Australia: Builders put on notice: A duty of care owed in respect of commercial buildings in NSW

Introduction

In Owners – Strata Plan No 61288 v Brookfield Australia Investments Ltd¹, the New South Wales Court of Appeal found that a builder owed a duty to exercise reasonable skill and care in the construction of a non-residential building to avoid causing the owner to suffer loss resulting from certain latent defects.

Prior to this case, it was widely thought that a duty of this nature would only apply to residential buildings, given the generally assumed bias against finding duties of care in arms-length, commercial relationships. Therefore, this case potentially expands the risk profile for builders across all commercial construction projects.

Facts

The case was brought by the owners corporation ("OC") of a strata title development comprising serviced apartments. The OC alleged the common property suffered from numerous latent defects. As the OC did not have a contractual relationship with the builder, it brought the claim against the builder in tort, alleging negligent building work.

Procedural history

At first instance, the Supreme Court found that no duty of care existed. The judge reasoned that to find a duty of care would be inconsistent with the deliberate statutory limits imposed by the Home Building Act 1989 (which implies statutory warranties into contracts for domestic but not commercial building works), and that it would be inappropriate for a judge of first instance to expand the obligations of a builder under the general law by imposing a 'novel' duty of care.

The Court of Appeal disagreed, ultimately finding that the builder owed the OC a duty to exercise reasonable care to avoid causing the OC to suffer economic loss.

Duty of care not limited to residential structures

The Court of Appeal held that the nature of the building is not the deciding factor when determining whether a duty of care applies. It favourably cited the principle that there is no "bright line" between cases concerning the construction of dwellings and cases concerning the construction of other buildings. The nature of the building is only relevant to the extent that it establishes the relationship between the parties and bears upon the vulnerability of the plaintiff. A duty of care will therefore extend to commercial buildings in appropriate circumstances.

Duty of care not inconsistent with the terms of the construction contract

While the Court of Appeal acknowledged the principle that no duty of care can arise with respect to successive owners unless a builder owed a tortious duty to the original owner with whom it contracted, the Court rejected the trial judge's finding that there was no room for a duty of care between the builder and the developer. The Court noted that concurrent liability can exist in both contract and in tort, and there was nothing in the terms of the contract between the builder and the developer which excluded a general law duty of care in tort.

Vulnerability and the nature of the defects

The Court of Appeal affirmed that the plaintiffs' 'vulnerability' is an important requirement for finding a duty of care to avoid economic loss. The term refers to the plaintiff's inability to protect itself from the consequences of a defendant's want of reasonable care, either entirely or at least in a way which would cast the consequences of loss on the defendant.

The fact that the alleged defects were 'latent' (which the Court of Appeal defined as "not readily detectable by any reasonable process of inspection") was particularly relevant. The Court said the defects could not have been identified without undertaking invasive investigations, such as removing masonry and render, which the developer and the OC's members could not reasonably have been expected to carry out. Therefore, the Court found that the OC was vulnerable to the presence of latent defects.

It was also relevant that the building contract between the builder and developer (based on AS-4300) did not provide a mechanism for dealing with or limiting liability for latent defects, and was thus not inconsistent with the alleged duty of care.

Implications of the decision on parties to construction contracts

The case represents a significant development in tort law with respect to builders' liability for economic loss caused by latent defects.

The position now appears to be as follows: A builder will owe a duty to exercise reasonable care in the construction of a building to avoid causing an owner to suffer loss resulting from latent defects which are structural, constitute a danger to persons or property or make the building uninhabitable, unless certain factors exist which militate against the existence of a duty.

The terms of the construction contract are a relevant, but not necessarily decisive, factor in determining whether a builder will owe a duty of care to future owners. Therefore, builders may be able to limit or exclude their exposure to claims in tort by negotiating terms which are inconsistent with a coextensive, tortious duty of care.

While the duty of care, as expressed by the Court, is presently owed by builders in relation to certain categories of latent defects, there appears to be scope for the duty to be extended to engineering and design professionals, and potentially broader categories of latent defects. Therefore, this case will most likely have wider implications for the construction industry.

This article was first drafted with the assistance of Brad Spiers who is now a senior lawyer with Leighton Contractors Pty Ltd

Footnote

¹[2013] NSWCA 317

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.