The High Court's Decision in Brookfield's Case

Are strata building negligence claims for defects really down for the count …

A bit like Ali v Frazier, I think that whilst strata building defect negligence claims have taken a solid blow from the High Court’s decision in Brookfield’s Case, the fight ain’t over yet. Maybe strata buildings just need a new coach, some training to get match ready, and, some new moves; then they can stage a strata defects negligence comeback.

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[19.0 minutes estimated reading time, 3778 words]

Introduction

A bit like Muhammed Ali who was knocked down twice by Joe Frazier and lost on points in the 1971 ‘Fight of the Century’ but eventually defeated Frazier in a rematch and was recognised as one of the greatest boxers of all times, strata buildings and their advisors may have been knocked down by the High Court’s decision in the Brookfield Case, but the fight isn’t over yet and they can still become winners.

So, in this article I explore the background, the decision, my insights into the issues that arose and arise, and, the possibilities for future strata defect negligence claims.

The High Court’s decision in the Brookfield case

In October 2014 the High Court decided Brookfield’s appeal from the NSW Court of Appeal about its liability in negligence for the defective construction of the building comprised in the Strata Corporation for SP 61288.

Many legal and other commentators have written summarising the decision and the key points made in it which you can easily find by a web search. 

Since I’m not so arrogant as to think I know more than so many other experts and rather than add another paraphrasing to the narrative about the case, I’m just going to repeat the extracts from the High Court’s own published judgment summary statement as follows.

  • The High Court unanimously allowed an appeal from a decision of the Court of Appeal of the Supreme Court of New South Wales.

  • The High Court held that Brookfield, the builder of a strata-titled apartment complex, did not owe a duty of care to the Owners Corporation to avoid causing it economic loss resulting from latent defects in the common property.

  • Brookfield built the complex pursuant to a design and construct contract with a developer who owned the land on which it was built.

  • Upon the registration of a strata plan in relation to the part of the complex which was to be used for serviced apartments, the Owners Corporation was created by operation of law.

  • The common property was vested in the Owners Corporation as manager of the strata scheme and as agent for the owners of the serviced apartments.

  • The design and construct contract contained detailed provisions with respect to the quality of the work to be performed by Brookfield and required Brookfield to remedy defects or omissions in the work within a defined defects liability period.

  • The standard form contract of sale to purchasers of the serviced apartments, annexed to the design and construct contract, conferred on each purchaser specific contractual rights in relation to defects in the property, including the common property.

  • The Owners Corporation commenced proceedings against Brookfield in the Supreme Court of New South Wales to recover damages including the cost of repairing latent defects in the common property of the apartment complex.

  • Brookfield was said to be liable in negligence for breach of a duty to take reasonable care to avoid a reasonably foreseeable economic loss to the Owners Corporation in having to make good the consequences of latent defects caused by the building's defective design and/or construction.

  • The primary judge held that Brookfield did not owe the duty propounded by the Owners Corporation.

  • On appeal, the NSW Court of Appeal unanimously held that Brookfield did owe the Owners Corporation a duty of care, albeit a narrower duty to avoid causing loss resulting from latent defects which were structural or dangerous or which made the serviced apartments uninhabitable.

  • By grant of special leave, Brookfield appealed to the High Court.

  • The Owners Corporation was granted special leave to cross-appeal and sought orders providing for a wider duty of care than that found by the Court of Appeal.

  • The High Court allowed the appeal, dismissed the cross-appeal, and held that Brookfield did not owe the duty of care propounded by the Owners Corporation or found by the Court of Appeal.

There’s also an excellent academic review of the Brookfield Case by Birttany Cherry of the University of Notre Dame ‘Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288: More Certainty Concerning the Builder’s Duty of Care for Economic Loss’.

And, you can even read the parties’ submissions and watch the hearing at the High Court’s page for the case here.

More analysis of Brookfields Case and where to from here on negligence claims

The decision has in practice effectively ended negligence claims by strata buildings for their building defects after a few decades where the ability to make such claims was opening up with favourable decisions in Australia and overseas. 

Why, is that, and what options still exist?

So, here are my 7 thoughts about the High Court’s reasoning and the future of negligence claims for strata building defects.

I warn you that some of it gets a bit ‘wonky’.

1.   The characterisation of the strata owners & strata building

The High Court decided that the purchasers of strata lots from Chelsea were ‘effectively investors in a hotel venture under standard form contracts which … contained specific provisions relating to the construction of the building and Chelsea’s obligations to undertake repairs’. 

This finding meant that it also decided that neither Chelsea (the developer and original owner) nor the strata lot owners could be regarded as vulnerable, and, as result, Brookfield did not owe a duty of care in negligence to either of them.  So, only Brookfield’s contractual responsibilities applied.

