Supreme Court New South Wales Medium Neutral Citation: Owners Corporation Strata Plan 61288 v Brookfield Multiplex [2012] NSWSC 1219 Hearing dates: 06/09/2012; further written submissions 05/10/2012 Decision date: 10 October 2012 Jurisdiction: Equity Division - Technology and Construction List Before: McDougall J Decision: Judgment for first and second defendants with costs. Catchwords: [PROCEDURE] - civil - whether court should order the separate and prior determination of the question of the existence of a duty of care - all relevant factual material before the court. [BUILDING AND CONSTRUCTION] - strata titles - whether defendants owed a common law duty of care - whether duty of care alleged is inconsistent with principle - whether appropriate for a trial judge to determine a common law duty of care owed to an owners corporation - whether decision in Bryan v Maloney (1995) 182 CLR 609 is authority for the existence of a duty of care. Legislation Cited: Civil Procedure Act 2005 (NSW) Home Building Act 1989 (NSW) Strata Schemes Management Act 1996 (NSW) Strata Schemes (Freehold Development) Act (NSW) Uniform Civil Procedure Rules 2005 (NSW) Cases Cited: Astley v Austrust Ltd (1999) 197 CLR 1 Bryan v Maloney (1995) 182 CLR 609 Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649 The Owners-Strata Plan No 43551 v Walter Construction Group (2004) 62 NSWLR 169 Owners Corporation Strata Plan 72535 v Brookfield [2012] NSWSC 712 Stolfa v Owners Strata Plan 4366 [2010] NSWSC 1507 Tepko Pty Ltd v Water Board (2001) 206 CLR 1 Tyrell v Owners Corporation Strata Plan 40022 [2007] NSWCA 8 Young v Murphy [1996] 1 VR 279 Category: Principal judgment Parties: Owners Corporation Strata Plan 61288 (Plaintiff) Brookfield Multiplex Limited (ACN 008 687 063) (First Defendant) Multiplex Corporate Agency Pty Ltd (ACN 003 070 120) (Second Defendant) Representation: Counsel: F C Corsaro SC / P J Bambagiotti (Plaintiff) R G McHugh SC / T J Breakspear (Defendants) Solicitors: Grace Lawyers Pty Ltd (Plaintiff) Gilbert + Tobin (Defendants) File Number(s): 2008/290669 Judgment 1HIS HONOUR: The plaintiff (the Owners Corporation) is the owners corporation of a strata title development at Chatswood (the serviced apartments development). That development is operated, under the name Mantra Chatswood Hotel, as serviced apartments available for public letting. The complex of which the development forms part was constructed by the first defendant (Brookfield) pursuant to a design and construct contract made with the developer, Chelsea Apartments Pty Ltd (Chelsea). 2The Owners Corporation claims that Brookfield's work was defective, and that there are many defects in the common property of the serviced apartments development that require rectification. It sues Brookfield to recover the cost of rectification. Its cause of action is based upon an asserted common law duty of care. 3The parties have asked that the question, as to whether there was owed the duty of care alleged, be determined separately from and before the determination of all other questions in the proceedings (UCPR r 28.2). 4For the reasons that follow, I conclude that: (1) the question of existence of a duty of care should be determined separately from and before the determination of all other questions in the proceedings; and (2) Brookfield did not owe the Owners Corporation the duty of care alleged. The pleaded duty of care 5The procedural history is a little confusing. The serviced apartments development formed part of a larger development. The first nine floors of the building are the floors that are the subject of the strata plan of which the Owners Corporation is the owners corporation, and that are used as the Mantra Chatswood Hotel. 6The higher floors (floors 10 to 22) are the subject of a separate strata plan (SP61287) with its own owners corporation. Those floors were developed for use, and are used, as residential apartments. 7When the proceedings were commenced, the owners corporations of both strata schemes were plaintiffs. The owners corporation in respect of the residential apartments relied, among other things, on the implied warranties under the Home Building Act 1989 (NSW). 8It is common ground that the Home Building Act has no application to the strata scheme, of which the present plaintiff is the owners corporation, the common property and lots in which are used for the purposes of the Mantra Chatswood Hotel. 9Thus, as between the Owners Corporation and Brookfield, there is neither actual privity of contract nor what might be called deemed or extended privity of contract pursuant to the Home Building Act. The Owners Corporation relies on a duty of care at common law. 10Before I set out the duty of care alleged, I should note that there are two defendants. The second defendant (Multiplex CA) is a related company of Brookfield. The Owners Corporation asserts that the design and construct contract was made by Chelsea with Brookfield "and/or" Multiplex CA (amended list statement filed 15 November 2011, para 9). I do not know why the plaintiff has involved Multiplex CA. The design and construct contract that it has pleaded (and that has been proved) was made between Chelsea as developer and Brookfield (under its prior name Multiplex Pty Ltd) as contractor. No contract involving Multiplex CA has been particularised or proved. 11Paragraph 69 of the amended list statement alleges that Brookfield owed the Owners Corporation a duty of care, and sets out the circumstances relied on to support the imposition of that duty of care. However, neither para 69 or any other pleading asserts the content of the duty of care. 12I set out para 69: 69. In carrying out the Building Works the First Defendant owed the Plaintiff a duty of care by reason of the following: (a) it was reasonably foreseeable that if the First Defendant failed to exercise reasonable care in carrying out the Building Works there was a real risk that the Plaintiff might suffer loss; (b) the Plaintiff by reason of being a successor in title to the Developer was so closely and directly affected by the acts or omissions of the First Defendant that the First Defendant ought reasonably to have had the Plaintiff in contemplation as being affected by those acts or omissions; (c) the First Defendant in carrying out the Building Works assumed responsibility to the Plaintiff in respect of the First Defendant's acts or omissions in carrying out the Building Works; (d) the Plaintiff relied upon the First Defendant taking care in carrying out the Building Works; (e) the First Defendant was aware or ought to have been aware that the Plaintiff would rely on the First Defendant taking such care. 13In case it is not clear, Brookfield is the "the First Defendant" and Chelsea is "the Developer". 14Paragraph 70 of the amended list statement alleges that Brookfield breached the duty of care, and gives particulars of some 15 matters. 