On 8 October 2014, the High Court handed down its decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor  HCA 36 which has serious implications for apartment owners in New South Wales.
The case involved a long-running dispute between the appellant builder, Brookfield, and the respondent owners corporation with respect to building defects in the common property of a commercial building, being The Mantra Chatswood Hotel, a serviced apartment business.
The Court adopted the case-by-case approach prescribed by previous judgments in this area and held that the builder did not, in these circumstances, owe the owners corporation a duty of care to exercise reasonable care in the construction of the building to avoid causing the owners corporation economic loss resulting from latent defects in the common property.
There were two questions that the Court answered in coming to its ruling: firstly, whether the builder owed a duty of care to the developer and, secondly, whether the builder owed a duty of care to the owners corporation independently of any duty of care to the developer.
With regards to the first question, the Court held that the developer, who originally contracted with the builder, sufficiently protected itself and was not ‘vulnerable’ to the builder’s conduct in the legal sense (vulnerability being a legal requirement for a duty of care to exist).
The Court pointed out that the contract between the builder and the developer contained numerous stringent clauses holding the builder accountable for building defects. It stated that, to supplement the contractual provisions with a duty of care towards the developer would inappropriately alter the allocation of risk effected by the parties’ contract. Therefore, there was no duty of care. And, if no duty of care was owed to the developer, it would be difficult to argue that a duty of care should flow to a subsequent owners corporation as a subsequent owner. That is, the subsequent owner should not hold greater rights than the original owner, being the developer.
In relation to the second question, the Court held that the builder did not owe a duty of care to the owners corporation independently of its obligations to the developer. As the owners corporation did not exist at the time the defective work was carried out, there could not have been any reliance by the owners corporation upon the builder. Furthermore, the Court held that the owners corporation did not suffer any loss because it acquired the common property without any outlay on its part.
Consistent with its case-by-case approach, the Court distinguished this case from the previous case of Bryan v Maloney (1995) 182 CLR 609 where a subsequent owner successfully argued that a builder of a residential house was liable for economic loss arising from building defects. The Court held that the contractual protections provided to the original owner and subsequent purchaser in Bryan v Maloney were far less than those offered in the current case and consequently, a duty of care arose in Bryan v Maloney.
However, the Court also made it clear that it was inappropriate to use the mere nature of the purchase (i.e. whether it was a commercial or residential property) as the decisive factor in determining whether a duty of care exists. Rather, the salient features of the relationship between the builder and the owners corporation, including whether the builder owed the developer a relevant duty of care, must be considered.
The main practical outcome for residential apartment owners is that it will be generally much more difficult for them to succeed when suing builders in negligence for building defects in lot or common property. In particular, owners corporations will need advisors to carefully analyse the contracts relating to the development, construction and conveyance of apartments to determine the precise level of contractual protection afforded to the relevant parties. Indeed, it is fortunate that the Court left it open that such matters must be decided on a case-by-case basis, rather than set out a blanket rule that builders do not ever owe a duty of care to owners corporations.
Finally, owners will now have to rely more heavily on state and territorial government statutory warranty regimes and act rapidly to not fall foul of limitation periods. Unfortunately, these statutory warranty regimes tend to be more limited in scope than negligence. In particular, from 1 December 2014, it is anticipated that the vast majority of new apartment owners in New South Wales suffering lot and common property building defects will effectively only have 2 years to sue due to the latest amendments to the Home Building Act 1989.
Authors: Christopher Kerin & James Qian