It's relatively common to have defects in a commercial or residential building that are not immediately apparent, and in these cases a court or tribunal such as VCAT often awards compensation. Questions often arise for builders generally as to their potential exposure to pay damages in such a case and to whom.

A fairly recent case explored that issue, and very specifically the potential liability of a builder to a strata owners corporation (a ‘strata’ body corporate in the old terminology) in respect of latent defects in the common property in the building. Some of the units in the relevant development were sold to investors and a further critically important issue was potential legal exposure to those purchasers. The case was and still is critical for developers and builders.

This case is known as the Brookfield Multiplex case, and it was decided in 2014. The case went to the highest court in the land which overturned what was held by the appeal court in New South Wales. The holding in the appeal court was contrary to what was held at first instance, hence the complexities of the issues.

The further discreet but important issue was whether the law would allow a plaintiff in the perhaps surprisingly common scenario stated above, where the damages being claimed were purely ‘economic loss.’ That is, the financial losses being claimed are not in respect of ‘damage’ to the property per se (for example defects), but where they are claimed for loss in value suffered by the owners corporation, as to the relevant common property.

Essentially, the courts in Australia, as opposed to those in the UK, have very often been reluctant to award damages for economic loss, where there is no ‘physical damage’ to the building. This case confirmed that thinking among a number of the judges deciding the case (being decided by seven, the full bench).

Builders can breathe easier in such situations as in Australia now that a precedent has been set and a court would be unlikely to award damages against a builder in the situation whose arose out of the case.

In addition, builders can possibly avoid any liability by another method: by having a carefully drafted contract of sale in respect of the property which is sold. That way, builders in situations of potential liability as described above can avoid being liable.

The reason why such contractual protection can work is that courts very often consider the concept of vulnerability of a party where they have faced negligent acts or omissions in the sense of not being able to adequately or at all, protect their interests.

Where there is a carefully and perhaps fair ‘bargain’ or contract freely and voluntarily struck between the parties where risks are property apportioned and allocated, it is much less likely that a court would say the home owner was vulnerable and unable to protect their economic interests. The concept of vulnerability and a party being able to protect themselves was absolutely critical to the court’s holding in the Brookfield case and it is consistent with a fairly long train of thought for higher level judges in Australia in cases like this one.

Another distinction which can be quite relevant to the courts in cases like this one is whether the property in question is a residential construction or a commercial one. It is likely a court will take a ‘softer’ line toward owners where the building is residential as opposed to commercial as again, courts believe that commercial parties are not as vulnerable in the sense they are more sophisticated commercially and more able to have protective mechanisms in place.

It should also be remembered that the position as to liability as described here does not mean that the standard state based domestic building act warranties set out in respect of, for example due care and skill, supply of ‘good and suitable materials’ and fitness for purpose do not apply to make builders potentially liable for claims for non-economic loss in respect of property damage or ‘standard defect’ claims.

As always, advice should be sought if one is faced with these pretty complex situations and it is best sought early rather than later.