15Paragraph 71 alleges that the Owners Corporation has suffered loss by reason of that alleged duty of care. The loss claimed is particularised as: ... the cost of rectifying the defects... . The Plaintiff also claims the diminished value to the Building and the loss of rents and income during the period of and due to the rectifying of the defects. The quantum claimed will be provided in due course. 16Those allegations (as to duty, breach and loss) are then repeated as against Multiplex CA in paras 72 to 74. 17The written outline of submissions for the Owners Corporation did not seek to identify the content of the duty of care alleged. It may be inferred from them, perhaps, that the duty alleged was one "to ensure that the Building was designed and built with reasonable care, so that it would be fit for the purpose" (of what, is unspecified): written outline para 20(d). I say that because it appears to be the submission for the Owners Corporation that the duty of care should reflect the terms of the design and construct contract (see also the conclusion to para 21 of those submissions, which alleges that "the Multiplex Parties owed a duty of care in the construction of the Building to the developer"). 18In oral submissions, Mr Corsaro of Senior Counsel, who appeared with Mr Bambagiotti of counsel for the Owners Corporation, referred to particulars of the duty of care that had been supplied by letter dated 10 August 2012. In that letter, the duty of care was said to be one: ... to take reasonable care to avoid a reasonably foreseeable economic loss to the Plaintiff in having to make good the consequences of latent defects caused by the building's defective design and/or construction. There should be separate and prior determination 19The notice of motion seeking separate and prior determination was listed for hearing on the basis that the court would take evidence, and hear submissions, on both the procedural and the substantive questions. Thus, the parties directed evidence and submissions both to the question of whether there should be a separate and prior determination and to the question of whether there was owed the duty of care alleged. 20Having considered the evidence, and the parties' submissions, prior to the hearing, I informed counsel at the outset that I was satisfied that the duty of care question should be determined separately from and before the determination of all other questions in the proceedings. I now set out my reasons for coming to that conclusion. 21I am satisfied, on the evidence, that: (1) there is no overlap between the evidence relied upon to support (or negate) the existence of a duty of care on the one hand, and that relevant to the question of breach on the other; (2) the evidence on the former question is entirely documentary; (3) thus, there is no question of credibility arising in relation to the duty of care question, and a fortiori no risk of inconsistent views as to credibility; (4) preparation of Brookfield's case on defects would require it to retain experts in six different disciplines, who would be required to consider and respond to some 41 reports and affidavits on which the Owners Corporation apparently relies, on the question of defects. 22Brookfield's solicitor, Mr Confos, has estimated that it would take some 9 to 12 months to prepare Brookfield's case on the question of defects, and that the costs involved would be of the order of $1 million. That evidence was neither challenged nor controverted. 23A determination on the duty of care question does not require the court to proceed on the basis of assumed facts. On the contrary, the parties have adduced a body of evidence, which is uncontroversial and (subject to what I say at [25] below) is the entirety of the available evidence that they propose to lead on that question. 24In those circumstances, the duty of care question could be (as it was) dealt with in the space of no more than a day's hearing. It is impossible to give any realistic estimate of the likely duration of a hearing on the "defects" question. However, taking into account the nature, range and scale of the alleged defects, and the sheer volume of the evidence that, apparently, would be adduced, it is clear that, even before a referee, that hearing would be likely to occupy many weeks. 25In my view, there is very significant utility in considering first, and separately, the question of whether Brookfield owed any duty of care as alleged. If, as I conclude it should be, that question is answered in favour of Brookfield, then Brookfield (directly) and the Owners Corporation (indirectly) are spared the costs of preparation, and of a lengthy hearing, on the defects question. Conversely, consideration of the duty of care question will not be improved if it is undertaken in the light of all of the evidence, specifically that relevant only to the question of defects. 26What I have just said requires some qualification. Mr Corsaro announced that he wished to tender the entirety of his client's evidence on the question of breach. The reason for doing this was, apparently, to show that at least some of the defects in question were latent defects, and were not susceptible or discoverable on reasonable examination (either by the Owners Corporation, which of course had no opportunity to accept or reject the vesting in it of the common property, or by subsequent purchasers of lots). 27Mr McHugh of Senior Counsel, who appeared with Mr Breakspear of Counsel for the defendants, opposed the tender of this evidence. He said that his clients were prepared to make an admission, as to the latency of the alleged defects, to address Mr Corsaro's concern. 28I came to the conclusion that the defects evidence should not be admitted. I will set out in due course the admission made by the defendants, the nature of the defects alleged and what are in my view obvious conclusions, in relation to at least some of those defects, on the question of "latency". 29To return to the question of separate and prior determination: I accept that there have been warnings, of high authority, about the sometimes illusory benefits of proceeding by way of separate question. See, for example, Kirby and Callinan JJ in Tepko Pty Ltd v Water Board (2001) 206 CLR 1 at [168] to [170]. Nonetheless, in my view, taking into account s 56 of the Civil Procedure Act 2005 (NSW), the circumstances to which I have referred suggest very strongly that the just, quick and cheap resolution of the real issues in dispute favours separate and prior determination of the duty of care question. 