Does a builder owe a duty of care to subsequent owners? The High Court answers in a landmark decision

The High Court has unanimously ruled that a builder does not owe a duty of care to an Owners’ Corporation, a successor in title, for damage relating to ‘latent defects’ resulting in pure economic loss. The consequence for builders is that they will likely not be liable for the cost of fixing alleged defects to a property – in this case, it was the common property of an apartment building – where a claim is made by someone that has purchased the property from the original owner.

Facts

In Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61228 [2014] HCA 36, the builder was contracted to build a “mixed use retail, restaurant, residential and serviced apartments building” by a developer who owned the land. The contract price was in excess of $57 million and, as to be expected, contained detailed terms pertaining to the quality of work to be performed and provisions for rectifying defects. The terms of the contract were met by the builder as specified. Upon completion of the apartment complex, an Owner’s Corporation was created to manage the strata scheme. The Corporation then discovered defects in the building that needed to be rectified and undertook the works at its own expense. Subsequently, the Corporation brought a negligence claim against the builder to recoup these financial losses.

Questions to be answered

Did the builder owe a duty to exercise reasonable care to avoid causing pure economic loss stemming from defects even though the specifications in the contract were met?

In regards to pure economic loss, how does the duty from the builder to the developer differ to that of the builder to a future owner?

Decision

The High Court held that the builder did not owe a duty to the Corporation.

A crucial element of establishing a duty is dependent upon the vulnerability of the plaintiff. Justices Hayne and Kiefel defined vulnerability as:

“[T]he plaintiff’s inability to protect itself from the defendant’s want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant.”

The court found that the detailed terms of the contract between the “sophisticated” parties suggested that the developer could “protect their own interests”.  As such, the absence of any real vulnerability meant that there was no duty owed by the builder to either the developer or the Corporation to avoid pure economic loss outside of what was contained in the contract.

It was found that a duty owed from the builder to the original owners was not the same as a duty owed to future owners. Justice Gageler found that, since future owners have the freedom to choose the price they are willing to pay and the terms upon which they are prepared to purchase the property, there is no reason that future owners are not able to protect themselves from this type of pure economic loss. Therefore, the builder owes no duty to prevent future owners from incurring the cost of repairing latent defects.

Implications

The High Court has given certainty to those in the construction industry as to whether a builder owes a duty to a subsequent purchaser (the position was not so clear after the Court of Appeal’s decision in the same case). The answer is no.

The significance of the decision is the recognition and weight given to the contractual rights and commercial bargaining of parties. The High Court indicated that the rather exhaustive contractual arrangements made between sophisticated parties meant that a tortious duty of care did not arise and the court should not intervene to change the bargain that had been reached.

The above is not intended as legal advice. You should obtain legal advice in relation to your own specific circumstances.

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