Brookfield Multiplex Ltd (Brookfield), represented by Gilbert + Tobin, were successful in the High Court of Australia on 8 October 2014 whereby the full bench of the High Court unanimously allowed an appeal from a decision of the New South Wales Court of Appeal.  The High Court of Australia held that Brookfield, the builder of serviced apartments, did not owe a duty of care to the Owners Corporation to avoid causing it pure economic loss resulting from latent defects in the common property. 

In this article we set out the history of the decisions leading to the High Court of Australia’s landmark judgment.

The Facts

The Owners Corporation is the owners corporation of a strata titled serviced apartments development located at 10-18 Railway Street, Chatswood (Serviced Apartments).  The Serviced Apartments are located on the first 9 floors of the building and are currently operated as the Mantra Chatswood Hotel.  Levels 10 to 22 of the building are residential apartments and are the subject of a separate strata plan and comprise a distinct legal title.

The development of the Serviced Apartments arose out of a commercial transaction between Chelsea Australia Pty Ltd (Chelsea) and the Stockland Trust Group.  Prior to the development, Chelsea was the registered proprietor of the land.  Chelsea agreed to construct the Serviced Apartments and then lease the property to a Stockland subsidiary, Park Hotel Management Limited, pursuant to a Deed of Master Agreement dated 11 August 1997 (Master Agreement).  Following execution of the Master Agreement, Chelsea retained Brookfield pursuant to a contract to design and construct the Serviced Apartments (D&C Contract) for the amount of approximately $57,000,000. 

The strata plan was registered on 11 November 1999 and the Owners Corporation came into existence as the registered proprietor of the common property. 

Supreme Court of New South Wales Judgment

On 3 November 2008, the Owners Corporation commenced proceedings in the Supreme Court of New South Wales alleging that defects existed in the common property of the Serviced Apartments and contended for a cause of action in negligence against Brookfield.

The duty contended by the Owners Corporation was described as one:

“to take reasonable care to avoid a reasonably foreseeable economic loss to the Plaintiff in having to make good the consequences of latent defects caused by the building’s defective design and/or construction.”

By the time of the hearing before his Honour Justice McDougall, the Owners Corporation had abandoned an earlier pleaded cause of action under Part 2C of the Home Building Act 1989 (NSW) accepting that the commercial use of the Serviced Apartments meant that the development was outside of the statutory warranty regime. 

Ultimately, his Honour Justice McDougall entered judgment for Brookfield and dismissed the Owners Corporation claim holding, in summary, that:

•  the duty alleged was novel;
•  that Bryan v Maloney (1995) 182 CLR 609 was no authority for imposition of the duty alleged;
•  that it was not appropriate for a Judge at first instance to identify and impose a novel duty; and
•  that in accordance with the observations of Justice Brennan in Bryan a decision to impose additional duties on a builder in the form of transmissible warranties was a serious matter requiring attention to a range of factors such that it was something to be undertaken by the legislature.

The Owners Corporation appealed the decision at first instance.

New South Wales Court of Appeal Judgment

On 25 September 2013, the New South Wales Court of Appeal comprising Basten JA , Macfarlan JA and Leeming JA, allowed the Owners Corporation’s appeal thereby overturning the reasoning of Justice McDougall at first instance. 

Ultimately, the Court of Appeal found two main duties owed by Brookfield, as follows:

•  a duty to avoid pure economic loss which was owed by Brookfield to the developer Chelsea concurrently with Brookfield’s contractual obligations arising under the D&C Contract.  The Court of Appeal held that Chelsea was “vulnerable” in the relevant sense due to its reliance on the expertise Brookfield, notwithstanding an earlier finding that Chelsea not only could have protected itself but did so by entering the D&C Contract; and
•  a duty to avoid pure economic loss owed by Brookfield to the Owners Corporation, as a successor in title to Chelsea.

The Court of Appeal held that the duty to avoid pure economic loss, set out directly above, arose only in respect of latent defects in the common property which are structural, constituted a danger to persons or property in the vicinity or made those apartments uninhabitable.  Interestingly, the Owners Corporation had not pleaded or argued for a duty as defined in that manner.

Brookfield appealed the decision of the New South Wales Court of Appeal and on 14 March 2014, the High Court of Australia granted Brookfield special leave to appeal the decision of the Court of Appeal. 

High Court of Australia Judgment

There were two mains issues considered by the High Court of Australia, namely:

•  Did Brookfield owe a duty of care to the Owners Corporation independently of the existence of a duty of care owed to Chelsea, and if so, what was its content?
•  Did Brookfield owe a duty of care to Chelsea and thereby a similar duty of care to the Owners Corporation, and, if so, what was its content?

The judgment is extensive as there were four separate judgments with a full bench reaching a unanimous decision that Brookfield, the builder of the Serviced Apartments, did not owe a duty of care to the Owners Corporation to avoid causing it economic loss resulting from latent defects in the property.