Commercial Construction and a Duty of Care

Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 36

The High Court of Australia has unanimously held that Brookfield Multiplex Ltd (Brookfield) did not owe a duty of care to prevent economic loss suffered by the Owners Corporation in a strata-titled complex it constructed. Brookfield was in fact not liable to Owners Corporation Strata Plan 61288 (Owners Corporation) for the pure economic loss it suffered as a result of costs incurred in repairing latent defects in the common property.

Brookfield had undertaken a design and construct contract for a substantial mixed use commercial and residential tower in the North of Sydney. The action was brought by the Owners Corporation (established by the developer to act as the manager of the common property owned by purchasers of serviced apartments). The Owners Corporation argued the existence of a duty of care in 2 alternatives:

  1. that because the statutory body was established by force of law as first owner and proxy of the developer it assumed the benefit of a duty of care owed by Brookfield to the developer; or

  2. that because the statutory body acted as an agent for subsequent owners and could not protect itself during construction, that Brookfield owed to the Owners Corporation a similar duty of care that a residential dwelling builder owes to subsequent ‘vulnerable’ purchasers.

However, Brookfield successfully argued that its obligation to respond to and repair latent defects post the defects liability period operated completely pursuant to its contract with the developer. It alone regulated the appellant’s obligations to the developer and the extent of the appellant’s liability in case of failure to meet those obligations.  The Court found that the existence of a general duty of care owed to the developer did not exist in the contract and such the Owners Corporation could not have ‘assumed’ the benefit of such a duty:

[144] “These detailed provisions were apt to secure performance of… the D&C contract, which required that the construction be completed in accordance with detailed specifications. They set out the extent of the [Brookfield’s] obligations to ensure that the developer should “get what it paid for”. To supplement them with an obligation to take reasonable care to avoid a reasonably foreseeable economic loss to the developer in having to make good the consequences of latent defects cause by [Brookfield’s] defective work would be to alter the allocation of risk effected by the parties’ contract.” (Crennan, Bell and Keane JJ).

The Court found that the Owners Corporation had a statutory duty to properly maintain common property and to that extent was ‘vulnerable’, but it enjoyed the right to sinking funds and a levy against the owners so as to meet the costs of such obligations. Any further latent defects were dealt with in the standard form contracts the owners had with the developer relating to the developer’s obligation to undertake repairs. As such the Owner’s Corporation and the purchaser’s rights as to remedy of defects operated completely pursuant to the contract with the developer:

[148] “the purchasers did insist upon a “contractual right as against… the developer in the cl 32.6 of the sales contracts. It may also be noted that there was no factual basis for a conclusion that each purchaser was deprived by the [Brookfield’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 or suggestion that [Brookfield] assumed responsibility to them for their decision.” (Crennan, Bell and Keane JJ)

It is important to note the continuing authority that a different position exists in regards to construction of residential dwellings and the duty of care owed to subsequent purchasers. Legislation adopts much of the common law position, and was repeated unanimously:

[185] “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. That is because, by virtue of the freedom they have to choose the price and non-price terms on which they are prepared to contract to purchase, there is no reason to consider that subsequent owners cannot ordinarily be expected to be able to protect themselves against incurring economic loss of that nature.” (Gaegler J)

The case highlights that in the nature of commercial transactions, parties are generally experienced and sophisticated entities negotiating on equal footing and at arms length:

[58]. “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. It was not suggested that the parties could not protect their own interests. The builder did not owe the Owners Corporation a duty of care.” (Hayne and Keiffel JJ)

To that extent, it is important builders and developers have their contracts reviewed in order to understand the extent of specific rights and obligations for which they have bargained.

 

Disclaimer: The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.