Case summary: Brookfield v Owners Corporation

​On 8 October 2014, the High Court of Australia (French CJ, Hayne, Crennan, Kiefel, Bell, Gageler and Keane JJ) handed down its decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 (Brookfield v Owners Corporation).¹ The Court confirmed that a builder will not owe a common law duty of care to a subsequent purchaser of a commercial building.

The decision was comprised of 4 separate judgements and related to whether the Court should impose a duty of care on builders to protect owners corporations against economic loss caused by latent defects.

The Court essentially followed the High Court of Australia’s decision in Woolcock Street Investments Pty Ltd v CDG Pty Ltd² (Woolcock).

The Court also considered the decision in Bryan v Maloney³ and confirmed that no duty of care will be owed unless the subsequent owner falls within a class of persons incapable of protecting themselves from the consequences of a builder’s want of reasonable care, i.e. the subsequent owner is ‘vulnerable’.

By following Woolcock, the Court indicated that owners corporations, and by extension purchasers of an investment apartment, in a building constructed to be used as serviced apartments will be deemed to be capable of protecting themselves contractually.

Consequences of decision

The decision is a further clarification of the law relating to when a common law duty of care will arise. It does not materially change the current understanding of the law of tort.

Developers should be aware:

• a Court is unlikely to find a developer ‘vulnerable’ and it is unlikely that a developer would be able to prove that a builder owed the developer a common law duty of care.  It is therefore important for developers to tailor building contracts carefully to ensure that a builder will remain liable for latent defects after a final certificate has issued; and
• it is likely that purchasers will attempt to negotiate more protection against defects into purchase contracts.

In relation to subsequent purchasers of commercial property:

• purchasers should take the possibility of construction defects into account when evaluating a property;
• given that a subsequent purchaser will not have a direct contractual link with the builder, a subsequent purchaser should attempt to reduce the risk of latent construction defects causing loss or damage through its contractual arrangements with the vendor.  At a minimum, a subsequent purchaser should ask the vendor of the property to assign to the purchaser all warranties received from the builder and all rights the vendor has or had under the building contract.

Background

The case concerned a claim by Owners Corporation Strata Plan 61288 (Owners Corporation) against Brookfield Multiplex Ltd (Brookfield) for the cost of rectifying alleged defects in common property. Brookfield contracted with a developer to design and construct a serviced apartment complex. Latent defects in the common property of the building were subsequently discovered.

The Owners Corporation alleged that the builder Brookfield breached its common law duty of care and, as a result, the Owners Corporation had suffered loss in the form of pure economic loss. The Owners Corporation claimed damages from Brookfield for the cost of rectifying the defects, the diminished value of the building and the loss of rents and income during the rectification period.

At the initial trial, the Supreme Court of New South Wales found that Brookfield did not owe the Owners Corporation a duty of care to avoid causing it loss resulting from latent defects.  The Court at first instance found that the contract dealt comprehensively with the relationship between the parties, and there was therefore no reason for the law to intervene with a general duty of care.

This decision was overturned on appeal by the NSW Court of Appeal. The Court held that Brookfield did owe the Owners Corporation a duty to exercise reasonable care in the construction of the building and that the contractual relationship between the parties did not exclude any liability for defects which might arise under contract or general law.

The High Court of Australia overturned this decision and held that no duty of care existed in this relationship. The Court said that the Owners Corporation could not be considered vulnerable because of the contractual relationship that existed between Brookfield and the developer and the original purchasers. The contract contained detailed provisions relating to the risk of latent defects in Brookfield’s work and required Brookfield to undertake repairs in certain situations.  Several members of the Court indicated that the purchasers could have decided not to proceed with the sale or could have negotiated better defect protection.

This contract demonstrated the ability of the original owner to protect against any lack of care by the builder in performing its contractual obligations. The original owner therefore did not rely on the builder to perform its works, and no common law duty of care can be owed to it or the Owners Corporation as subsequent owner.

¹[2013] HCA 36.

²(2004) 205 ALR 522.

³(1995) 182 CLR 609.