Relevant to that finding was a distinction that was made to previous cases like Bryan v Maloney (1995) 182 CLR 609, that the strata owners were not ‘unskilled in building matters and inexperienced in the niceties of real property and investment’.

Frankly, that’s artificial nonsense built upon a carefully crafted narrative from Brookfield in the case about the investment structure at the Chelsea.  After all, how many strata investor buyers of serviced apartments have property and investment skills?

In fact, most strata owners are not sophisticated property owners [with all due respect].

So, the decision leaves wide open the possibility that where it can be established that the strata owners are first home buyers, first-time investors, uneducated, foreign language speakers, etc [ie: normal people] they are vulnerable and owed a duty of care.

Plus, the strata building was a purpose design, built, and developed serviced apartment complex which most strata buildings are not.

I’d say that’s most strata owners in most strata buildings.

2.   The effect of the contracts & interparty connections

Another very critical issue in the High Court’s decision was the elaborate way that the contracts for the development and sale of strata apartments dealt with building defects.

Those contracts operated on three levels as follows:

  • the design and construct contract between Brookfield and Chelsea provided for a defects liability period of 52 weeks except for latent defect,

  • the sale contracts between Chelsea and the strata owners required Chelsea to repair defects or faults where written notice was given to Chelsea within 7 months of registration of the strata plan, and

  • the sale contracts between Chelsea and the strata owners gave them extra rights in respect of structural defects or defects which required urgent attention, could cause danger, or, made the property uninhabitable.

As a result of these provisions, the High Court decided that the inclusion of specific provisions covering rights over building defects meant the parties had agreed a different regime that operated to further exclude the operation of negligence principles on the basis that the ‘risk’ of defects had been contemplated and because the Courts will generally try to preserve the integrity of agreed contractual provisions.

Additionally, the High Court said that the strata owner had the ability to both investigate the construction quality issues and as well as to negotiate the contract provisions so that they should be bound by the commercial decisions they made.

So, it seems that if the strata lot purchase contract includes detailed or semi-detailed provisions over building defects and/or regulates the quality of the building work, it is unlikely that a duty of care will found on the High Court’s reasoning.

But, 40% of Chelsea by a Brookfield subsidiary so that the building contract was between partly related parties.  So, it’s no surprise that they had contracts that were weaker and more restrictive in relation to building defects than the general law.

Plus, if you look at the specific provisions in the Chelsea strata apartment sale contracts they were not actually that detailed or sophisticated.

And, it’s completely unrealistic to believe that strata purchasers in off the plan apartment sales have any real ability to do anything to be satisfied with the quality of the building construction or to negotiate the sale contract to have different and better provisions to protect them in relation to common property defects. 

I almost fell off my chair laughing when thinking about the response from the developer when a purchaser asked for genuinely useful contract clauses to protect them from building defects.  It’s just too funny.

So, a more innovative way to argue around the very controlled contract provisions in construction and strata apartment sale contracts that doesn’t rely on or accept their legitimacy is necessary.

After all, on the High Court’s reasoning, a smart and well-advised strata developer would simply write a contract with a builder effectively releasing them from all building defects and then require strata lot purchasers to acknowledge that provision, and, then [hey presto] all non-statutory warranty rights are effectively extinguished.  In fact, it’s likely the construction costs could be considerably reduced by that strategy. 

And, that’s somehow okay?

3.      A narrower duty of care for some defects

When the NSW Court of Appeal decided that case some of the judges decided that a narrower duty of care in negligence existed that applied only to building defects that affected the health and safety in the strata building.

They relied on a Canadian decision for that approach [Winnipeg Condominium Corporation No 36 v Bird Construction Co (1995) 1 SCR 85, where the Supreme Court of Canada held that a builder owes a duty of care in tort to a subsequent purchaser of the building if it can be shown that it is foreseeable that a failure to take reasonable care in constructing the building would create defects that pose a substantial danger to the health and safety of occupants

But, the High Court did not accept that the character of the building defects affected the existence of a duty of care in negligence. 

The reasoning for that gets a bit legally complex and boring now as follows:

  • In the Winnipeg Condominium Case the Supreme Court of Canada did not to follow the English House of Lords decision in D & F Estates Ltd v Church Commissioners for England (1989) AC 177, and Murphy v Brentwood District Council (1991) 1 AC 398.

  • The English D & F Estates Case and the Murphy v Brentwood Case rejected the existence of a duty of care in negligence owed to subsequent owners of the property.

  • The Winnipeg Condominium Case was noted but not expressly followed by the High Court in Bryan v Maloney (1995) 182 CLR 609, or in Woolcock Street Investments ((2004) 216 CLR 515, which are the key predecessors to the Brookfield Case.