30Further, if (contrary to the view of which I have come) Brookfield did owe the Owners Corporation a duty of care, the just, quick and cheap resolution of the remaining issues would be likely to involve the court's managing the dispute until the evidence is complete and then referring out all the defects issues to some unfortunate referee. Proceeding by those stages would not involve any duplication of work or waste of costs. (Of course, on the view to which I have come, the Owners Corporation's costs of preparing its case on defects have been wasted; but in the counterfactual situation, the benefit of those costs would remain available to it for the purposes of the hypothetical reference out.) 31In Tyrell v Owners Corporation Strata Plan 40022 [2007] NSWCA 8, Spigelman CJ at [12], [13], considered that it could be appropriate to determine the existence of a duty of care as a separate and prior issue if the full range of evidentiary material relevant to that issue were before the court. For the reasons that I have given, this is such a case. 32Accordingly, I conclude that it is appropriate to determine, as a separate and prior question, whether the pleaded duty of care was owed. Duty of care: the relevant facts 33Chelsea was the registered proprietor of the land on which the strata title developments have been constructed. It entered into two relevant agreements. One was a master agreement made with the Stockland Trust Group. The other was the design and construct contract. It is clear from the master agreement that it was the common intention of Chelsea and Stockland that the serviced apartments development would be operated as serviced apartments, under the "Holiday Inn" franchise. It is equally clear, from the terms of the development consent, that there could be no other use without consent. The master agreement 34The master agreement was made by deed dated 17 August 1997. By that deed, Chelsea agreed to design and construct the serviced apartments. It agreed further that, on completion, those apartments would be leased to a subsidiary company in the Stockland Group, Park Hotel Management Pty Limited (Park Hotel). Park Hotel agreed that it would operate a serviced apartment business under the "Holiday Inn" brand. 35By cl 9.1 of the master agreement, each lot in the development (and I stress that I am referring only to floors 1 to 9, which comprise the serviced apartments) was to be leased to Park Hotel. Those leases have been put in place. By each of those leases, Park Hotel acquired in effect the right that Chelsea, as registered proprietor, had to direct the affairs of the Owners Corporation. 36The project was marketed for sale to investors. What was offered was the opportunity to purchase an apartment that would be used exclusively as part of a serviced apartment complex, and which would provide a regular return. The marketing material made it clear that all purchases of lots in the serviced apartments development would cede their voting rights to the operator from time to time (initially, Park Hotel). 37Most of the lots have been sold to investors, who have taken title subject to the leases to Park Hotel. Chelsea sold some other lots to Stockland, pursuant to a put and call option agreement. Stockland is bound by the terms of the leases of those lots to Park Hotel. 38Under the master agreement, Stockland bargained for and obtained from Chelsea detailed contractual warranties with respect to the quality of the building work. 39It is common ground (and the list statement effectively pleads facts to show) that Chelsea was an experienced and sophisticated developer. A Multiplex company had a 40% interest in Chelsea. The remaining 60% interest was controlled by a well-known Queensland developer, E Kornhauser Investments Pty Ltd. 40It is self-evident that Stockland, a major listed public company, is an experienced and sophisticated investor. There can be no doubt that, in negotiating the terms of the master agreement, each of Chelsea and Stockland bargained at arms' length and on an equal footing. Each was in a position to assess, in its own interest, what it wanted from the agreement and what it was prepared to give in exchange. 41Nothing of present significant flows from the fact that Stockland has sold its interest in Park Hotel to the Mantra Group. The design and construct contract 42The design and construct contract was made on 5 November 1997. It is clear that Chelsea was not prepared to enter into the design and construct contract until it had concluded the master agreement with Stockland. 43A number of clauses of the master agreement (which operate of course as between Stockland and Chelsea) are repeated (as between Chelsea and Brookfield) "back to back" in the design and construct contract. 44The design and construct contract contained detailed contractual provisions relating to the quality of the services that Brookfield was to provide. It is self-evident that each of Chelsea and Brookfield was sophisticated and experienced in its area of business, and that each negotiated at arms' length and on an equal footing. Again, it is clear that each was capable of assessing what it wanted from the design and construct contract, and what it was prepared to give in exchange. 45The design and construct contract contemplated that Chelsea would offer individual lots for sale to investors. There was annexed to it a form of standard contract for sale, relating to lots in the serviced apartments development. Under that standard form of contract, Chelsea agreed to give the purchaser the benefit of specific contractual rights in relation to the quality of Brookfield's work, and defects. 46One significant group of provisions in the design and construct contract related to practical completion, the defects liability period and what was to happen at the expiry of that period. When practical completion was certified, the defects liability period commenced. That was a period of 52 weeks. 47At the conclusion of the defects liability period, and within 28 days thereafter, Brookfield was required to prepare a final payment claim. That final payment claim was to be assessed. In the assessment, the superintendent would, among other things, deal with any unrectified, defective or incomplete work, and take into account the cost of rectification or making good. 48Unless the final certificate were disputed, it was to stand as evidence that the works had been completed in accordance with the design and construct contract. There were exceptions for: (1) fraud and the like; (2) "any defect (including omission) in the Works or any part thereof which was not apparent at the end of the Defects Liability Period, or which would not have been disclosed upon reasonable inspection at the time of the issue of the Final Certificate"; and (3) obvious errors (of inclusion or exclusion) and arithmetical errors. The position of the Owners Corporation 49The Owners Corporation is a creature of statute. By s 8(1) of the Strata Schemes Management Act 1996 (NSW), (the SSM Act) the Owners Corporation was "established" on registration of the strata plan. By s 8(2), it "has the principal responsibility for the management of the scheme". 