Litigation & Disputes

Rights of Apartment Owners for Economic Loss from Latent Building Defects


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Rights of Apartment Owners for Economic Loss from Latent Building Defects

The Facts

The decision of Brookfield Multiplex v Owners Corporation Strata Plan 61288 & Anor (‘Brookfield’) involved a long-running dispute regarding latent building defects in the common property in a set of apartments in Chatswood in Sydney. The dispute arose between the appellant who was the builder and the respondent who was the owners’ corporation in 2012.

The Decision at first instance

At first instance the Supreme Court of New south Wales held the appellant did not owe a duty of care to prevent reasonably foreseeable economic loss flowing from the latent defects in the common property caused by the buildings defective design and/or construction. The basis for this was the comprehensive negotiation between the developer and the appellant concerning the contractual rights. Further, the judge refused to identify or impose a ‘novel duty of care’ between the appellant and the respondent where one was absent from the contract. The trial judge also noted that to rule in favour of the respondent would result in encroaching into an area which was not provided for by the legislature. His honour therefore held for the appellant in the action.

The Decision on appeal to the NSW Court of Appeal

The case subsequently went on appeal in the NSW Court of Appeal in which the decision at first instance was overturned. The appellate court rejected the proposition that the contract between the parties comprehensively dealt with the imposition of a duty of care to an extent which left no room for imposition of duties in tort. However, the court found a narrower duty than was argued by the respondent. Ultimately the court found a duty, however they limited it to building defects which were structural, constituted a danger to persons or property or made the apartments uninhabitable.

The Decision on appeal to the High Court

The principle question raised in the appeal to the High Court was whether Brookfield owed the corporation a duty to exercise reasonable care in constructing the building to avoid causing the corporations suffering pure economic loss from latent defects. The High Court overturned the prior decision in the Court of Appeal implementing a case-by-case approach proscribed by previous judgments in the area. The High Court unanimously found that on the facts, the appellant did not owe a duty of care to the respondent.

In coming to this finding, the judges examined the contract between the appellant and the developer and identified that the developer was adequately protected as the contract contained numerous stringent clauses which allocated liability for building defects. Thus, the court stated that to impose any duty of care would improperly modify the careful allocation of risk within the contract.

In obiter, Gageler J noted that it was for the legislature to act in order to protect subsequent purchasers. While both New South Wales and Victoria have enacted such legislation, at the time of writing Queensland has no statutory safety net in place for apartment owners. Thus, in Queensland apartment owners are not protected from latent building defects.

The effect of the decision

The decision has extinguished any rights against builders in respect of latent defects to common property for a large number of body corporates in Queensland. It has created a model which is likely to ensure that new apartment blocks have contracts similar to those analysed in the case. This will ensure that liability is allocated sufficiently as to prevent apartment owners having any rights against builders outside those allocated within the contract.

As noted, Queensland has no legislative protection in place at present, thus while applications may be made for rectification orders in the Queensland Building and Construction Commission, these are non-binding and are able to be appealed to the Queensland Civil and Administrative Tribunal. Thus, protection at current for apartment owners and body corporates in Queensland in respect of latent building defects to common areas is limited.

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