High Court finds builders do not owe a duty of care to owners corporations

Yesterday the High Court issued its decision on Brookfield Multiplex’s appeal in the Mantra Chatswood case.

The High Court reversed the NSW Court of Appeal’s decision, finding that Brookfield did not owe a duty of care in negligence (seperate to the contractual or statutory duties) to either the developer or the Owners Corporation to prevent economic losses arising from building defects.

The decision

The case related to a building that was set up to operate as a hotel – initially the Holiday Inn, then rebranded as Mantra. The original owners of the units were the investors in the hotel venture but by the time the defects emerged, many had sold.

The High Court held that, because of the very extensive contract negotiated between the builder and the developer, and that the original owners had a 6 month maintenance period given by the developer in the sale contracts, the resulting Owners Corporation was not ‘vulnerable’ and the builder did not owe it any duty of care. This was notwithstanding the fact that the maintenance period had expired, many of the units had since been sold, and the Owners Corporation could not sue on the contractual warranty given by the developer in the original sale contract.

The court held that the law of negligence would not step in to protect the investors from what had turned out to be a bad bargain.

Does this mean that all building professionals are off the hook?

No. It does not even mean that a duty of care is never owed to an investor. The majority of the court made it clear that the test for whether a duty of care is owed depends on the facts of the case.

Back in 1992, the High Court held in Bryan v Maloney[2] that the builder of a house in Tasmania was liable to the third purchaser of the house, who discovered cracks caused by defective foundations many years later. Subsequent cases[3] have limited the scope of Bryan v Maloney, finding that the test for whether a duty of care

is owed depends on a range of ‘salient features’, with most decisions hinging on whether the party ultimately suffering the loss is considered by the court to be sufficiently ‘vulnerable’ for the building professional to have owed it a duty of care. Generally speaking, it seemed more likely that purchasers of residential buildings will be considered vulnerable, and those in commercial transactions would not — but there was no clear rule.

We were hoping that the High Court would use Brookfield as an opportunity to give a definitive ruling about the precise scope of Bryan v Maloney in light of the subsequent cases.

Six of the seven judges did not, however, address this question, instead applying the principles set out in previous cases, namely that the court will look at all of the facts to determine whether the owner was sufficiently vulnerable.

Only one judge, Gageler J, directly addressed Bryan v Maloney, saying that in his Honour’s view its application was now clearly confined to cases where the building is a dwelling house and the subsequent owner is a person incapable of protecting him or herself from the builder’s negligence. His Honour held that in all other cases, there was no longer any general duty of care owed by builders.

As this view was not echoed by the remaining judges, it remains very difficult to give clear advice about the ongoing liability of a builder. The answer requires an examination of the circumstances of the party that suffers the loss. In building cases, this is often a game of musical chairs where it is impossible to predict at the outset who will be the person left standing when latent defects emerge.

A missed opportunity?

One question put to the High Court was whether the duty to a subsequent purchaser depends on there being a duty of care owed to the first owner (in this case, the developer). The High Court found it unnecessary to determine that issue, finding that there was no duty in either case. This means that it remains unclear whether exclusions and limitations on scope or liability in the building contract have any impact on the builder’s obligations to subsequent purchasers.

There were, in our view, strong policy reasons for doing away with any right to sue the builder in negligence for economic loss caused by building defects. The assessment of vulnerability seems to depend, at least in part, on whether the affected owners bargained (or could have bargained) for contractual protection from the vendor. However the extent to which contractual protections are sought will depend on the advice the owner receives regarding the other protections – including claims in negligence – that are available to it. It is unsatisfactory for that advice to be ‘it depends on what kind of warranties you are able to negotiate.’

Further, statutory remedies now exist in all jurisdictions for owners of residential property affected by defects. There are gaps in statutory warranty coverage (for example, in the ACT where the statutory warranties do not extend to buildings of more than 3 storeys), however owners are, in our experience, relying on the law of negligence to fill those gaps. It would be a better outcome for all involved to have certainty as to what the coverage actually is.

Doing away with the duty of care owed by building professionals for economic loss altogether would:

make it easier for building professionals to define their exposure under contract and statute, and therefore price the contract accordingly and/or insure against risk; and

make it clearer to owners, at the point of purchase, who they can sue for any latent defects and, therefore, the extent of due diligence they need to conduct on the building or the scope of any warranties or indemnities they may need to seek from the vendor.

If you have any questions about the impact of the decision, we would be very happy to discuss them with you.

For more information contact the Construction Dispute Resolution Team:

Alisa Taylor Partner — Construction Dispute Resolution
(02) 6279 4388
alisa.taylor@mvlawyers.com.au