By Rufina Cheung, of Wolters Kluwer, CCH
Seven judges of the High Court in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288  HCA 36 have unanimously held that a builder did not owe a duty of care to an owners corporation of a strata titled serviced apartment building to avoid the economic loss of the owners corporation having to repair latent defects in the building’s design or construction. The key fact leading to this conclusion was the detailed contractual arrangements between the builder, the developer and the purchasers of the apartment units, which included expansive terms dealing with and limiting liability for defects.
Contrast residential apartments
This case dealt with serviced apartments purchased by investors, rather than residential apartments. Statutory warranties under the Home Building Act 1989 (NSW) protect consumers who acquire buildings as dwellings: see .
Different countries have taken different approaches on whether builders have a duty of care to subsequent owners. The High Court’s decision is consistent with the position in the United Kingdom, and the preponderance of judicial authority in the United States. However it is contrary to the position in Canada, where a duty of care is recognised but limited to the cost of remedying dangerous defects. It is also inconsistent with the position in New Zealand, where a duty of care is recognised, covering the cost of remedying all latent defects: , , .
Background case law
There were two key cases that formed the background to this case. One was Bryan v Maloney (1995) 182 CLR 609;  HCA 17, where the High Court held that the builder of a dwelling house owed a duty of care to a subsequent purchaser of the house, which could be breached by careless construction leading to latent defects, supporting an action in negligence for economic loss. In that case, the existence of a duty of care to the prior owner supported a duty of care to the subsequent purchaser. The building contract had left room for concurrent tortious liability to the prior owner. The High Court distinguished this case.
Crennan, Bell and Keane JJ observed at : “The material distinctions between the present case and Bryan v Maloney lie, first, in the detailed prescriptions of the [design and construct] contract between the [builder] and the developer, in contrast to the simple obligation in Bryan v Maloney between the builder and the original owner to exercise reasonable skill and diligence in the construction of the dwelling; and, secondly, in the express promises in cl 32.6 and 32.7 of the sales contracts, in contrast to the situation in Bryan v Maloney, where there was no promise as to quality given to Mrs Maloney when she acquired the dwelling.”
The reference to cl 32.6 and 32.7 is a reference to the developer’s express promises in its sale contracts with the purchasers of the apartment units which protected the purchasers and the owners corporation from economic loss due to defects.
In Bryan v Maloney, there was no disconformity between the duty owed by the builder to the prior owner and the duty asserted by the subsequent purchaser. “The absence of disconformity was an essential step in the reasoning in Bryan v Maloney. That step is not available in this case”: Hayne and Kiefel JJ at .
The other key case was Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515;  HCA 16, where the High Court held that an engineering company, which had designed inadequate foundations for a warehouse and office complex resulting in structural damage, did not owe a duty of care in relation to economic loss suffered by a subsequent purchaser. The High Court reasoned in analogy to Woolcock.
Hayne and Kiefel JJ observed at  that “The making of contracts which expressly provided for what quality of work was promised demonstrates the ability of the parties to protect against, and denies their vulnerability to, any lack of care by the builder in performance of its contractual obligations. … The builder did not owe the Owners Corporation a duty of care.”
French CJ at  stated that: “The nature and content of the contractual arrangements, including detailed provisions for dealing with and limiting defects liability, the sophistication of the parties and the relationship of [the developer] to the [owners corporation] all militate against the existence of the asserted duty of care to either [the developer] or the [owners corporation].”
Gageler J at  held: “The continuing authority of Bryan v Maloney should be confined to a category of case in which the building is a dwelling house and in which the subsequent owner can be shown by evidence to fall within a class of persons incapable of protecting themselves from the consequences of the builder’s want of reasonable care. Outside that category of case, it should now be acknowledged that a builder has no duty in tort to exercise reasonable care, in the execution of building work, to avoid a subsequent owner incurring the cost of repairing latent defects in the building.”
Crennan, Bell and Keane JJ observed at  (see also ) that “The common law has not developed with a view to altering the allocation of economic risks between parties to a contract by supplementing or supplanting the terms of the contract by duties imposed by the law of tort.”
At , their Honours stated “It may also be noted that there was no factual basis for a conclusion that each purchaser was deprived by the [builder’s] conduct of the choice of bargaining with the developer for a more extensive warranty as to quality or of walking away from the negotiation and investing elsewhere if a satisfactory warranty at an acceptable price was not forthcoming. In this regard, there was no encouragement given by the [builder] or suggestion that the [builder] assumed responsibility to them for their decision.”
At –, their Honours observed “The purchasers had a contractual right against the developer which could have protected them against the risk of which the [owners corporation] now complains had those rights been pursued in accordance with their terms. … the contractual rights of individual purchasers for which they bargained were cast in terms which expressly limited their scope and duration in a manner inconsistent with the open ended liability now asserted by the [owners corporation].”
Their Honours also observed at  that “This Court’s decision in Bryan v Maloney does not sustain the proposition that a builder that breaches its contractual obligations to the first owner of a building is to be held responsible for the consequences of what is really a bad bargain made by subsequent purchasers of the building. To impose upon a defendant builder a greater liability to a disappointed purchaser than to the party for whom the building was made and by whom the defendant was paid for its work would reduce the common law to incoherence. Moreover, to hold that a subsequent purchaser of a building is vulnerable to the builder so far as the risk of making an unfavourable bargain for its acquisition is concerned would involve a departure from what was held by this Court in Woolcock Street Investments.”
This case will be reported in CCH’s Australian Contract Law Reporter.