High Court confirms no duty of care owed by builders to developers and future owners in claims for pure economic loss

The High Court, in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor [2014] HCA 36 (Brookfield), has unanimously held, a builder did not owe a duty of care to an owners corporation with respect to a claim for 'pure economic loss' relating to latent defects in the common property of a strata-titled development.

Latent defects in common property

The dispute related to the design and construction of a mixed-use commercial and residential development in Chatswood, NSW. The development included nine floors of serviced apartments which were to be operated collectively as a hotel. Defects were subsequently discovered in the common property. The Owners Corporation Strata Plan (Owners Corporation) (the owners of the common property) commenced proceedings against the builder in negligence for 'pure economic loss' (that is, financial loss caused by the negligence of a party but which is not accompanied by any physical damage to person or property). As the defects had not resulted in any physical damage to the common property itself, the particular loss alleged by the Owners Corporation to have been suffered was the diminished value of the common property and the failure of the purchasers of the serviced apartments to get value for money from the developer.

While the Owners Corporation lost its case at first instance, it successfully appealed to the NSW Court of Appeal. The Owners Corporation succeeded because the Court of Appeal found the builder owed a duty of care to the Owners Corporation in negligence to avoid causing it to suffer loss resulting from latent defects in the common property in circumstances where those defects were structural or constituted a danger to persons/property in the vicinity, or made the apartments uninhabitable. This decision raised concerns for builders as it represented a significant increase in their potential liability and a shift from the previous position that (subject to a number of exceptions) a party does not owe a duty of care to avoid causing reasonably foreseeable economic loss.

The builder sought and was granted special leave to appeal to the High Court.

Duty of care to avoid causing pure economic loss?

The particular question for 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.

In determining whether the builder owed such a duty of care, the High Court considered, amongst other things, whether there was 'vulnerability' (a party's inability to protect itself from the consequences of another's want of reasonable care) on the part of the Owners Corporation. In light of the sophisticated contractual arrangements in place, which included detailed provisions with respect to quality and defects liability, it was held the Owners Corporation was not vulnerable in this instance. Chief Justice French went as far as to say the purchasers of the serviced apartments (and collectively the owners of the common property) 'were effectively investors in [a] hotel venture'.

As a consequence of there being no vulnerability, it followed there was also no duty of care owed by the builder to the Owners Corporation. The builder's appeal was allowed.

Implications

Brookfield is a significant decision which has implications for both residential and commercial building work.

In Bryan v Maloney, the High Court has previously found a duty of care existed between a builder and a subsequent purchaser of a dwelling (rather than a commercial property), arising from a builder's failure to take reasonable care in the construction of that dwelling.

However, in Brookfield the High Court appears to be drawing a line with respect to an analogous duty of care for commercial property because the necessary criterion of 'vulnerability' did not exist in that case where there were arm's length commercial parties and investors who had protected themselves by way of a detailed, contractual framework.

Legislation (for example, Part 2C of the Home Building Act 1989 (NSW) and Part 2 of the Domestic Building Contracts Act 1995 (Vic.)) provides further protection for purchasers of residential property who may not be expected to have the bargaining power or industry knowledge to protect their own economic interests. In NSW, the fact this legislation does not apply to serviced apartments shows that the Parliament has made a deliberate decision to differentiate between consumers and 'investors' as the Chief Justice observed above. The same observation applies in Victoria, where apartments used as a residential hotel are not covered by the protections under the Victorian Domestic Building Contracts Act 1995.

It is important to characterise the type of loss to which the High Court's decision relates. The case was focussed specifically around whether a duty of care is owed from a builder to an owners corporation to avoid causing ‘pure economic loss’. 'Pure economic loss' is to be distinguished from other types of loss arising from physical damage to a property. As stated above, the Owners Corporation's claim was the common property it acquired from the developer was not as valuable as it should have been if the purchasers had got 'value for money' for their investment.

However, if the latent defects had caused physical damage to the common property which resulted in the Owners Corporation having to expend money to minimise the damage or prevent an injury from occurring then the result in Brookfield may have been very different. The position will depend on the particular circumstances in each case.

Following Brookfield, owners corporations involved in commercial/mixed-use developments should give careful consideration before commencing legal proceedings against builders in the absence of appropriate contractual arrangements. A duty of care will not necessarily be imposed on a builder merely because a purchaser/investor has made a bad bargain.

It should be noted this case concerned the construction of serviced apartments (effectively a hotel operating under the 'Holiday Inn' brand). The High Court's decision therefore should not be seen as a 'universal principle' for whether a duty of care will exist for other types of property (such as apartments).