Court Finds Builder has a Duty of Care to Owners Corporation to Avoid Causing Economic Loss.

The Court of Appeal has overturned the earlier Supreme Court decision of Justice McDougall and has held that a builder has a duty of care to an owners corporation to avoid causing economic loss. The decision relates to a claim by an owners corporation in respect of loss arising from latent defects in common property. Preceding case law

In June 2012 Justice McDougall handed down his decision in Owners Corporation Strata Plan 72535 v Brookfield Australia Investments Ltd [2012] NSWSC 712 (Star of the Sea case). This was a building defects claim where it was held that a builder did not owe a duty of care to a residential owners corporation in respect of building defects. The decision cited the protection afforded by the Home Building Act 1989 (NSW) as a factor against finding such a decision.

This decision was followed by the decision of Justice McDougall in Owners Corporation Strata Plan 61288 v Brookfield Multiplex [2012] NSWSC 1219 (Chelsea case). This decision was handed down in October 2012. It held that a builder also does not owe a duty of care to the owners corporation of a commercial development.

The reasoning for the decision was that the builder and developer had negotiated a careful bargain and it was not considered that the builder owed a duty of care in addition to these negotiated rights. If the builder did not owe a duty of care to the developer it was reasoned that no such duty of care was owed to a successor in title, such as the owners corporation.

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The Owners Corporation appealed Justice McDougall’s decision in the Chelsea case and the Court of Appeal has now overturned his finding. The Court found that the builder owed a duty to the owners corporation in respect of latent defects in the common property which were structural, constituted a danger to persons or property or made the apartments uninhabitable.

The judgment indicates:

• negotiation of a thorough contract does not preclude the existence of a duty of care by a builder to a developer unless there is an express exclusion;
• the existence of a statutory scheme affording protection, such as the Home Building Act 1989 (NSW) will not necessarily exclude a duty of care;
• both developers and owners corporations can be sufficiently vulnerable to suffer loss as a result of actions of the builder that imposition of a duty of care is warranted. This is particularly the case in relation to latent defects.

The facts of the Chelsea case meant that the decision related solely to an owners corporation of commercial property. However it is possible that the reasoning of the judges of the Court of Appeal may be used to extend the protection to a residential owners corporation. A window of opportunity has been opened to argue that the Star of the Sea case should not be followed.