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Facts of the case

The case involved proceedings commenced by an Owners Corporation (“OC”) of a strata title services apartment building. The OC asserted that the building had defects and the builder should be held responsible to the OC for the costs of repairing these defects. To succeed in the case the OC had to establish that the builder owed a duty of care to the OC to prevent economic loss that would be suffered in repairing latent defects in the building’s construction.

History of the proceedings

The Supreme Court initially ruled in favour of the builder.

The OC appealed and on appeal the NSW Court of Appeal overturned the decision. It held that the builder owed the OC a duty of care to avoid causing them loss resulting from latent defects that were structural, constituted a danger to persons or property, or made the apartments uninhabitable. This decision was appealed by the builder, seeking to avoid liability, and the OC who sought that the duty of care of the builder extended further than the NSW Court of Appeal held.The High Court overturned the Court of Appeal’s decision and found in favour of the builder. The High Court identified the following two key factors underlying their conclusion:

  1. the nature and conduct of the contract between the original owner of the property and the builder. This contract included detailed provisions providing limited liability for defects and the High Court found that it would be unreasonable to impose a greater liability on a builder to a subsequent purchaser than their liability to the contracting party; and

  2. the sophistication of the parties (being the developer and subsequent purchasers). The High Court found the subsequent purchasers were capable of protecting themselves from the consequences of the builder’s actions and were not sufficiently “vulnerable” to warrant imposition of the duty of care.

Serviced apartments v residential dwellingsServiced apartments are not covered by the Home Building Act 1989 (NSW) and do not have the benefit of the statutory warranties for residential dwellings under this legislation. These statutory warranties enable a subsequent purchaser to claim against a builder without establishing a duty of care. If the apartments were residential apartments the statutory warranties may have assisted the OC to claim against the builder.

Important notes for builders:

This latest ruling does not extend to protect builders constructing residential dwellings, or contracting with “vulnerable” parties, such as “mum & dad” clients.

Take care to include express provisions in building contracts dealing with the liability you will have to a developer. These provisions may assist you to defeat a claim by a subsequent purchaser.