50By s 18 of the Strata Schemes (Freehold Development) Act (NSW) (the SSFD Act), and again on registration of the strata plan, the common property in the strata plan vested in the Owners Corporation. 51By s 20 of the SSFD Act, the Owners Corporation holds its interest in common property "as agent" for the proprietors from time to time of all the lots in the scheme. 52By s 21 of the SSFD Act, common property may be dealt with only in accordance with that Act and the SSM Act. 53Section 24(2) of the SSFD Act makes it clear that each proprietor of a lot in a strata scheme has a beneficial interest in the common property of that scheme. As Spigelman CJ (with whom Ipp and McColl JJ agreed) said in The Owners Strata Plan No 43551 v Walter Construction Group (2004) 62 NSWLR 169 at [43], [44], it follows that each proprietor of a lot has an equitable interest in the common property as tenant in common with the other proprietors of lots in that strata scheme. 54Further, his Honour said at [48], the position of the Owners Corporation, in respect of common property, was analogous to that of a trustee. 55A proprietor's beneficial interest in common property is caught up by any dealing with that proprietor's lot, and cannot be dealt with separately from that lot (see, respectively, subss (1) and (2) of s 24 of the SSFD Act). 56The Owners Corporation has the statutory responsibility of management and control of the use of the common property. See s 61(1) of the SSM Act. By s 61(2), its duties include the obligation to maintain and repair the property in accordance with Pt 2 of that Act. 57Section 62 of the SSM Act (which appears in Pt 2 of Ch 3) sets out the duties of maintenance and repair: STRATA SCHEMES MANAGEMENT ACT 1996 - SECT 62 What are the duties of an owners corporation to maintain and repair property? 62 What are the duties of an owners corporation to maintain and repair property? (1) An owners corporation must properly maintain and keep in a state of good and serviceable repair the common property and any personal property vested in the owners corporation. (2) An owners corporation must renew or replace any fixtures or fittings comprised in the common property and any personal property vested in the owners corporation. (3) This clause does not apply to a particular item of property if the owners corporation determines by special resolution that: (a) it is inappropriate to maintain, renew, replace or repair the property, and (b) its decision will not affect the safety of any building, structure or common property in the strata scheme or detract from the appearance of any property in the strata scheme. Note: The decision of an owners corporation under subsection (3) may be reviewed by an Adjudicator (see section 138). 58The duties of maintenance and repair are absolute and not optional. See Stolfa v Owners Strata Plan 4366 [2010] NSWSC 1507. 59The Owners Corporation is entitled and required to levy proprietors for the proper cost of, among other things, meeting its obligations of maintenance and repair. Sections 66 and 69 of the SSM Act require there to be established, respectively, an administrative fund and a sinking fund. Section 75 requires the Owners Corporation to prepare estimates of contributions to those funds to cover, among other things, the estimated costs to be paid out of them. 60In essence, those funds are to be held to enable the Owners Corporation to meet its obligations, including obligations of maintenance and repair (see s 68 as to the administrative fund, and s 71 as to the sinking fund). 61There are administrative provisions relating to the estimating and levying of contributions in ss 75 to 80 of the SSM Act. 62Thus, the absolute duty of maintenance and repair of common property is balanced by an entitlement to be recouped for the cost of so doing by levies required to be paid by proprietors of lots. 63In this case, the contractual obligations that were put into place included, under the leases of the various lots to Park Hotel, that Park Hotel as lessee would pay, among other things, contributions to the administrative fund (but not contributions to the sinking fund). That directs attention to s 76(4) of the SSM Act, which provides that if an owners corporation is faced with expenses that it cannot meet from either the administrative fund or the sinking fund: ... it must levy on each owner a contribution to the administrative fund, determined at a general meeting of the owners corporation, in order to meet the expenses. 64The duty to maintain and repair common property is not limited by reference to the source of the problem that gives rise to the need for maintenance or repay. The duty will extend, in an appropriate case, even to the rectification of defective work left unrectified by the builder. The nature of the defects 65Mr Corsaro provided a schedule which set out both the defects alleged and gave references to the evidence that, he said, would support them. I set out that schedule: Item No. Particulars of item claimed Report reference (Court Bundle reference in brackets) 1. Steel Lintels - Curved on Plan 1.Report of Michael Jaroszewicz, dated 30 January 2012, Paragraphs 14 to 65 inclusive (Volume 8, Tab 51). Nature of defect alleged 2.Affidavit of Dr. Keith Thompson, sworn 31 January 2012 (Volume 8, Tab 52). (a)The steel lintels (which are curved on plan) above the windows to the south east and south west elevations, are not hot-dip galvanised, contrary to the Specification. 3.Affidavit of Graham Peter Vile, sworn 2 March 2012, paragraphs 11 to 19 inclusive (Volume 9, Tab 54). (b)In addition, the lintels have been installed without the backing rod and sealant required by the Specification, and the galvanised steel mesh has not been provided, contrary to the Specification (the Lintel Omissions). 4.Affidavit of Henk Van Den Heuvel, sworn 2 March 2012 (Volume 12, Tab 58). (c)The render which had been applied to the soffit of each lintel, has become detached from the soffit. 5.Report by Evans & Peck dated 31 January 2012, paragraphs 72 to 90 inclusive, Appendix 17 and table at paragraph 198 (as to quantum) (Volume 4, Tab 39) (d)The installation of the steel lintels occurred during construction of the building, prior to the registration of the Strata Plan. (e)Once installed, the steel lintels themselves were concealed by masonry and render. The steel lintels and the Lintel Omissions could not be observed without the erection of scaffolding or swinging stage and the removal of render and masonry. Location of defect alleged The lintels are located at the south east and south west elevations. Each elevation has 4 lintels, giving a total of 8 lintels per level for a total of 9 levels (i.e. Levels 1 to 9 inclusive). Thus the total number of lintels with the defects described above is 72. 2. Windows 1.Report prepared by Mr Keith Wilson, of Sydney Facades, dated 14 March 2008 (Volume 3, Tab 33) Nature of defect alleged 2.Report prepared by Mr Keith Wilson, of Sydney Facades, dated 23 February 2009 (Volume 3, Tab 34) (a)The Picture Windows do not meet the requirements of the Specification in respect of structural adequacy or resistance to water penetration. 