  • The Queensland Court of Appeal decision of Fangrove Pty Ltd v Tod Group Holdings Pty Ltd (1999) 2 Qd R 236, also noted that no Australian authority had adopted the Winnipeg Condominium Case approach.

  • The approach in the Winnipeg Condominium Case has the practical difficulty that ‘the existence of the duty will not be known until after the defects have occurred and they can be confidently categorised as dangerous’, so it is uncertain and unpredictable.

This is really a turf war between following the reasoning of the English cases or the Canadian cases in the High Court’s evolution of negligence laws in Australia.

It’s beyond the scope of this article to explore that arcane topic much further but trust me when I say that thousands of pages of judgments have been written in the High Court about the topic and I expect many thousands more will be written before that debate ends.

So, in many ways, the Chelsea Apartments strata building negligence claim has suffered as a stepping stone in a long-running legal debate about wider and less practically impactful matters.

That’s a terrible outcome in this instance, but also means that the negligence laws remain unsettled and could be re-interpreted or applied in the future.  Especially if the defects can be separated into different categories with differing causes, consequences, and impacts.

So, again, a more innovative way to argue around these authorities is required and, in my view, possible in a different strata building’s circumstances.

4.      The impact of the economic loss character of the claim

Courts have always distinguished between negligence claims for physical injury or damage to those for economic losses. 

And, for complex reasons, a strata building’s defects are not physical damage claims but rather economic loss claims.  That’s because the failure by a builder to properly construct a building that failure does not directly cause damage to the building, instead it creates an obligation on the owner to fix the defects so as to restore the building to the required standard; which is a money loss.

This distinction began as early as 1897 but was cemented in Australian law by the English House of Lords Hedley Byrne & Co Ltd v Heller & Partners Ltd (1964) AC 465.  Since then, the distinction was noted in cases involving defectively constructed buildings like Voli v Inglewood Shire Council (1963) HCA 15, John Pfeiffer Pty Ltd v Canny (1981) HCA 52, and Fangrove Pty Ltd v Tod Group Holdings Pty Ltd (1999) 2 Qd R 236.

So, in Brookfields Case, the High Court also noted that distinction as relevant deciding that the common law doctrine of caveat emptor [a legal Latin term meaning buyer beware] and the contract provisions meant that it was the strata owners’ fault that they were not aware of the defects in the building and suffered the economic loss [whether they actually knew or failed to find out when they could have].

Again, this is a completely unrealistic and artificial reconstruction of the position of the Chelsea Apartment strata buyers’ positions.  Even I, with my 25+ years experience in strata building defects, could not have found out about the likely future building defects when signing a contract to buy an off-the-plan strata apartment [since it wasn’t yet built] and probably not even when it was finished.

So, again, a more innovative way to argue around these propositions by explaining and demonstrating the reality of the off-the-plan purchase processes is required and, in my view, possible.

It also suggests, that including claims for physical damage to the building and/or strata owners property by reason of the building defects [like damaged carpets, fixtures, fittings, etc] in strata building defect negligence claims might usefully open up the available legal remedies.

5.      A novel or special category of negligence for strata buildings vs. societal costs

The arguments before the High Court in Brookfields Case and some of the judgment focused on the unique nature of a strata title building entity which was very neatly described as:

the peculiar feature of an owners corporation that the corporation has no option but to be brought into existence as the legal owner of common property and to shoulder the ongoing responsibility for keeping that common property in a good state of repair’.

But, that did not matter to the High Court as it decided that a builder’s liability in negligence had to be determined by reference to the position vis-à-vis the strata owners [that the strata corporation stood in as an agent for] since they ultimately bore the burden of the economic loss and by general principles that could apply to all building construction and not just strata title buildings.

Following that reasoning the High Court noted that there were divergent approaches on a builder’s liability in negligence as follows:

  • in England, where it had been rejected,

  • in Canada, where it had been approved,

  • in New Zealand, where it had been approved, and

  • so far in Australia, where it had been partially approved,

but that there were net benefits and costs to society by either approach.

On their balancing of those societal costs and benefits, the High Court decided that the uncertainty for builders resulting from potential liability for economic loss resulting from defects arising in the future in a building they constructed was of greater harm than subsequent owners of the building suffering losses they may have been able to protect themselves against.

But, the High Court did not overturn the prior decisions [especially Bryan v Maloney (1995) 182 CLR 609, or in Woolcock Street Investments (2004) 216 CLR 515] which means that this balancing act between societal costs can re-occur with a different conclusion next time a strata building defect case is considered.

Perhaps now the real cost of rectifying strata building defects is being better documented [as I outline in my article ‘How Big is the Australian Strata Defect Problem?’] and known the balance on societal costs might tip in favour of strata buildings and strata owners.

