Recently the extent of a builder’s liability in tort has been the subject of a number of judicial decisions in New Zealand.
Across the Tasman Australia have been grappling with similar considerations. The High Court of Australia (Australia’s highest court) has recently released a decision concerning builder’s liability for pure economic loss; Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor  HCA 36.
Before we get into the facts it is important to note that Australia has adopted a different approach than New Zealand when it comes to determining tortious liability. However, despite this difference the decision is still likely to carry limited weight in New Zealand.
The issues occurred at a mixed-use apartment block that housed retail, restaurants and a combination of serviced and un-serviced apartments. In 1997 the builder entered into a design and build contract with the developer, Chelsea Apartments Pty Ltd. Once completed an owners corporation (the Australian equivalent of a body corporate) was formed and the common property was vested in the owners corporation. In 2004 defects were discovered in the common property and proceedings were commenced in 2008. While defects had been identified in the complex they had not yet manifested in any actual damage, meaning the claim was for pure economic loss (or put another way, diminution in value).
The key question was whether the builder was liable to the owners corporation for pure economic loss (diminution in the property value) – we note that this was not a case of actual property damage. The relevant facts include:
- The builder had provided comprehensive warranties to the developer under the construction contract.
- The developer has in turn provided comparable warranties to the investors through the sale contract for the apartments.
- The investors had warranted (to the developer) that they had obtained independent advice and were satisfied with the purchaser’s obligations and rights.
The High Court of Australia released a unanimous decision, overturning the Court of Appeal and finding that the builder did not owe a duty of care to the subsequent purchasers for pure economic loss. In reaching this finding the Court seems to focus on two aspects:
- The vulnerability of the plaintiffs; and
- The extent that obligations are covered by the contract.
Essentially it was found that the investors were not sufficiently vulnerable. The investors had the freedom and ability to negotiate the sale contract in such a way as to protect their position. They did in fact have contractual remedies against the developer that facilitated the remediation of the defects complained of. The fact that any remedy against the developer may have expired due to limitation was irrelevant to assessing vulnerability. In addition the contracts were thorough and sufficiently allocated the risk and obligations between the parties.
These factors indicated that the builder did not owe a duty of care to subsequent purchasers in relation to latent defects (pure economic loss).
While this decision does not have any direct application in the New Zealand context it is a significant decision across the ditch. Notwithstanding the difference in jurisdiction, the reasoning of the High Court are likely to have weight in the New Zealand, particularly in novel situations where the contractual provisions comprehensively allocate risk between the parties.