3.Report prepared by Mr Keith Wilson, of Sydney Facades, dated and 17 December 2009 (which enclosed a report dated April 2009) (Volume 3, Tab 35 and 36) (b)Windows have been installed with the omission of the following items: 4.Affidavit of Graham Peter Vile, sworn 2 March 2012, paragraphs 20 to 53 inclusive (Volume 9, Tab 54) (c) 5.Report by Evans & Peck dated 31 January 2012, paragraphs 91 to 101 inclusive, Appendix 19 and table at paragraph 198 (as to quantum) (Volume 4, Tab 39) (i)the sub sill section as depicted in the Architect's details; and (ii)internal angle brackets as shown in the window manufacturer's shop drawings. (the Window Omissions) (d)The method of fixing the perimeter of the windows to the surrounding structure is inadequate and does not comply with the requirements of the Specification. (e)Water penetration has occurred as a consequence of defects to the windows, including the absence of subsill and sub head sections, poor flashing details and the absence of small-joint sealant. (f)The installation of the windows occurred during construction of the building, prior to the registration of the Strata Plan. (f)Once installed, the Window Omissions and method of fixing of the windows were concealed and could not be observed without the erection of scaffolding or swinging stage and the removal of render and masonry. (g) Location of defects alleged All floors and elevations 3. External Render Repair 1.Affidavit of Graham Peter Vile, sworn 2 March 2012, paragraphs 54 to 71 inclusive (Volume 9, Tab 54) Nature of defect alleged 2.Affidavit of Kim Parsons, dated 2 March 2012, being the All Area Access report (Volume 12, Tab 55) (a)The external render to the façade of the building is defective. It is cracking at numerous locations to all elevations, particularly at junctions between external masonry and slab edges. 3.Report by Evans & Peck dated 31 January 2012, paragraphs 102 to 110 inclusive, Appendix 20 and table at paragraph 198 (as to quantum) (Volume 4, Tab 39) (b)The cracking has occurred due to deficiencies in workmanship, substrate preparation and joint fixing details (the Render Deficiencies). (c)The installation of render occurred during construction of the Building, prior to the registration of the Strata Plan. (d) (e)Once the render was installed, the Render Deficiencies could not be observed without the erection of scaffolding or a swinging stage and the removal of the external render. Location of defect alleged To the external walls of the Building, all floors and elevations. 4. Cowlings 1.Inspection Report: Chelsea Apartments, Office of Fair Trading, Claim No.3183, 12 December 2007 (Volume 3, Tab 38) Nature of defect alleged 1.Affidavit of Donald Van Aldren dated 8 June 2012, paragraphs 24-28 (Volume 7, Tab 48) (a)The sheet metal cowlings to the fire services shutters above certain windows to the exterior of the building were fabricated and coated with materials which were unsuitable for exterior exposure. The metal cowlings are corroding as a consequence and require replacement. 2.Report by Evans & Peck dated 31 January 2012, paragraphs 111 to 118 inclusive, Appendices 22 and 23 and table at paragraph 198 (as to quantum) (Volume 4, Tab 39) (b)The installation of cowlings occurred during construction of the Building, prior to the registration of the Strata Plan. (c) (d)Once the cowlings were installed, the materials used to fabricate and coat the cowlings could not be identified without the erection of scaffolding or a swinging stage. Location of defect alleged The defective metal cowlings are located above a number of windows on the northern and eastern elevations of the building. 5. Water leak from Spa 2.Affidavit of Richard Cortis, dated 21 December 2011 (Volume 6, Tab 41, Exhibit 8 para.14) Nature of defect alleged 3.Affidavit of Donald Van Aldren dated 8 June 2012, paragraphs 33-36 (Volume 7, Tab 48) (a)Water was leaking from the spa at Level 1 into the Function Rooms below as a consequence of defects to the waste connection and inadequate waterproofing to the enclosure below the spa. 4.Report by Evans & Peck dated 31 January 2012, paragraph 67, table at paragraph 198 and Invoices within Appendix 37 (as to quantum) (Volume 4, Tab 39) (b)Services penetrations were not sealed in accordance with the relevant fire regulations. (e)The installation of spa and the surrounds occurred during construction of the Building, prior to the registration of the Strata Plan. (f) (g)Once the spa was installed, the inadequate waterproofing and the deficiencies in the sealing of the service penetrations could not be observed without the removal of the spa or other invasive investigations. 66I have included the evidentiary references only to give an indication of the bulk and nature of the material that Mr Corsaro wished to tender (see at [26] above). 67As I have said above, Mr McHugh stated an admission that his clients were prepared to make for the purposes of the proceedings. I set it out: MCHUGH: On the question of duty of care, my client is prepared to concede as to foreseeability that at the time of construction it was reasonably foreseeable that if there were defects in the building, some of those defects might be latent at the time of registration of the strata plan. So far as I apprehend it that should cover what is of interest to my friend for the purposes of the question of duty of care. That is, it was reasonably foreseeable that if there were defects they might be latent. 68It does not seem to me to be necessary to have expert evidence to understand that many of the defects alleged are of their very nature latent. For example, items 1(a) and (b) refer to defects in the quality of certain steel lintels and the manner of their installation. If, as one would expect and as the particulars assert, the lintels have been covered by masonry and render, those defects would not be capable of detection unless one were prepared to remove the masonry and render. In many case, this would involve working from scaffolding or some form of stage or lift. 69Again, item 2(b) refers to defects in the installation of the windows. The same comments as to covering over (and I do not use this in a pejorative sense) and detection apply. 70If there were evident external signs that could suggest the presence of such defects (and others alleged in the schedule), then reasonable inspection might require that the person undertaking the inspection should go to the lengths of using scaffolding or other means to gain access to the area of alleged defective work, and undertaking the kind of invasive procedure that I have briefly described. But in my view, if there is no reason to suspect the existence of these defects (because their consequences have not manifested themselves in any observable way on the structure of the building) then it could not be part of any obligation or duty of reasonable inspection to go to those lengths to see if the work were defective. 