Builders Lament – Body Corporate’s Rejoice?

Whilst the case of The Owners – Strata plan number 61288 v Brookfield Australia Investments Ltd [2013] NSW CH 317 is on special leave to the High Court, it is a decision that neatly captures the law of negligence in relation to builders and owners of bodies corporate.
Essentially, the Court of Appeal found that a builder owed a body corporate, a duty to exercise reasonable care in the construction of the building to avoid causing the body corporate to suffer loss resulting from latent defects in the common property vested in the body corporate which defects:

    1. were structural; or
    2. constituted a danger to persons or property in, all in the vicinity of, the service departments; or
    3. made those apartments uninhabitable

The Facts

A developer (Chelsea), entered into a design and construct contract with Brookfield for construction of a 22 story building with some serviced apartments, some residential apartments and some commercial premises. In 1999, the certificate of final completion was issued and separate Strata plans for the serviced apartments (the “appellant”) and the residential apartments were registered. In 2004 the appellant discovered numerous defects in the common property and commenced proceedings, which came before McDougall J.
McDougall J was asked to decide as a preliminary question whether Brookfield owed the appellant a duty of care in negligence (“DOC”), and on that question he decided in summary:

  1. an arm’s length negotiated building contract left no room for a DOC;
  2. the fact that statutory warranties had only been given to the residential apartments suggested that Parliament intended no benefit for serviced apartments;
  3. there was no precedent he could follow, so he was not prepared to make new law.

The Decision
Basten JA gave the leading judgement with whom the other appeal judges agreed, and held that.

  1. McDougall J had erroneously concluded that the case of Astley v Antitrust Ltd [1999] HCA 6 held that a contract could completely and exclusively declare the legal rights and obligations of the parties, thereby excluding a general law duty of care; when Astley actually recognised concurrent duties in contract and negligence;
  2. One could not look to the regulations to define the intention of a statute;
  3. It was not a case of making new law, but rather applying the principles defining the limits of the duty of care for purely economic loss to the case at hand.

His Honour had canvassed the law of negligence generally and specifically in relation to buildings in some detail and some of the important issues discussed are as follows:

  1. His Honour stated that Brookfield could not have a liability to the appellant unless there had been an equivalent liability to the developer.
  2. In discussing the two important High Court cases of Bryan v Maloney [1995] HCA 17 and Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16, His Honour noted that “proximity” was no longer the critical test in determining whether a duty exists with respect economic loss (as in Bryan v Maloney), but rather notions of assumption of responsibility and known reliance (as in Woolcock Street).
  3. His Honour also considered the “vulnerability” of the appellant under 3 categories in relation to the inability to:
    1. control or influence of physical events, i.e. physically inspect the property.
      According to His Honour, it was not practicable for either the developer or the appellant to realistically carry out such inspections;
    2. negotiate a contract imposing liability on the defendant.
      His Honour did not agree that a person was not “vulnerable” because they could have insisted upon a contractual right against a builder or developer;
    3. obtain insurance.

His Honour held there was no authority that insurance was a significant element in the concept of “vulnerability”. He held that, “The duty of self- protection through insurance should properly be determined after identifying where liability lines, rather than as part of the exercise of determining where liability lies (my underlining).

  1. As to the extent of liability, if the developer had contracted for materials of a particular durability and quality (which may not have been provided), the duty of care may not extend to replacing these.
  2. His Honour then said that the duty of care extended to defects which were “dangerous” and therefore reasonably require rectification, “to protect the bodily integrity and property interests of the inhabitants of the building”.

The case dealt with the duty owed to a body corporate, which is a creature of statute created after the building is completed, which may give some comfort to bodies’ corporate, even in Queensland.

However, the principles in this case (unless overturned by the High Court) may equally apply to owners of commercial premises, because His Honour explained that Woolcock Street had been decided on the basis of pleading and agreed facts and there were no facts in that case establishing an assumption of responsibility or known reliance.

If you have any questions about this case, or you are a body corporate or a builder, please do not hesitate to contact us on 07 3220 0299.

Categories: News & Publications