Builder’s duty not owed to subsequent purchasers

Legal Directions

Two recent Supreme Court of NSW judgments have determined that a builder does not owe a common law duty of care to the subsequent purchaser of a property for the costs of rectifying defects arising from defective design or construction.

The judgments are of concern to owners corporations and owners of non-residential properties who may not be able to recover the costs of defective works undertaken by a builder, particularly in circumstances where the defects are latent and not apparent until a later date.

Background

Both cases involved very similar facts, and issues, and were preliminary determinations heard by the same judge.

Both properties were strata buildings which had been designed and constructed by a builder for a developer. Following completion of construction, strata plans were registered for each building with the common property being vested in the owners corporations.

As a result of defects with the design and construction of the building, the owners corporation suffered economic loss in the form of the cost of rectifying those defects. Further, as each owners corporation had acquired title from the developer, they were subsequent purchasers and had no direct contractual rights against the builder.

In both cases the owners corporation alleged that the builder owed a common law duty of care to avoid a reasonably foreseeable economic loss to them by having to make good the consequence of any latent defects caused by the building’s defective design and / or construction.

Star of the Sea

In Owners Corporations Strata Plan 72535 v Brookfield (‘Star of the Sea’) [2012] NSWSC 712 (29 June 2012), the owners corporation claimed damages against the builder for:

  • Breach of statutory warranties under the Home Building Act 1989 (NSW) – on the basis that the building was a residential construction thereby attracting the protections of that Act
  • Breach of a common law duty of care.

Justice McDougall agreed that the building attracted the protections of the HBA, however did not accept the owners corporation’s contention that a common law duty of care also existed as:

  • A duty of care owed to a subsequent purchaser by the original builder could result in anomalies in comparison to the original owner’s rights against the builder – as the original owner’s rights against the builder could be limited by contract, whereas the subsequent purchaser’s rights (in tort) against the builder were not so limited
  • There was no clear judicial authority to support such a duty of care existing and the authority of Bryan v Moloney only justified a duty of care existing in circumstances where a sufficient relationship of ‘proximity’ existed, however proximity had subsequently been discarded as the basis of determining a duty of care
  • To the extent that the owners corporation claimed its ‘vulnerability’ justified extending a duty of care, it had the benefit of statutory warranties under the HBA to alleviate that vulnerability – and His Honour was reluctant to impose a duty of care over and above that which Parliament had expressly imposed.

Accordingly, Justice McDougall determined that no common law duty of care was owed by the builder to the owners corporation (as subsequent purchaser), and could rationalise that determination as the owners corporation was protected by the statutory warranties available.

Mantra Chatswood

In Owners Corporation Strata Plan 61288 v Brookfield Multiplex (‘Mantra Chatswood’) [2012] NSWSC 1219 (10 October 2012), the owners corporation sought damages from the builder based solely upon a common law duty of care as the statutory warranties available under the HBA were not available as the building was not residential.

Based upon the same reasoning in Star of the Sea Justice McDougall determined that the builder did not owe the owners corporation (as a subsequent purchaser) a common law duty of care. His Honour further justified that determination on the grounds that:

  • In the absence of authority to support such a duty of care, it was inappropriate for a Court of first instance to recognise an entirely novel category of case
  • Where Parliament had provided express protection for residential properties under the HBA, but not provided similar protections for non-residential properties, imposing a duty of care would create a protection which the legislature appeared not to have considered justified.

Whilst His Honour’s decision that no duty of care was owed was grounded in legal authority and reasoning, his justification for determining that a duty of care was not necessary in the Star of the Sea (due to the HBA statutory warranties) appears to have made it difficult for him to later determine in the Mantra Chatswood that such a duty existed.

Indeed, His Honour stated in Mantra Chatswood: ‘I start with what I said in Star of the Sea. The key feature of my reasoning in that case was that the Owners Corporation had the benefit of the statutory implied warranties … I said in substance that it was not appropriate for the Court to impose some further or more onerous duty of care .. In this case, however, it is clear … the Owners Corporation does not have (nor did it ever have) the benefit of that statutory regime’.

Comment

Whilst both judgments are of concern to owners corporations, the absence of a duty of care only exists in relation to the building work undertaken prior to registration of the strata plan and the absence of a duty of care for residential buildings is addressed by the statutory warranties under the HBA. Further the judgments are confined to claims for pure economic losses, and do not extend to claims for broader losses such as for personal injury or property damage.

It may also be that the absence of protection to owners corporation for non residential buildings is otherwise addressed by legislation or on appeal – as stated by Justice McDougall a change in the law was ‘something to be undertaken by the legislature … [or] … something to be undertaken at a higher level in the Curial hierarchy’.

Authored by Andrew Toogood, Partner, Sydney.


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