Developers and latent defects: are your building contracts protecting you and your clients?

Developers need to assign all rights against consultants to a subsequent purchaser of a project

In Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004), an investor purchased a commercial building some years after it was built. After taking possession, the purchaser discovered that the building had latent defects that were attributable to the negligent design of the footings. The purchaser sued the engineer in negligence, there being no contractual relationship on which it could rely against the builder. The purchaser had not negotiated any warranties from the developer as to the condition of the building, nor any right to sue the engineer as assignee.

The purchaser’s claim failed.

The High Court expressed the view that the ‘vulnerability’ of a purchaser had emerged as ‘an important requirement in cases where a duty of care to avoid economic loss has been held to have been owed’. McHugh J said:

“The better view in all cases – not merely building cases – is that the capacity of a person to protect himself or herself from damage by means of contractual obligations is merely one – although often decisive – reason for rejecting the existence of a duty of care in negligence in cases of pure economic loss”

Rights against builders for latent defects need to be assigned to a body corporate and off the plan purchasers

In Brookfield Multiplex Ltd v Owners Corp Strata Plan, a building contract was entered into between a developer, and Brookfield, as builder.

The developer was the owner of the land, and remained the owner until the strata plan was registered. Upon registration, a body corporate came into existence and became the legal owner of the common property. The body corporate did not have any contractual relationship with either the developer or Brookfield. It held the common property as agent for the developer within the meaning of the strata legislation.

Under the standard-form contract of sale for each of the lots, the body corporate was empowered to give written notice of defects in the common property to the developer. This would enliven the developer’s contractual obligation to the lot owners to repair such defects. As usual, the responsibility assumed by Brookfield with respect to the developer was defined in detail by the building contract entered into between them.

Again, the High Court rejected the suggestion that the body corporate could sue the builder on the following basis:

“the relevant parties made a contract for the construction of the building and for subsequent sale of parts of the building which were contracts that could (and did) make provisions regulating the quality of what was to be received in return for payment of the price. The making of those contracts denies vulnerability.”

Vulnerability refers to a plaintiff’s “inability to protect itself from a builder’s negligence, either entirely or at least in a way which would cast the consequences of loss on the builder”.

The making of construction contracts demonstrated the ability of the parties to protect against any lack of care by the builder in the performance of its contractual obligations.

The builder’s obligations to the developer were comprehensively stated in the building contract and there was no room for the imposition of a concurrent duty of care owed to the developer in negligence. The liability of the builder to the developer was the subject of detailed provisions in the contract relating to the risk of latent defects in the builder’s work.

What does this mean for you?

  1. A failure to negotiate protective contractual terms for latent defects in a building contract may prevent any claim in negligence against a builder from arising at all.
  2. The liability imposed pursuant to an initial construction contract will not be permitted to grow wider when relied upon by a body corporate, purchaser or lessee.
  3. The obligations of a builder to a subsequent owner of a building that is affected by latent defects should be limited by the terms of the building contract to which that owner was not a party.
  4. Developers need to consider obtaining, from builders, as a precondition to practical completion, a warranty assigning all the rights in favour of the developer to the body corporate, purchaser and lessee.



This post doesn't have any comment. Be the first one!

hide comments

This is a unique website which will require a more modern browser to work!

Please upgrade today!