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Construction defects high court appeal

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Upcoming High Court Hearing

Brookfield Australia Investments Limited (A.C.N. 008 687 063)(Brookfield) v The Owners – Strata Plan No 61288 Proceedings Number S66/2014 HC

Next week the High Court in Canberra will hear a final appeal between Brookfield and The Owners – Strata Plan No 61288, being only the second matter involving an owners corporation which has ever been heard before the High Court.

We have been instructed to act on behalf of the Owners Corporation in this Appeal which will no doubt be a landmark decision in the area of building and construction law.

The Supreme Court of NSW (at first instance) has held in various cases involving an owners corporation, including these proceedings before they reached the High Court in Owners Corporation Strata Plan 61288 v Brookfield Multiplex & Anor [2012] NSWSC 1219, that an owners corporation cannot make a claim for negligence against the original builder as the builder did not owe the Owners Corporation a “Duty of Care.” The Supreme Court also found that where there was a building contract between the ‘original owner’ and Brookfield, there was no ability for an owners corporation to sue for negligence when all the rights and obligations of the parties (and any remedies) were set out in the building contract.

If this decision were allowed to stand, it would be extremely detrimental to the rights of owners corporations, as the fundamental issue for owners corporations is that quite often an owners corporation has no ability or may be unable to commence an action for breaches arising out of the building contract and the only other available action to pursue recovery for building defects is an action in negligence. If negligence was not available to an owners corporation in building defect matters, the scheme would have no remedy at all against the builder or the developer for defective building works leaving lot owners to foot the entire bill for remedial work to repair any construction defects.

The Owners Corporation instructed us to appeal the original decision to the NSW Court of Appeal and in a unanimous and landmark decision the NSW Court of Appeal dismissed the original decision and found in favour of the Owners Corporation.

The NSW Court of Appeal found that builders and others involved in the construction of apartment buildings owe a duty of care in relation to those building works to the ultimate owners (ie: the owners corporation).  That duty applied to the avoidance of losses arising from:

  • structural matters;
  • risk of loss to persons or property; and
  • the property (in whole or in part) being uninhabitable.

In this regard, the Court of Appeal held that:

  • there could be a concurrent duty of care where a building contract exists allowing an owners corporation to collectively and independently claim against a builder for: 

          (a)  breach of contract; and
          (b)  negligence

  • there had been no preclusion of the common law duty in tort;
  • the duty sought to be imposed by the owners corporation was not novel, noting similar cases had been upheld in other common law jurisdictions (Canada and New Zealand) where it was found that the builder owed a duty of care to the Owners Corporation;

Brookfield unsuccessfully argued that where a contract exists no concurrent duty allowing an owners corporation to sue in negligence for building defects could be found. Brookfield then made an application seeking leave to appeal to the High Court.

Leave to Appeal to the High Court

Brookfield lodged an Application for Leave to Appeal the NSW Court of Appeal decision which was heard on 14 March 2014.

The High Court only allows exceptional cases of great importance to be granted leave to be heard before it. Unlike other Appeal Courts, the High Court does not allow appeals from the Courts below on the basis that there may have been an error of law. The only circumstances in which the Court will grant leave to appeal are: 

  1. where there is a genuine question of public importance;
  2. where there is a difference of opinion between, or within the courts; or
  3. where the interest of justice require it.

The majority of applications are dealt with on written submissions and only limited applications are listed for oral argument.

Matters listed for oral argument go before 1-3 of the justices of the High Court where each party is provided with a strict 20 minutes to address the Court on the reasons why leave should or should not be granted. The Court makes a determination immediately thereafter without providing reasons for the decision.

On 14 March 2014, the Leave Application was listed for hearing before French CJ and Crennan J where the matter was heard for in excess of 1 hour outside of its usual strict time periods.

The Court immediately indicated that leave would be granted on the basis that:

  1. the decision is one of great public and national importance; and
  2. it is necessity to clarify the law in this area given that some of these issues have not been addressed by the High Court in over a decade and there are a number of state based decisions which have differing interpretations of the law in this area.

Allowing this matter to be determined by the High court will provide clarity to the Courts below in relation to the law relating to the extent of the duty of care owed by a builder to an owners corporation.

High Court Appeal

The proceedings are now before the High Court on Appeal in relation to the distinct questions relating to whether Brookfield owed the Owners Corporation a duty of care in the construction of the building and whether the Owners Corporation can sue Brookfield in an action for negligence for building defects.

This decision will be of great importance for all owners corporations and builders throughout New South Wales and the rest of the states and territories and should provide a clear indication of the extent of any duty of care owed (and the circumstances in which it exists) by a builder to an owners corporation.

The matter is listed for hearing on 18 June 2014 and is expected to be heard before the full bench of the High Court. The matter is likely to be heard over 1 day however no decision will be handed down for several weeks/months after the hearing date.

What does this mean for owners corporations?

Currently, the law in New South Wales is that a separate duty of care is owed by a builder to an owners corporation as successor in title, concurrently with any contractual duties between the parties. However, this could change upon determination of this High Court appeal, either by restricting the rights of owners corporations by limiting the circumstances in which a duty of care is owed, abolishing any duty of care whatsoever or confirm the decision of the NSW Court of Appeal.

Given the uncertainty in the law in this area particularly in relation to any possible claim for building and construction defects, it would be prudent for any owners corporation to continue to take steps to preserve any possible rights they may have (ie for an action in negligence) until the outcome of the High Court appeal is known.

Once a determination has been made we will release a further industry update so that all interested parties are aware of the rights they may or may not have under the new High Court decision.

If you have any questions or wish a copy of the decision please contact Daniel Radman or Colin Grace in our Sydney office.