did not have contractual rights against the Builder. (The investors' rights against the Developer under the individual contracts of sale were not the subject of the High Court proceedings.)

The Owners' Corporation sued the Builder for negligence. The discovered defects had not caused any damage to the building (or any person), so the Owners' Corporation's alleged loss was limited to the cost of the remedial works. The alleged loss was, therefore, "pure economic loss".

The principal issue before the High Court was whether the Builder owed the Owners' Corporation a duty to exercise reasonable care in the construction of the building to avoid causing the Owners' Corporation to suffer pure economic loss resulting from latent defects in the common property. An aspect of the issue before the High Court was whether any duty arose as an extension of a duty owed by the Builder to the Developer (if such duty were found to exist) or whether there was a separate duty of care owed by the Developer to the Owners' Corporation.

In four separate judgments, all seven justices of the High Court held that no duty of care existed.

Vulnerability and contractual obligations

Vulnerability has been traditionally recognised as the key touchstone for a finding of negligence for pure economic loss. The judgments illustrate the weight placed on the existing contractual arrangements in assessing whether the Developer or Owners' Corporation was vulnerable.

Chief Justice French stated that the relationship between the Builder and the Developer was "defined in detail" by the D&C Contract and there was no assumption of responsibility by the Builder so as to give rise to a duty of care to the Developer or the Owners' Corporation as its proxy. His Honour also held that the investors were parties to standard form contracts and agreed to their terms and could not be regarded as vulnerable.

Justices Hayne and Kiefel were prepared to assume that each of the Developer and subsequent purchasers relied on the Builder to "do its work properly". That was not, however, sufficient to establish vulnerability. Vulnerability is concerned with the plaintiff's inability to protect itself from the defendant's negligence. Their Honours noted that as the D&C Contract and the original contracts of sale contained provisions regarding the quality of work, it could not be said that the Developer or subsequent purchasers were vulnerable in the relevant sense.

Justices Crennan, Bell and Keane emphasised that the D&C Contract between the Builder and Developer contained detailed provisions relating to the risk of latent defects. Their Honours held that the Builder's liability to the Developer was to be determined by reference to the D&C Contract and not any common law duty of care. Their Honours also said that each purchaser of lots from the Developer "exercised its contractual wisdom to bargain for protection against the risk of defects in the work". Their Honours held that there was no basis in the circumstances for finding an assumption of liability by the Builder in favour of the Developer.

Justice Gageler also stated that it is not the court's role to extend the statutory protection provided in respect of residential dwellings to investors and circumvent the deliberate policy choice of Parliament.

Take-home message

Although there were multiple judgments, the essential message to be drawn from this decision is that in the commercial property sphere, investors will have to be diligent in protecting their interests and one way of doing so is by contract. The consequences of a failure to exercise such diligence will not be able to be sheeted home to builders through negligence claims, unless there are special circumstances giving rise to a duty of care.


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