Testing the water — does a builder owe a duty of care to an Owners Corporation?
In an important decision which has ramifications for Owners Corporations, the High Court has recently held that a builder did not owe a duty of care to an Owners Corporation to avoid causing it to suffer economic loss from latent defects in common property.
Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288  HCA 36
Chelsea Developments Pty Ltd (Chelsea) engaged Brookfield Multiplex (Brookfield) to construct a mixed residential, retail and serviced apartment complex in Chatswood, NSW (Complex)1. Chelsea leased the serviced apartments to Park Hotel Management Pty Ltd, a subsidiary of Stockland Trust Group, who carried on the serviced apartments under the Holiday Inn brand. The case before the High Court concerned the Owners Corporation of the serviced apartment section of the Complex2.
The Owners Corporation commenced proceedings against Brookfield, claiming that Brookfield was responsible for loss the Owners Corporation suffered due to latent defects in common property. The claim was made on the basis that Brookfield owed the Owners Corporation a duty of care in negligence. The High Court found that there was no duty of care. In determining this, the High Court considered whether any duty owed by Brookfield to the Owners Corporation was a consequence of a duty of care owed to Chelsea, or to subsequent purchasers. The High Court also considered whether Brookfield owed the Owners Corporation a duty of care independently of a duty of care to Chelsea, or subsequent purchasers3.
The High Court found that because of the nature of the contracts Chelsea and the subsequent purchasers entered into, which included clauses regarding liability for defects and defect rectification, Chelsea and the subsequent owners were not “vulnerable”, and therefore there was no duty of care to Chelsea and the subsequent owners, and no duty of care could be owed to the Owners Corporation as the statutory agent4. The High Court also found that, in this case, the fact that the Owners Corporation did not exist at the time of the alleged defects5, that the Owners Corporation did not pay for the common property6, and that any loss suffered by the Owners Corporation, independent of the lot owners, could not be found7, were all factors which went against the High Court finding a duty of care as asserted by the Owners Corporation8.
Although this case was decided on its own facts, this decision is a note that Owners Corporations should consider the contracts entered into by the owners with the builder, or with a previous owner, and check the position with respect to defect liability before embarking on a claim against a builder. It also applies to builders, developers, and purchasers to ensure that their contracts provide sufficient protection against liability for defect rectification. This decision also raises a question about whether the statutory remedies provided for in the Competition and Consumer Act 2010 (Cth) provide more expansive redress for consumers than the remedies offered in property legislation in NSW.
Strata Title Reform
As well as keeping the effect of this High Court decision in mind, builders, developers and Owners Corporations should also be aware of proposed reforms to strata schemes and community schemes legislation. There have been consultations with respect to proposed reforms, and although these have not yet come into effect, for developers, they may include such things as the removal of developers’ rights to vote on matters concerning building defects at meetings, a requirement that builders/developers provide a maintenance schedule to the owners, and a requirement that a developer of a high-rise strata development pay a bond which is returnable when defects identified by an independent defects inspector have been rectified.
Amendments to the Home Building Act 1989 (NSW)
On 5 June 2014 passed the Home Building Amendment Act 2014 (NSW). While the commencement date has not been announced, this legislation brings changes of which both builders and owners should be aware. For example, with respect to defect notification and rectification, a party who has the benefit of a statutory warranty now has a duty to mitigate their loss, notify the person who is responsible for the breach within 6 months of when they identify the breach or of when they should have reasonably become aware of the breach, and allow that person access to the property to rectify the breach. It is also worth noting, that any failure to comply with these duties can be taken into account by a court or tribunal. The other matter with respect to defects is that courts and tribunals are now to regard an order for rectification of defective work as a preferred remedy.
The developments outlined above are just a sample of some of the changes that are happening in strata and home building space which building industry participants should keep on top of.