6.      Is the OC in the same position as the strata owners on vulnerability or protection

As I’ve noted in point 5, the High Court did not consider that the strata building entity’s status was important in determining whether a duty of care in negligence existed or not, saying that it was the mere agent of the strata owners.

But, that’s not completely right.

As I’ve started exploring in my series of articles ‘The Dilemma of One v. Many in Strata Buildings: Part 1’, there a steady progression of superior Court decisions that identify, confirm and rely on a separation of the position and interests of strata owners as individuals and the strata building entity as a collective.

It’s an esoteric and still emerging legal analysis that goes something like this in the strata building defect context.

  • A strata building with defects must fix them via the strata corporation.

  • Strata owners have to pay those costs and suffer economic losses.

  • Strata building defects are not all fixed or paid for at one point in time.

  • Payment for fixing the building defects may also come from levies and/or loans further altering the payment burdens and economic losses.

  • Strata owners pay those costs in different proportions [by levy entitlement] to how they experience the consequences of the defects as the defects and the impacts occur randomly around the building vis-à-vis the strata owners.

  • The strata owners are not a fixed group as they change constantly, so they don’t suffer losses in the same proportions or at the same time.

  • Strata owners can also have building defects in their lots which are actionable independently of the strata corporation.

  • In some states, the strata corporation can take legal action for and on behalf of strata owners for building defects in their lots.

  • Strata owners can also take legal action and recover damages from the strata corporation for the further consequent losses arising from common property defects.

All of which suggests to me that the relationship between strata owners and the strata corporation is far more complex and nuanced in relation to building defects than the High Court’s glib dismissal of it in the statement:

the characterisation of the Corporation as a trustee or an analogue of a trustee was not in dispute before the Court of Appeal or in this appeal’.

7.      Alternate or supporting equitable claims [arising out of Arrow’s Case]

Even if we assume the High Court is right about negligence claims or won’t change its view about things for a very long time if ever, I believe there’s another way ‘to skin this strata defects cat’.

In 2007 the NSW Supreme Court decided the Arrow Case [Community Association DP No. 270180 v Arrow Asset Management Pty Ltd & Ors (2007) NSWSC 527] about which I lectured and presented a paper [see The Arrow Case: Implications for Developers]. 

In that case, the NSW Supreme Court decided that the relationship between the developer and the strata building had fiduciary elements that imposed duties on the developer not profit or benefit unfairly from it at the strata building’s or strata owners’ expense.

Whilst that case involved committing the strata building to an uncommercial long term management contract, why couldn’t the principle be applied to:

  • the building contracts between the developer and the builder for the construction and effective creation of the strata building,

  • management or investment contracts between the developer and other entities for the future operation of the strata building, and

  • sale contracts for strata apartments that protected the developer and builder.

All those existed at the Chelsea Apartments and worked in a coordinated way to deny the strata owners rights over building defects.  In fact, those ‘unfair’ [my word] contracts were the key basis for the High Court’s rejection of a duty of care in negligence.

So, perhaps a parallel and secondary argument about fiduciary duties might prevail in future claims, or, at least refocus the High Court’s attention on the oppressive nature of the contracts that seek to exclude liability?

Conclusions

As I’ve highlighted in some of my thoughts, strata building defect claims in negligence are a victim of a long-running esoteric debate in the High Court about negligence claims for pure economic loss which has engaged legal jurists for more than 50 years.

That debate is a bit like the feud between the Hatfields and the McCoys:  but with one group of lawyers that believe the extension of negligence laws into and across other legal areas [like contracts or statutory rights] is wrong and contrary to their purist ideals, and, another group of lawyers that believe negligence laws are the incubator for new legal principles that reflect changing socio-economic norms ahead of legislators recognising them.

That’s pretty unfair for strata buildings with defects.

But, I hope I’ve also demonstrated the Brookfield Case decision is not the end of things for strata building defects claims in negligence and there are other novel claims that can be made.

And, at least in New South Wales, there’s an attempt by the government to restore a ‘defacto’ negligence claim for strata building defects with the new Design and Building Practitioners Act 2020 which I’ll write about soon.

So, there are plenty more paragraphs to write in this strata defect claim story yet.

June 02, 2021

Francesco …

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CASE DETAILS

Name Brookfield Multiplex Ltd v. Owners Corporation Strata Plan 61288 & Anor

Judgment     https://eresources.hcourt.gov.au/showCase/2014/HCA/36

Appealed Decision     New South Wales Court of Appeal [2013] NSWCA 317

Parties:

Builder          Brookfield Multiplex Ltd & Multiplex Corporate Agency Pty Ltd

Strata Building Owners Corporation Strata Plan 61288

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