High Court finds that a builder is not liable for economic loss suffered by subsequent owners of a mixed-use apartment complex

In brief - Property purchasers may assume risk of latent defects

The vexed question of extra contractual liability for latent defects in structures has troubled the construction and development industries and the common law for many years to such an extent that different answers are provided in Australia, Canada, New Zealand, the United States and the United Kingdom. Now the High Court has delivered a further judgement overturning the NSW Court of Appeal which raises important questions on the duty of care for builders, owners corporations, developers and purchasers.

Case appealed twice ends up in High Court

The owners corporation (OC) of serviced apartments commenced legal proceedings in the Supreme Court of NSW in 2008 against the builder to recover the costs incurred for rectifying defects found in the common property of the serviced apartment complex.

The matter went on appeal to the NSW Court of Appeal and was appealed again, finally ending up before the full bench of the High Court of Australia (Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36).

High Court decision raises questions around duty of care

The High Court held that the builder was not liable to compensate the OC for latent defects which had gone undiscovered for a period of about nine years. This decision raises three main questions:

1. Why is the duty of care issue important to developers, builders and purchasers?
2. Does this case negate a duty of care between builders and OCs?
3. What steps can developers, builders and purchasers take to protect themselves?

Purchasers suffered economic loss due to latent defects

This case is focused on latent defects which caused purchasers of units that were to be used as serviced apartments to suffer economic loss incurred for rectification works for defects in common property. Latent defects are defects that emerge or manifest during the life of the built structure. Often they are defects that could not have reasonably been discovered before the purchase of the property. Latent defects can arise after the expiry of the statutory warranty period under the Home Building Act 1989.

Do builders owe a duty of care to developers and purchasers?

The issue is whether builders owe a duty of care (under the common law of negligence) to the developers by whom they were engaged to build the building and to the subsequent purchasers from that developer.

Since the decision of Bryan v Maloney [1995] HCA 17; (1995) 182 CLR 609, builders have been exposed to a potential duty of care to subsequent purchasers for latent defects which may arise in a dwelling house. That decision has been the subject of much debate, and left builders with a lack of certainty and exposure to a long tail of liability. Several of the judges noted that this uncertainty had encouraged builders to set up artificial structures to help mitigate losses in the event they are found liable for latent defects.

Are OCs owed a duty of care?

OCs bear the obligation of maintenance of the common property of strata development. Although the question is not finally resolved, there must be doubt about whether an OC of a purely residential development is owed a duty of care for latent defects. If the duty does not exist, then the risk of such defects rests with the OC and, through it, the owners.

Can developers recover against builders?

Are developers able to recover against builders for latent defects outside the contractual regime? If not, what measures can be built into contracts to protect them?

Do purchasers assume the risk of latent defects?

Is it now the case that purchasers have acquired the risk for the costs of rectification of defects if the liability arises after the expiry of the statutory warranty period? Can the purchaser pursue the builder? The High Court's decision seems to indicate that purchasers may be exposed to the risk of incurring costs for rectification of latent defects after the expiration of the statutory warranty period.

Limited circumstances to recover economic loss

In reaching its decision, the High Court was concerned with the issue of whether the OC was vulnerable to the builder and whether the OC (on behalf of the purchasers) was able to protect itself. The court confirmed the established principle that damages for the cost of rectification of defects in a building are pure economic loss. Such loss is recoverable in only limited circumstances. The court decided that this case was not one of those limited circumstances.

Circumstances relevant to whether the OC was vulnerable to the builder

The judges of the High Court found that several circumstances were relevant to whether the OC (as proxy for the purchasers) was vulnerable to the builder, including:

• The original purchasers were commercial investors.
• The original purchaser and associated investors had entered into a comprehensive contract with the builder which gave rise to legal protection against the builder for defects and were taken to be fully aware of the extent of legal obligations and protections under the contract.
• The role of the superintendent under the building contract, for at least some of the judges, was a significant contractual mechanism.
• The case concerned a mixed-use development, not a dwelling such as a house (as was the case in Bryan v Maloney).

Builders should review contractual responsibilities and applicable duties

Builders should review all contractual documents to ensure they are satisfied with their responsibilities and applicable duties. They should ensure that the developer does not impose a risk or duty on the builder which makes the contractual obligation more onerous than the statutory rights.

OCs should identify potential latent defects within the statutory warranty period

OCs need to be vigilant to identify potential latent defects within the statutory warranty period. This will be a difficult task given the hidden nature of the defects. Nevertheless, it will be a courageous OC that pursues an action based solely on a duty of care in relation to latent defects.

Developers' contractual relationships should cover quality and performance of work

Developers should ensure that their contractual relationships with builders contain extensive provisions as to the quality and performance of work. Developers may wish to consider entering into deeds with builders to give the developer a 12-year limitation period for commencement of actions. Throughout the project, developers need to be proactive and involved in the construction of the building in order to ensure proper surveillance of building processes (by superintendence or project management).

Purchasers should inspect property and OC records thoroughly

Purchasers need to ensure that the purchase contract does not diminish their rights as to the quality of the property they are purchasing. Purchasers will need to ensure that they thoroughly inspect the property and the records of the OC and understand that they will probably assume the risk of latent defects.

 

This note just speaks broadly and for general information and is not intended to be comprehensive. You should not rely on this as a final statement or as advice about your own situation.