Building defects – is there liability in negligence?

On 8 October 2014, the High Court handed down its decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36 in which it unanimously held that a builder did not owe a strata company a duty of care in negligence to avoid causing the strata company to suffer pure economic loss resulting from latent defects.  In doing so, the High Court overruled the decision of the Court of Appeal of NSW.

The decision represents a win for the construction industry and serves as a warning to buyers of apartments that claims against builders for defective works outside of the six year statutory defect liability period are unlikely to be successful.

Background

Chelsea Apartments Pty Ltd (Chelsea) contracted with Brookfield Multiplex Ltd (Brookfield) to design and construct an apartment building in Sydney.  Part of the building was to comprise serviced apartments that would form part of a “Holiday Inn”.  Chelsea sold the strata lots comprising the Holiday Inn to investors.  Investors acquired these strata lots subject to a lease to the operator of the Holiday Inn.

The strata company for the serviced apartment complex commenced action against Brookfield to recover the cost of repairing latent defects in the common property.  This was on the basis that Brookfield had been negligent in its performance of the building works and owed the strata company a duty of care.

The NSW Supreme Court held that Brookfield did not owe the strata company a duty of care.  However, the decision was overturned by the NSW Court of Appeal and ultimately appealed to the High Court.

High Court decision

In deciding that no duty of care was owed to the strata company, the High Court placed weight on the detailed terms of the design and construct contract between Chelsea and Brookfield and the contracts for the sale of serviced apartments between Chelsea and apartments purchasers.

The design and construct contract contained detailed provisions dealing with defect rectification and the performance of works.  The serviced apartment sale contracts imposed an obligation on Chelsea to rectify defective works in relation to the common property and each serviced apartment for seven months and six months respectively after registration of the strata plan.

The detailed contract provisions suggested that neither Chelsea nor serviced apartment purchasers were “vulnerable” and that they each had the opportunity to protect themselves against the risk of defective works by the builder.

Counsel for the strata company argued that it was vulnerable as it was not a party to the serviced apartment sale contracts.  This argument was rejected by the High Court on the basis that the strata company was an agent/proxy for each of the apartment buyers – accordingly it should be considered no more vulnerable than the apartment buyers.

Lavan Legal comment

In Western Australia, builders are required to rectify defective works identified within six years of practical completion of the works under the Building Services (Complaint Resolution and Administration) Act 2011 (WA). This is often referred to as the statutory defect liability period.

Negligence claims have been viewed as a fallback to be pursued where the statutory defect liability has expired.

This decision shows that there is very limited scope for apartment building owners to make successful negligence claims against builders in respect of defective works causing economic loss.

Consequently, owners should take steps to ensure that any defects are identified, and an appropriate claim is made against the builder, within six years of practical completion of the works.