Builders' liability for pure economic loss - duty of care extended
Insurance eBulletin - 7 October 2013
In The Owners - Strata Plan No 61288 v Brookfield Australia Investments Ltd, the NSW Court of Appeal held that a builder owed a duty of care to an owners corporation of serviced apartments to prevent latent defects in the common property which were structural, dangerous to people or property in the apartments and/or made them uninhabitable.
The decision is a significant development in tort law with respect to pure economic loss as it confirms that:
concurrent duties in tort and contract can exist unless the existence of the tortious duty is so inconsistent with the terms of the relevant contract that the parties can be taken to have agreed to limit or exclude a tortious duty;
in circumstances where protection is not afforded by the statutory warranties under the Home Building Act 1989 (NSW), a builder may owe a duty of care to an owners corporation of a building; and
vulnerability is still a key factor that will be considered by a court in determining whether a builder owes a duty of care. The courts will also consider the type of defects that are the subject of the claim by the subsequent owners.
On 25 September 2013, the New South Wales Court of Appeal allowed an appeal by an owners corporation of serviced apartments. The appeal came in response to a trial judge's decision that the builder of the apartments owed it no duty to prevent pure economic loss in respect of latent defects in the common property.1 This decision has significant implications for the development of the law relating to pure economic loss arising from building defects, at least in respect to commercial building disputes. While this development is probably confined to the somewhat novel position of a statutory owners corporation in its capacity as a successor in title to the original owner of a building development, this matter could open the door to similar findings in other more commonly encountered circumstances.
Chelsea Apartments Pty Ltd (Developer) contracted with Brookfield Australia Investments Ltd (Builder) to design and construct a $55m plus development in Chatswood, Sydney (Development). The Development included both residential and commercial areas including serviced apartments.
A strata plan for the serviced apartments was registered so that the apartments could be sold to investors but managed as a serviced apartment business. Upon registration, The Owners - Strata Plan No 61288 (Owners Corporation) came into existence, becoming the owner of the common property and responsible for its maintenance and repair.
The Owners Corporation later made a claim against the Builder for the cost of rectifying latent defects in the common property. It conceded that it was not entitled to the benefit of statutory warranties under the Home Building Act 1989 (NSW) (Home Building Act) because of the commercial nature of the serviced apartments. Therefore, its claim was brought in negligence for pure economic loss.
The trial judge held that the Builder did not owe a duty of care to the Owners Corporation in the circumstances because:
- the contractual relationship between the Builder and the Developer meant there was no room for a tortious duty between them and it followed that the Builder could not owe a tortious duty to a subsequent owner;
- the fact that the warranties available under the Home Building Act did not extend to commercial premises indicated a deliberate policy choice by the legislature not to extend the liability of a builder to a subsequent owner of commercial property; and
- it was inappropriate for a trial judge to impose a new form of tortious liability.
The Owners Corporation appealed.
The Court of Appeal overruled the trial judge's decision and held that a common law duty of care, albeit of limited scope, was owed. It disagreed with the trial judge's reasons for rejecting a duty and considered the vulnerability of the Owners Corporation to be a significant factor in finding the existence of a duty.
Room for a tortious duty
The Court of Appeal acknowledged that for a tortious duty to exist between a builder and a subsequent owner, such a duty must exist between the builder and the original owner. It disagreed however with the trial judge that no such duty existed in this case between the Builder and the Developer.
The common law recognises that concurrent duties in tort and contract can exist unless the existence of the tortious duty is so inconsistent with the terms of the relevant contract that the parties can be taken to have agreed to limit or exclude a tortious duty. In this case, the Court of Appeal found that the relevant contract did not, in the Court of Appeal's view, indicate any intention to exclude a tortious duty.
Relevance of the statutory scheme
The Court of Appeal agreed that the statutory warranties contained in Part 2C of the Home Building Act were of limited reach and did not extend any relevant rights beyond "residential building work". It doubted however, whether there was any basis for the proposition put forward by the trial judge that the general law principles of tort were in any way affected by Part 2C.
Novelty of liability
The Court of Appeal did not support the trial judge's reluctance to impose what he considered to be a new form of tortious liability. It said that due to the dynamic nature of the law, new classes of tortious liability may be identified from time to time and there is no reason why these cases cannot succeed at first instance.
Nevertheless, the Court of Appeal did not consider that this matter involved the imposition of a new form of tortious liability. Rather, it said that this case involved the application of principles governing the existence of a duty of care in novel circumstances.
Existence of duty in this case
Having concluded that there was nothing to exclude a duty of care between the Builder and the Developer, the Court of Appeal went on to consider whether such a duty extended to the Owners Corporation.
The Owners Corporation's vulnerability, in the sense of its inability to protect itself from the consequences of the Builder's negligence, was a particularly important factor in finding that the Builder owed it a duty in this case.
The Owners Corporation came into existence upon registration of the strata plan, after the Builder had completed at least its primary obligations under its contract with the Developer. The manner of its creation meant that it had no ability to control or influence the Builder's conduct, nor could it negotiate contractual protections either with the Builder or its predecessor in title, the Developer.
The latent nature of the defects meant that, even if the Owners Corporation could have inspected the Development before assuming ownership, the inspection probably would not have revealed the defects.
The Court of Appeal did not consider the availability or otherwise of insurance to be a significant element in determining a subsequent owner's vulnerability.
There was no relevant indeterminacy of liability to an unknown class of persons in this case, particularly as the Builder was at all times aware of the Developer's intention to register a strata plan to facilitate the serviced apartment business.
The Court of Appeal found that in light of these factors, it was appropriate to impose a duty of care to the Owners Corporation on the Builder.
Extent of the Builder's liability
Given that the Owners Corporation was not a party to the contract between the Builder and the Developer, the Court of Appeal considered it would be incorrect to impose a tortious duty equivalent to the contractual obligations of the Builder to the Developer.
It considered that the scope of that liability should instead extend to latent defects which are "dangerous" and which reasonably require rectification "to protect the bodily integrity and property interest of the inhabitants of the building". Therefore, it would be appropriate to impose liability for economic loss resulting from latent defects which were a) structural; b) constitute a danger to persons or property in, or in the vicinity of, the serviced apartments; or c) made them uninhabitable.
Builders of high rise residential apartments have previously publically expressed their concern that the risk of litigation brought many years after completion by owners' corporations for damages for latent defects, relying on a cause of action in negligence, would mean that fewer and fewer building firms would be prepared to take on these projects.
This case, although arguably limited in scope, therefore has significant potential implications for the building industry in NSW. Its importance to the building industry and the novel development of the common law make it likely that leave to appeal to the High Court will be sought.
This matter broadens the scope for litigation against builders and in that litigation, consultants (and their professional liability insurers) will inevitably become involved. This development is also a potential concern to them, given that the Court of Appeal has confirmed that a contract negotiated between two parties will not necessarily "cover the field" and exclude a common law duty of care (unless the contract limits or excludes a tortious duty).
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