71Thus, in my view, it must be acknowledged, in the real world, that if the defects alleged exist, then many of them are properly to be characterised as latent defects, not readily detectable by any reasonable process of inspection. I acknowledge that this assumes that, at the relevant time (which would be either when the common property vested in the Owners Corporation or, perhaps, when individual proprietors purchased their lots) there was no sign that would lead the reasonable mind to suspect the existence of the defect. There is no evidence one way or the other as to this. The parties' submissions 72Mr Corsaro accepted, in my view correctly, that the duty of care for which he contended was one to avoid economic loss flowing from the need to rectify defects in common property. 73Mr Corsaro submitted that vulnerability was not the sole criterion for the imposition of such a duty of care, and that, in determining whether a duty of care was to be imposed, it was necessary for it to consider the salient features of the whole of the relationship between the person said to owe the duty and person claiming the benefit of it. 74In this context, Mr Corsaro relied on the following matters: (1) the object of the design and construct contract was to bring into existence a high rise residential apartment building, which he characterised as "a very complex structure". (2) It was always intended that the building would be subject to strata subdivision. That would necessarily divide it into lots and common property. It meant, further, that the common property would necessarily be vested, for each of the two schemes, in its respective owners corporation. (3) Those owners corporations would immediately assume all the obligations imposed on them by relevant legislation, including the absolute duties of maintenance and repair of common property. (4) Under the design and construct contract, Brookfield was obliged to ensure that the building was designed and built with reasonable care, and fit for its intended purposes. (5) Some elements of the building (including some of those that are said to have been constructed defectively) are enclosed, and thus not susceptible of examination. (6) Some of the defects alleged by the Owners Corporation are, of their very nature, latent, in that they are not reasonably capable of detection on any reasonable examination. (7) Because the Owners Corporation came into existence by the very act of registration that created common property and thus engendered the obligation to repair, it had no ability to protect its position by prior examination of the common property, and no ability to bargain for contractual protection in respect of defects. 75Mr Corsaro submitted that it was not necessary that there be an equivalent common law duty of care owed by Brookfield to Chelsea (see Bryan v Maloney (1995) 182 CLR 609). But, he submitted, if that were a necessary condition, it was satisfied. In this case, he submitted, Brookfield owed Chelsea a common law duty of care concurrent with its contractual duties. He relied on Astley v Austrust Ltd (1999) 197 CLR 1. 76Thus, Mr Corsaro submitted, this was an appropriate case for the court to determine that Brookfield owed his client the duty of care alleged. He did not accept that the duty alleged was novel, but submitted that, even if it were, that was no reason why this court could not decide that the duty was owed. Mr Corsaro said that the court should consider the salient features of the relationship, in accordance with the reasoning of Allsop P (with whom Simpson J agreed) in Caltex Refineries (Qld) Pty Ltd v Stavar (2009) 75 NSWLR 649, in particular at [103]. 77If a duty of care were owed, Mr Corsaro submitted, then the Owners Corporation, by virtue of its ownership of common property, had the right to sue to recover damages for defective workmanship. He relied on Walter Construction Group and on the decision of the Full Court of the Supreme Court of Victoria in Young v Murphy [1996] 1 VR 279, in particular at 290 (to which Spigelman CJ referred, with apparent approval, in Walter Construction Group at [48]). 78However, although Mr Corsaro embraced the trustee analogy, he did submit that there was one important distinction. Many trustees (including those who undertake the position for reward) have the opportunity to decide whether or not to accept the terms of the trust. By contrast, no owners corporation has that ability. It has no choice but to accept, and to perform, the obligations of repair and maintenance imposed on it by the statutory scheme. 79Mr McHugh submitted, first of all, that there was no case shown against Multiplex CA. He submitted, correctly, that it was neither a party to the contract nor shown on the evidence to have had anything to do with the building work in question. 80As to the duty of care, Mr McHugh submitted that: (1) the duty of care was novel, in the sense that it did not fall within any established category of duty of care shown in the authorities. (2) it was not appropriate for a court of first instance to recognise "an entirely novel category of case". (3) in any event, the duty of care alleged was inconsistent with principle. (4) the decision in Bryan was no authority for the existence of the duty of care because: (a) the conclusion that the builder owed a duty of care to a successor in title to the person for whom the house had been constructed depended on the anterior conclusion that the builder owed a duty of care to that earlier proprietor; (b) in circumstances where Brookfield and Chelsea had carefully negotiated out, in detail, the terms of their bargain, there was no reason for imposing some separate duty of care as between Brookfield and Chelsea; and (c) in any event, the conclusion in Bryan depended on the proposition that there was a relationship of proximity between the builder and the subsequent owner; and the concept of proximity as a determinate of the existence of a duty of care has since been "discarded". 81As to the legislative scheme, Mr McHugh submitted that the provisions relied upon did no more than establish that it was reasonably foreseeable that the Owners Corporation might suffer economic loss by reason of defects in the common property. Reasonable foreseeability was not sufficient to generate a duty of care; nor was it sufficient to demonstrate vulnerability. 82In this case, Mr McHugh submitted, any consideration of the vulnerability of the Owners Corporation required an understanding of the interests and contractual rights and obligations of those who controlled it. When the Owners Corporation came into existence, it was effectively controlled by Chelsea, who at that stage owed all the lots in the strata scheme. Chelsea had entered into a detailed contract with Stockland, under which among other things Chelsea was required to lease the lots to Park Hotel and Stockland (or Park Hotel) had the benefit of Chelsea's control of the Owners Corporation. 