BackgroundThe owners corporation of serviced apartments (OC) found some latent defects (which could not have reasonably been discovered before the purchase of the property) in the common property of the serviced apartment complex.
The OC incurred costs rectifying those defects, and commenced legal proceedings in the Supreme Court of NSW in 2008 against the builder to recover the costs.
The High Court of Australia unanimously allowed (in 4 separate judgments) the appeal by the builder. The court concluded that the builder had no duty to avoid causing the OC economic loss, resulting from latent defects in the common property which had remained undiscovered for nearly nine years.
In Bryan v Maloney  HCA 17 (1995) 182 CLR 609, the High Court had previously held that builders have a potential duty of care to subsequent purchasers for latent defects which may arise in a dwelling house. This decision has caused a lot of uncertainty about the extent of a builder's duty and potential liability.
Brookfield was engaged by a developer under a design and construct contract to build strata-titled apartments in Chatswood in suburban Sydney. The developer was the registered proprietor of the land.
The OC commenced its existence when the strata plan was registered. At the same time, it became the registered proprietor of the common property. It had no contractual relationship with Brookfield or the developer. The OC did, however, hold the common property as agent for the developer and was effectively subject to the developer's control.
The design and construct contract contained detailed provisions with respect to the quality of the work to be performed by Brookfield and required Brookfield to remedy defects or omissions in the work within a defined defects liability period. The standard form contract of sale to purchasers of the serviced apartments, annexed to the design and construct contract, conferred on each purchaser specific contractual rights in relation to defects in the property, including the common property.
The decisionsThe Supreme Court of New South Wales (McDougall J) held that Brookfield did not owe the duty suggested by the OC. That duty was to take reasonable care to avoid a reasonably foreseeable economic loss to the OC in having to make good the consequences of latent defects caused by the building's defective design and/or construction. McDougall J held that the duty alleged was novel and that it was not appropriate for a Judge at first instance to identify and impose a novel duty.
On appeal, the NSW Court of Appeal unanimously held that Brookfield did owe the OC a duty of care. However, the actual duty found to be owed was a narrower duty to avoid causing loss resulting from latent defects which were structural or dangerous or which made the serviced apartments uninhabitable.
The Court of Appeal also decided:
- there will generally be concurrent liability for defects in both contract and tort, and
- the requirement of "vulnerability" for pure economic loss was present for the developer, the OC and, probably, subsequent purchasers.
The High Court unanimously held that Brookfield did not owe a duty of care to the OC to avoid causing it economic loss resulting from latent defects in the common property.
Chief Justice French held that:
- the nature and content of the contractual arrangements, including detailed provisions for dealing with and limiting defects liability
- the sophistication of the parties, and
- the relationship of the developer to the OC,
The High Court also stated that:
"To impose upon a defendant builder a greater liability to a disappointed purchaser than to the party for whom the building was made and by whom the defendant was paid for its work would reduce the common law to incoherence..."
ConclusionThe High Court recognised the importance of the terms of the bargain struck between the parties and recognised that the contract here meant that a concurrent duty of care did not arise.
W G Stark
Hayden Starke Chambers