As a result of a decision of the NSW Court of Appeal this week builders can once again be pursued by owners corporations for defective work outside the statutory warranty regime.
A brief period of respite: NSW Supreme Court decisions in 2012
Last year the NSW Supreme Court handed down two decisions involving Brookfield Australia Investments Ltd as the builder accused of negligent work in two high rise blocks of units. One related to a residential apartment building (the Star of the Sea case – you may have seen our article at page 32 of 2013/Edition 1 of the MBA Building News).  The other was a mixed use building with commercial premises and serviced apartments (as well as some residential units – however these units were governed by a separate owners corporation, and by the time the proceedings came on for trial, they had settled their claim) (the Mantra Chatswood case). 
The court found in each case that Brookfield did not owe any duty of care to the owners corporations.
The cases were significant. It is not open to a subsequent owner of a building (including an owners corporation) to sue the builder for breach of contract, because the subsequent owner was not a party to the building contract. Therefore claims by subsequent owners against builders for defects had to be brought either as claims for breach of a duty of care (i.e. negligence) or breach of statutory warranties. In the ACT the statutory warranties apply only to residential buildings not higher than 3 storeys, and expire 2 years after practical completion for non-structural defects and 6 years after for structural defects. Eliminating a claim in negligence therefore substantially curtailed the rights an owners corporation (particularly for high-rise buildings in the ACT) has against a builder for defects.
- The two cases were heard by the same judge and, although apparently consistent in their outcomes, it is difficult to reconcile the judge’s reasoning across the two cases. McDougall J found (amongst other reasons):
- In the Star of the Sea case: The property was residential and statutory warranties were available (unlike in the ACT, the NSW statutory warranties apply to residential buildings of all heights). Therefore the owners corporation was not vulnerable and there was no need to find that a common law duty of care was owed by the builder.
In the Mantra Chatswood case: The legislature had withheld the benefit of the statutory warranty scheme from owners of commercial buildings (including serviced apartments) ‘as a matter of deliberate policy choice.’  Therefore the court should not extend protection to those owners by finding that a common law duty of care was owed because the courts should not ‘go where the legislature did not.’ 
The Mantra Chatswood appeal
The owners corporation in the Mantra Chatswood case filed an appeal. The appeal was heard by the NSW Court of Appeal on 20 August 2013, with the decision published on 25 September 2013.  The Court of Appeal overturned the lower court’s decision, and found that Brookfield Multiplex did in fact owe a duty of care to the owners corporation. As such, the owners corporation was entitled to damages for the cost of rectifying the negligent work, which was predominantly related to water leakage from balconies.
Although the owners corporation in the residential Star of the Sea case did not appeal, the court’s findings in the Mantra Chatswood case possibly also weakens the precedent value of the Star of the Sea case.
So what is the builder liable for?
The Court of Appeal found that the duty of care owed by the builder to the owners corporation was narrower than the contractual obligations owed by the builder to the developer. That is, the owners corporation could not sue the builder for the cost of bringing the building up to the standard prescribed in the contract (e.g. use of particular materials). The owners corporation could only sue the builder for ‘the cost of steps reasonably taken to mitigate the risk of physical damage or personal injury.’  This would include the cost of altering or replacing parts of the building that were dangerous or defects that would, if left unrectified, cause damage to other parts of the building (such as structural defects, or defective waterproofing).
On the Court of Appeal’s reasoning, the liability would not include rectifying aesthetic defects such as cracking render. The specific defects in the Mantra Chatswood building were not addressed, however – the issue was remitted back to the Supreme Court for further hearing.
Implications for builders and owners corporations
The effect of the appeal is that builders are now firmly exposed to claims by owners corporations for defective work, even where there were no statutory warranties or the warranty period has expired. It is likely, however, that given the implications of this decision on the construction industry, Brookfield will take it on appeal to the High Court – in which case, keep an eye out for a future eBrief.
Builders, owners corporations or individual unit owners involved in actual or anticipated disputes regarding defects should therefore seek advice early before formulating a strategy for dealing with claims. The specialist construction dispute resolution team at Meyer Vandenberg can help you understand your likely exposure to, or right to recover for, these sorts of claims, both now and into the future.
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