83In those circumstances, Mr McHugh submitted, the interest of the Owners Corporation were aligned with, if not identical to, those of Chelsea and Stockland. In circumstances where Chelsea and Stockland were perfectly capable of looking after their own interests by negotiating appropriate contractual terms (both as between themselves and with Brookfield), there was no room, he submitted, for the law to impose some superadded common law duty of care. 84Mr McHugh relied on my reasoning in Owners Corporation Strata Plan 72535 v Brookfield [2012] NSWSC 712 (which I shall call, by reference to the name of the development, Star of Sea). In that case, I concluded that Brookfield, as builder, owed no common law duty of care to the owners corporation in respect of alleged defective work. Decision 85I start with what I said in Star of the Sea. A key feature of my reasoning in that case was that the owners corporation had the benefit of the statutory implied warranties, and what I have called above statutory privity of contract, against the developer and the builder. I said in substance that it was not appropriate for the court to impose some further or more onerous duty of care. 86In this case, however, it is clear, as the parties acknowledge, that the Owners Corporation does not have (nor did it ever have) the benefit of that statutory regime. 87Next, I note that the parties accept that the duty of care alleged is one to avoid causing economic loss. In my view, they are correct to do so. 88Thirdly, I note that although Mr Corsaro did not accept that the duty of care for which he contended was novel, he has not been able to point to any case establishing a duty of care of the kind alleged. In my view, the duty is novel. For the reasons that I gave in Star of the Sea (the essence of which is summarised in Mr McHugh's submission recorded at [80(4)] above), Bryan is no authority for the imposition of the duty alleged in the circumstances of this case. 89Mr Corsaro relied on the decision in Astley for the proposition that contractual and common law duties could coexist between parties to a contract. Mr McHugh accepted that in some cases this could be so. However, in my view, it is not so as a matter of absolute or general application. There is neither reason nor room for the imposition of a duty of care in the case of a contract negotiated at arm's length between parties of equal standing, who are able to bargain for and obtain the benefits that they seek, and to pay the price that they think appropriate. As the majority said in Astley at [47]: ... Unlike the duty of care arising under the law of tort, the promisee in contract always gives consideration for the implied term. And it is a term that the parties can, and often do, bargain away or limit as they choose. Rather than ask why the law should imply such a term in a contract for professional services, it might be more appropriate to ask why should the law of negligence have any say at all in regulating the relationship of the parties to the contract? The contract defines the relationship of the parties. Statute, criminal law and public policy apart, there is no reason why the contract should not declare completely and exclusively what are the legal rights and obligations of the parties in relation to their contractual dealings. 90In my view, their Honours' observations apply equally to a contract for the provision of specialist services, of the kind which Brookfield agreed to supply under the design and construct contract. Where the parties have negotiated in full their rights and obligations, there is no reason for the law to intervene by imposing some general law duty of care. 91Further, and contrary to Mr Corsaro's submission, I do not think that it is appropriate for a judge of first instance to identify and impose a novel duty of care. If that is within the province of the courts, it is in my view a matter to be dealt with at a higher (or the highest) appellate level. 92In this context, I think that the courts must pay particular attention to the views of Brennan J in Bryan at 644: It would be anomalous to have claims relating to the condition of the building by an original owner against the builder determined by the law of contract if the relief claimed by the remote purchaser against the builder would be determined by the law of tort. Such a situation would expose the builder to a liability for pure economic loss different from that which he undertook in constructing the building and would confer a corresponding right on the remote purchaser which the purchaser had not sought to acquire from the vendor (45). It would be tantamount to the imposition on the builder of a transmissible warranty of quality. In some jurisdictions, Parliament has provided such a remedy by statute. The social question whether building costs should be inflated to cover the builder's obligation under such a transmissible warranty in an appropriate question for parliaments to consider but, in the absence of compelling legal principle or considerations of justice reflecting the enduring values of the community, the courts should not decide to extend remedies not hitherto available to remote purchasers of buildings without considering the cost to builders and the economic effect of such an extension. Those are questions which the courts are not suited to consider. The extension of remedies in that direction is properly a matter for Parliament. 93As I said in Star of the Sea at [145], accepting that his Honour dissented in that case, nonetheless: ... what his Honour said focuses attention on the critical questions to be considered in deciding whether, as a matter of policy, the law should impose, on a builder in the position of Brookfield, a duty of care (over and above the statutory warranties) in favour of a successor in titled to the developer, such as the Owners Corporation." 94The reference to the "statutory warranties" is perhaps of less significance in this case, but it is not entirely insignificant. The legislature has put in place a regime for the protection of those who buy defective residential property. It crafted that regime to exclude developments such as that with which I am concerned, where the development was always intended to be used for commercial purposes. Thus, in this case, the Owners Corporation is inviting the courts to go where the legislature did not. 95The last point requires some elaboration, by reference to the provisions of the Home Building Act and the Home Building Regulation 1997 (the Regulation). 