26/11/2014

You would assume you could claim against a builder who failed to complete its works properly, but a recent High Court Case has stated otherwise.

In most commercial arrangements, we expect some form of protection against another party's negligence. So when it comes to investment properties such as high rise apartments, many would assume to be able to claim against a builder who failed to complete its works properly. A recent High Court Case however has now stated otherwise.

The case involved a major building company and a large developer who entered into an agreement to construct an apartment block. A number of provisions were set out in the contract covering what would occur in the event that the builder's work was found to be defective.

As the building was nearing completion, a strata plan was registered with local council and an Owners Corporation was established. The corporation initially represented the developer and later, individual investors who purchased apartments in the building. One of its major responsibilities was to ensure the common areas of the apartment block were kept in a state of good and serviceable repair.

Years after the project had been completed, a number of building defects not previously detectable began to emerge in the common areas.  Having not suffered any actual damage or loss, but still responsible for fixing the defects, the Owners Corporation sought to recover damages for economic loss from the builder.

It argued that negligent works of the builder had caused it great expense and that the builder should be found to have breached its duty to construct the apartments with reasonable care. The builder counter argued that the contract between the developer and the builder already covered these issues extensively and that this removed the need for the court to find a further duty of care owed to the Owners Corporation.

The court therefore had to answer the question; did the building company owe a duty of care to the developer or Owners Corporation in respect of the hidden defects?

The Court unanimously said no.

In reaching its decision, the court stated that a duty of care to prevent economic loss would only arise in special cases. A party seeking damages would need to show  that it was unable to protect itself from losses flowing from the other party's failure to exercise reasonable care – that is, the failure of the builder to complete the building satisfactorily.

The court also found that the contracts involved in the construction and purchase of the apartments contained numerous and detailed provisions designed to protect the purchasers for this type of event. As such, it was inappropriate for the Court to find a further duty of care.

So what does this mean for future investors in apartment or commercial building developments? Essentially, parties should be checking their purchase contract to ensure that they are adequately protected against any defective works of their builder. If the contract lacks such protection, your investment may quickly become a liability.

For more information regarding this article, please call Michael Mobberley at Townsends Business & Corporate Lawyers on (02) 8296 6222.