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10 Oct 14
High Court rules out duties of care owed by builders to subsequent purchasers and owners' corporations

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The High Court has unanimously held that a builder will not owe a duty of care to prevent pure economic loss to an owner, an owners’ corporation or to subsequent purchasers except in extremely limited circumstances. 

Background
Brookfield Multiplex Ltd (Builder) was engaged by Chelsea Apartments Pty Ltd (Developer) to design and construct a high rise apartment building at Chatswood.  The building included serviced apartments which were sold to investors (Subsequent Purchasers) and managed by a third party.

The Owners’ Corporation brought a claim for damages against the Builder for negligent design and construction of the building, alleging that the Builder owed the Owners’ Corporation a duty of care to prevent it from suffering economic loss (the cost of rectifying defects). 

Decision
The High Court held that the Builder did not owe the Owners’ Corporation a duty of care.  The High Court also found that the Builder would not have owed the Developer or the Subsequent Purchasers a duty of care.

The High Court held that in order for a duty to exist, the plaintiff needs to show some specific vulnerability.  This was characterised by Hayne and Keifel JJ as a concern 'with a 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'.   Conversely, if a plaintiff can protect itself, no duty of care will exist. 

Hayne and Keifel JJ found that if the relevant parties could have included provisions in their contract regulating the quality of the building (to be constructed or purchased), that would be enough to negate any vulnerability on behalf of a plaintiff necessary to establish a duty of care.  In other words, unless a plaintiff is able to show that it was unable to protect itself through contractual safeguards or by, for instance, building inspections, no duty of care will exist.  This will almost never occur because, as Gageler J stated, there are a 'variety of ways in which a subsequent purchaser might take steps to protect against the risk of latent defects'.

In this case, both the construction and sales contracts included warranties with respect to the quality of the building work and to undertake repairs.

Effect of judgment
This decision firmly dismisses almost any possibility that a builder will owe a duty of care in a commercial setting, whether to developers, subsequent purchasers or owners’ corporations in the absence of a defective building causing injury or damage to other property.

It emphasises the need for developers and subsequent purchasers of apartments or buildings to ensure that their contracts adequately deal with the quality of the works to be performed or sold.  In addition to contractual mechanisms, it may be prudent to have an expert investigate and report on the state of the premises before purchase or contractual warranty periods expire.

The decision carefully left in place the determination of the court in Bryan v Maloney so a builder can owe a duty of care in limited residential building contexts where the plaintiff can identify a specific vulnerability.  Generally, this issue of potential vulnerability is more directly addressed by residential building legislation.
 

Focus covers legal and technical issues in a general way. It is not designed to express opinions on specific cases. Focus is intended for information purposes only and should not be regarded as legal advice. Further advice should be obtained before taking action on any issue dealt with in this publication. 

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