96Section 18B of the Home Building Act implies into "every contract to do residential building work" certain warranties. The statutory implied warranties include: (1) a warranty that the work will be performed in a proper and workmanlike manner, in accordance with the plans and specifications; (2) a warranty that materials will be good and suitable for their purpose and (unless otherwise stated) new; (3) a warranty that the work will be done with due diligence and within the stipulated or a reasonable time; and (4) a warranty of fitness for purpose where that purpose is made known to the contractor beforehand. 97The expression "residential building work" is defined in s 3 of the Home Building Act as follows: "residential building work" means any work involved in, or involved in co-ordinating or supervising any work involved in: (a) the construction of a dwelling, or (b) the making of alterations or additions to a dwelling, or (c) the repairing, renovation, decoration or protective treatment of a dwelling. It includes work declared by the regulations to be roof plumbing work or specialist work done in connection with a dwelling and work concerned in installing a prescribed fixture or apparatus in a dwelling (or in adding to, altering or repairing any such installation). It does not include work that is declared by the regulations to be excluded from this definition. 98That definition directs attention to the definition of "dwelling", which is defined as follows in s 3: "dwelling" means a building or portion of a building that is designed, constructed or adapted for use as a dwelling (such as a detached or semi-detached house, transportable house, terrace or town house, duplex, villa-home, strata or company title home unit or residential flat). It includes any swimming pool or spa constructed for use in conjunction with a dwelling and such additional structures and improvements as are declared by the regulations to form part of a dwelling. It does not include buildings or portions of buildings declared by the regulations to be excluded from this definition. 99The definition of "dwelling" directs attention to the Regulation. Clause 5 of the Regulation declares certain "structures and improvements... to form part of a dwelling when constructed for use in conjunction with a dwelling". It is intended to deal, among other things, with a structure that includes both residential and non-residential elements. Nothing of present moment turns on cl 5. 100However, cl 6 of the Regulation is of some significance. It declares "to be excluded from the definition of dwelling for the purposes of the Act" a number of commercial uses. The excluded uses include, by para (f), "a house or unit designed, constructed or adapted for commercial use as tourist, holiday or overnight accommodation". 101I should note that the relevant provisions of the Act have been amended from time to time; and, more so, of the Regulation. However, despite the changes in wording, the essential structure of the Act and Regulation has been the same since at least 1990 (although the name of each has changed); and I have sought to quote from the Regulation as it stood in 1997. 102It will be seen that the legislature has decided, as a matter of policy, to exclude, from the regime of protection given to dwellings under the Home Building Act, a number of categories of dwelling, including in effect dwellings used for the purposes of overnight accommodation. That could be seen to represent a considered decision by the legislature that the benefits of the regime established by the Home Building Act should not be extended to those who construct, for commercial rather than purely residential purposes, developments such as that with which I am presently concerned (of course, to the extent that it is used as a residential apartment hotel). 103Thus, a decision to impose a common law duty of care on a builder such as Brookfield that undertakes to construct such a development involves a conscious decision to extend, through the imposition of a common law duty of care, a benefit that the legislature appears to have withheld as a matter of deliberate policy choice. 104It must be clear, I think, that contractors in the position of Brookfield price their work, and more generally undertake contractual obligations, with reference, among other things, to the contractual and statutory warranties by which they are bound. A decision to impose additional duties on such a contractor is, as Brennan J pointed out in Bryan, a serious matter. It requires attention to a range of factors, including the additional costs that would be imposed on contractors and the corresponding benefits to those in whose favour the duty of care might extend. That, in my view, is something to be undertaken by the legislature. 105Even if the matter were not one to be dealt with only by the legislature, nonetheless the factors to which Brennan J referred, which focus attention on key policy considerations, show why it is appropriate that any principled extension of the law of negligence, of the kind that the Owners Corporation says it seeks in this case, is something to be undertaken a higher level in the curial hierarchy. 106Numerous other matters were debated in submissions, including as to the "vulnerability" of the Owners Corporation, and as to the related question of the supposed alignment between its interests and those of Stockland and Chelsea. The relevant facts have been set out above, and in any event are documentary and non-contentious. The submissions of the parties have been put both in writing and orally (recorded in the transcript). I do not think that there is any purpose to be served by my offering an opinion on the question of, for example, vulnerability in circumstances where I have concluded that it is not appropriate, at the trial level, to undertake the imposition of a novel duty of care. 107Likewise, I do not think that any useful purpose would be served if I were to consider and express some moot conclusion on the numerous other issues debated by the parties. 108I add only, and by way of reinforcement, that nothing that was put in submissions indicated any possible basis for a finding that Multiplex CA owed any duty of care to the Owners Corporation. Conclusion and orders 109For those reasons, the Owners Corporation has not made good its case that either of the defendants owed it the duty of care alleged. 110I make the following orders: (1) direct entry of judgment for first and second defendants. (2) order the plaintiff to pay the defendants' costs. (3) direct that the exhibits be handed out. ********** DISCLAIMER - Every effort has been made to comply with suppression orders or statutory provisions prohibiting publication that may apply to this judgment or decision. The onus remains on any person using material in the judgment or decision to ensure that the intended use of that material does not breach any such order or provision. Further enquiries may be directed to the Registry of the Court or Tribunal in which it was generated. Decision last updated: 10 October 2012