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Court opens the way for subsequent purchasers of commercial buildings to claim against a builder for pure economic loss

Newsletter 22 April 2014

Since Bryan v Maloney [1], the Courts have recognised that a builder owes a duty of care to a successor in title of residential property for pure economic loss. While the Home Building Act 1989 (NSW) (Home Building Act) is silent as to whether the general law principle extends to constructions other than residential homes, the Court refused to extend this duty of care to a non-residential property in Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) [2].

However, in a recent NSW Court of Appeal case [3], the Court recognised the common law duty of care to avoid economic loss arising from defective building work owed to a successor in title of a commercial building.

Facts

The developer contracted with a builder to carry out a development comprising of a demolition of the existing hotel and construction of a 22 storey mixed use retail, restaurant, residential and serviced apartments building in Chatswood.

The building was completed in 1999 and on registration of the strata plan for the serviced apartments, the Owners Corporation came into existence. Almost 10 years later, the Owners Corporation commenced proceedings against the builder claiming defective building works and identified numerous defects in the common property said to have been discovered in early 2004.

The Owners Corporation had conceded that it was not entitled to the benefit of the statutory warranties under the Home Building Act. Accordingly, its claim for the costs of rectifying the latent defects in the common property against the builder was brought in negligence under common law.

The Issue

The critical issue in this case was whether, the fact that the Owners Corporation may be vulnerable is relevant in circumstances where the original owner is not.

The Court confirmed the importance of the Owners Corporation’s extent of vulnerability as a key factor in identifying the scope of a duty of care for pure economic loss, which ordinarily is a prerequisite to imposing such a duty [4].

In this case, the Owners Corporation submitted it was vulnerable because of the manner of its creation in that it had no ability to control the work undertaken by the builder, nor carry out any appropriate inspection or investigation before acquiring the common property.

However, the builder argued, in broad terms, that the Owners Corporation was the alter ego of the beneficial owners of the lots (and common property) which, at the point of registration of the strata plan, vested in the developer. Accordingly, the Owners Corporation, on that view, was no more vulnerable than the developer itself.

The builder also argued that the builder’s liability is limited to the statutory warranties owed to successors in title of residential dwellings under the Home Building Act and the Owners Corporation’s claim would be extending the builder’s liability for pure economic loss beyond this statutory scheme, relying on Woolcock Street Investments as authority for this view.

The Decision

The Court found that the builder did owe a duty of care to the developer and to the body corporate on which the common property was vested on registration of the strata plan.

The Court found that there are significant features which weigh in favour of the existence of a duty of care covering loss resulting from latent defects which were structural; constituted a danger to persons or property in, or in the vicinity of, the serviced apartments; or made them uninhabitable.

The Court found that the Owners Corporation was vulnerable because:

  • There was no evidence that the Owners Corporation could have taken steps to protect it from the builder’s conduct so as to impose liability on the builder – it was not a party to the building contract;
  • The defects could not have been discovered by the Owners Corporation - it was not a practicable option for the Owners Corporation or the investors, who had a more limited interest in the building, to realistically be expected to carry out inspections, nor would they have any right, individually, to remove all render or masonry from part of the common property to identify the defects.

The Court doubted that the statutory warranties under the Home Building Act in any way affected the general law principles in tort. The reforms under the Home Building Act were irrelevant. Instead the Court reconciled Bryan v Maloney and Woolcock Street Investments by saying that in Woolcock Street Investments, there was no challenge to the principles established in Bryan v Maloney, the joint reasons rejecting ‘a bright line of cases concerning the construction of dwellings and cases concerning the construction of other buildings.’

Conclusion

The Court acknowledged Street CJ’s comments that legal principle is constantly evolving [5] and from time to time new classes of tortious liability will be identified. However, the Court recognised that the law is dynamic and this is not a new class of tortious liability, but rather what the Owners Corporation seeks is merely the application in a novel case of principles governing the existence of a duty of care.

This case is likely to lead to many claims for pure economic loss being brought by owners corporations against builders affected by defective works in commercial buildings not covered by the statutory warranties under the Home Building Act.

[1] [1995] 182 CLR 609
[2] [2004] 216 CLR 515
[3] The Owners – Strata Plan No.61288 v Brookfield Australia Investments Ltd [2013] NSWCA 317
[4] Perre v Apand Pty Ltd [1999] HCA 36
[5] Reg v Unger [1977] 2 NSWLR 990 [at 995]


Christopher Conolly, Partner
Sydney

Newsletter 22 April 2014
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