Uncertainty over builder’s duty of care to subsequent owners resolved

Legal Directions

Ongoing uncertainty as to whether a builder owes a duty of care to a subsequent owner of premises for latent defects has been resolved by the New South Wales Court of Appeal determining that a duty is owed. The existence of the duty may however depend upon the nature of the defects.

Background

Two judgments in 2012 of Justice McDougall of the Supreme Court of New South Wales held that a subsequent owner of premises was not owed a duty of care by the builder for any latent defects (being in the nature of pure economic loss).

These judgments were of particular concern to owners corporations, which are subsequent owners when a property becomes vested in them upon registration of a strata plan, as they had no recourse under the common law for building defects. Both judgments were reported in the December 2012 edition of Legal Directions.

Facts

Chelsea Apartments Pty Limited was the owner of premises that it intended to redevelop.

Chelsea retained Brookfield Australia Investments Limited to design and construct a 22 storey building on the premises. Floors 1 to 9 were to be serviced apartments and floors 10 to 22 were to be residential.

Upon completion of the building, separate strata plans were registered for the serviced apartments and the residential apartments, such that the owners corporations were subsequent owners of the building.

Five years after registration of the strata plans, a number of latent defects in the building were discovered. As the defects had been present from the time of construction, the cost of rectifying them was a pure economic loss.

The residential strata plan had the benefit of statutory warranties against Brookfield under the Home Building Act 1989 (NSW) (HBA), however the serviced apartment strata plan (the Owner) did not and needed to establish that Brookfield owed and breached a duty of care under the common law.

Judgment

Justice Basten (with MacFarlan and Leeming JJ agreeing) initially reviewed the considerations for determining whether a duty of care is owed for a pure economic loss (including the issues of vulnerability, indeterminacy, proportionality, and ordinary business conduct), and their particular relevance to the owner’s claim against Brookfield.

His Honour then observed that Justice McDougall had declined to find that duty of care was owed by Brookfield as:

  • An original owner’s rights against the builder were solely under contract and there was no room for the builder to also owe a tortious duty of care. Permitting a subsequent owner to have a tortious action against the builder might provide the subsequent owner with superior rights to the original owner, which would be anomalous under the law
  • By expressly providing statutory rights to residential owners, but not other types of owners, the parliament had intended that those other types of owners were not to have the same entitlement
  • There was no clear authority to support such a duty of care existing and Bryan v Maloney 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.

His Honour rejected the view that the contract between Brookfield and Chelsea necessarily excluded any tortious rights existing between the parties.

His Honour noted that a number of High Court authorities (including Astley v Austrust Limited) recognised that contracting parties could concurrently have obligations in contract and tort. Further, there was nothing in the contract which excluded or varied any of the tortious rights.

His Honour also rejected that the statutory warranties for residential premises under the HBA suggested that similar rights were not available for non-residential properties. His Honour did not consider this to be proper legal reasoning and, in any event, the HBA involved a broad suite of reforms to provide protections for owners of residential premises so such a conclusion could not be drawn from it.

Finally, His Honour considered that the principle in Bryan v Maloney that a duty of care was owed by a builder to a subsequent owner had not been challenged and other jurisdictions recognised such a duty of care existed.

His Honour considered that the owner was in a position of sufficient vulnerability to Brookfield, from which it was limited in its ability to protect itself, such that a duty of care should be imposed. However, given that there is no general duty of care for economic loss, His Honour suggested that the duty of care may be limited to covering losses resulting from latent defects which were (a) structural; (b) a danger to person or property in the vicinity; or (c) made the premises uninhabitable.

Comment

While the uncertainty as to whether a duty of care is owed has been resolved, it has been resolved such that builders (and their insurers) will not be able to avoid liability to subsequent owners for certain types of latent defects.

However, given the three categories of defects for which Justice Basten recognised a duty of care, it would appear from His Honour’s comments elsewhere that the duty of care may not exist for lesser, non-structural defects, such as where a lower grade material has been used, necessitating greater maintenance.

Authored by Andrew Toogood, Partner and Brian Moroney, Special Counsel, Sydney.


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