The hotel window closes - no vulnerability where a contract exists

In brief

The High Court recently overturned a NSW Court of Appeal decision that stated a building contractor owed a duty of care for pure economic loss for defective work to a successor in title to the developer of commercial premises. Partner Leighton O'Brien and Lawyer William Coote assess the decision and its consequences.

Facts

In 1997, a developer signed a contract with Brookfield Australia Investments Ltd (then known as Multiplex Construction) (Brookfield) to construct a 22-storey building in Chatswood, Sydney. At the same time, the developer entered into an agreement with an entity in the Stockland Group under which a serviced apartment strata plan would be registered that would allow some of the apartments in the building to be sold to investors (as it would be used as a hotel). In 1999, a certificate of final completion was issued and the strata plan for the serviced apartments was registered (Strata Plan No 61288).

In November 2008, proceedings were commenced by the owners of Strata Plan 61288 (the Owners) against Brookfield. The Owners alleged that Brookfield owed them a duty of care not to cause them economic loss and that this duty was breached by defects that the Owners alleged existed in the building and which were caused by Brookfield's negligent construction. The issue of whether Brookfield owed the Owners a duty of care was put to Justice McDougall as a preliminary question.

First instance

At first instance, Justice McDougall ruled that Brookfield did not owe the Owners a duty of care.¹ This decision was based largely on the fact that no concurrent tortious duty was owed by the builder to the developer (as the building contract had been negotiated at arm's length); accordingly there was no duty to subsequent owners.

Court of Appeal

The NSW Court of Appeal overturned the decision of Justice McDougall. Justice Basten, with Justice Macfarlan and Leeming agreeing, found that Brookfield did indeed owe the Owners a duty of care.

The Court of Appeal looked first to whether the defects in the construction of the building would give rise to a duty of care. In respect of this, the court found that certain latent defects would be the subject of a duty to exercise reasonable care in the construction of the apartments to avoid causing another party to suffer loss resulting from a breach of that duty.²

Following this, the Court of Appeal ruled that the Owners were in a position of vulnerability. This position was grounded in their ruling that the developer was vulnerable with respect to the physical elements that gave rise to the loss. This is particularly so, given the inherent nature of latent defects, meaning that they were undetectable at the time the building reached completion. Such a duty of care did not simply cease when a successor in title came into existence or even when the properties were sold to third parties. Indeed, if the developer was in a position of vulnerability, then the Owners were even more vulnerable as they were unable to monitor construction activities in the way that the developer could have.³ Furthermore, the principle that parties to a contract can exclude a general law duty of care has no operation with respect to persons who are not party to the contract as was the case at hand.⁴

High Court

The High Court unanimously upheld Brookfield's appeal in finding that no duty of care was owed by Brookfield to the Owners.⁵

Vulnerability

Four separate decisions were given by the High Court. At the heart of all four, however, was an acknowledgement of the ongoing validity of the principles that the High Court established in Bryan v Maloney⁶ and Woolcock ⁷ in relation to the necessity of vulnerability in determining the success for a claim for recovery of negligently inflicted pure economic loss.⁸ In this context, vulnerability was said to refer to a plaintiff's inability to protect itself from the defendant's lack of reasonable care.⁹ This position of law was the same as that reached by the NSW Court of Appeal.

In determining whether a plaintiff is vulnerable, a court must analyse the relevant salient features of the case (that is, the factual context). It is in the analysis of the factual context that the High Court moved away from the decision of the Court of Appeal in concluding that the Owners were in a position where they could have protected themselves from pure economic loss.

The High Court dismissed the respondent's position that the lack of a contractual relationship between the Owners and Brookfield placed the Owners in a position of vulnerability. Instead, the High Court highlighted the fact that the Owners had the ability and the opportunity to include provisions in the contracts for sale provisions that would give rise to a right to have the relevant defects remedied.¹⁰ In stating this, the High Court noted that the contracts for sale to the Owners did include provisions covering the quality of work (albeit these were not of utility in relation to the claims raised in the proceedings).

Additionally, the High Court drew a factual distinction between the preceding cases of Bryan v Maloney (where a duty of care to subsequent owners was established) and Woolcock (where such a duty of care was not established). The High Court stated that the facts were more analogous to Woolcock on the basis that what was involved was a commercial property (as was the case in Woolcock).¹¹ As was the case in respect of the plaintiff in Woolcock, the Owners (all of whom were investors as opposed to residents) had the ability to protect themselves from the risk of latent defects by commissioning expert investigations before purchasing the lots.

Overseas authority

The High Court also did not agree with the Court of Appeal's use of overseas authority, in particular the Canadian case of Winnipeg Condominium.¹² In so doing, it noted the fact that the decision of the Supreme Court of Canada had not followed the previous decisions of the House of Lords¹³ (which aligns with the High Court's position) and that the High Court in both Bryan v Maloney and Woolcock had noted Winnipeg but chose not to follow it.

Implications

The case very much confirms the thread of common law, since Perre v Apand and Woolcock, that where the plaintiff owner is party to a contract (even if it is with the defendant builder) it cannot be vulnerable and cannot therefore sue the builder in negligence. Unless and until the High Court recategorises damages for defects as not being pure economic loss, defects claims in negligence have no future.

The immediate implication from the High Court's decision is the fact that it will be very difficult, if not impossible, for subsequent owners of buildings to bring actions against builders outside of any direct contractual right. This implies that the risks for builders, particularly where the construction is for strata complexes, will be limited in large part only to their agreement with the developer. The rights of subsequent owners will be limited to those under their contractual agreement with the previous owner. It should be noted, however, that the decision does not affect any statutory rights or obligations that may be available to plaintiffs (eg those that exist under the Home Building Act 1989 (NSW)).

More broadly, the High Court has stated clearly that, where two parties are free to contract with each other, it will be very difficult for one party to bring an action in negligence for pure economic loss as it will be unlikely to sustain a claim that they were in a position of vulnerability. As a consequence of this, parties should take great care to ensure that the relevant contract contains the entirety of the agreement with respect to any necessary warranties or indemnities, particularly in respect of defects.