No duty of care owed by builder and developer to Owners Corporation

Insurance eBulletin - 17 July 2012

Summary

  • In the recent case of Owners Corporation Strata Plan 72535 v Brookfield,1 the NSW Supreme Court held that a builder and developer of a resort-style residential development did not owe a common law duty of care to the development's Owners Corporation to prevent alleged defects in the common property.

  • The Owners Corporation did, however, have the benefit of statutory warranties implied by the Home Building Act 1989(NSW) against each defendant.

 

 

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Background

The "Star of the Sea" is a resort-style strata title development at Terrigal, comprising 52 residential lots and a separate manager's residence which formed part of the common property (development). Many of the residential lots were let for holiday accommodation. Only three were permanently occupied by their owners. 

The first defendant, Brookfield Australia Investments Limited (Brookfield), designed and constructed the development and the second defendant, Hiltan Pty Limited (Hiltan), was the developer. 

The plaintiff, the development's Owners Corporation, alleged that there were defects in the common property. It claimed that both Brookfield and Hiltan were liable for the defects under:

 

  • statutory warranties implied by s.18B of the Home Building Act 1989 (NSW) (Act), and
  • a common law duty of care.

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Decision

The statutory warranties 

Justice McDougall held that the relevant D&C contract concerned "residential building work" and the statutory warranties contained in section 18B of the Act were therefore implied into the contract. The Owners Corporation, as successor in title to Hiltan, was accordingly entitled to the benefit of these warranties as against both Brookfield and Hiltan, under sections 18C and 18D of the Act.

In deciding whether the statutory warranties were to be implied into the contract, the court had regard to the structure of section 18B and the language of the statutory warranties and concluded that the question is to be determined at the time when the Contract is made.

The defendants had sought to rely upon clause 6 of the Home Building Regulation 2004 (NSW) which excluded from the definition of "dwelling", and therefore arguably "residential building work", "a house or unit designed, constructed or adapted for commercial use as a tourist, holiday or overnight accommodation." Evidence was adduced by the defendants that the resort had been adapted to provide a tourist, holiday or overnight accommodation. For example, it had a reception desk and a management company conducted a holiday letting business in relation to the property.

His Honour held that the relevant evidence including, for example, provisions of the D&C contract and the development application submitted to the council, favoured a finding that the development was designed as a residential apartment complex albeit with features often associated with up-market holiday resorts. The court did not consider the subjective intentions of the apartment owners, or the subsequent use of the apartments, as being relevant.

Common law duty of care

His Honour then turned to the issue of a duty of care, remarking:

I think that the question of imposition of a duty of care is one for consideration either at the final appeal level or by the legislature.

Nevertheless, His Honour did reach a conclusion on the issue, deciding that no common law duty was owed for three reasons: 

 

  1. The Owners Corporation had the benefit of the statutory warranties. As the legislature made clear provision for the extent of a builder's liability to a subsequent owner in these statutory warranties, His Honour felt that the courts should be slow to substitute their own judgment for that of the legislature. It was therefore inappropriate to impose an additional common law duty of care.
  2. While in previous cases such as Bryan v Maloney2  courts have found that duties of care arise due to a relationship of proximity, the concept of proximity has now been discarded as the basis for the imposition of a duty of care. A relationship of proximity could not, of itself, therefore give rise to a common law duty of care. 
  3. There were no grounds for concluding that Brookfield owed a duty of care to the developer, Hiltan. Brookfield and Hiltan had negotiated, on an equal footing, a detailed contract in which each bargained for what it would give and receive. This being the case, it was not reasonable to conclude that Brookfield owed the Owners Corporation a duty of care.

His Honour added that if a common law duty of care existed, it would require a principal under a design and construct contract to "retain a small army of professional and otherwise qualified staff to supervise every aspect of the design and construction work undertaken by the builder" and that the law should be slow to impose such an onerous and expensive requirement on developers.

 

Implications for insurers

This decision highlights a continued trend by Australian courts to refrain from imposing a common law duty of care in circumstances where the wronged party's rights are, or may have been, protected either in contract or by legislation. It remains to be seen whether the decision will affect the way projects that may be subject to the Act's operation are described; for example in the D&C Contract or in plans submitted to the relevant council.

 

Authors

Patrick McGrath | Partner, Insurance Law & Litigation
Hubert Wajszel | Senior Associate, Insurance Law & Litigation 
Georgina Taylor | Graduate, Insurance Law & Litigation

 

Further information


1 [2012] NSWSC 712
2 (1995) 182 CLR 609

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