Owners Corporations and Dodgy Builders – Developments in Negligence and Strata Law

The relationship between Owners Corporations and the builders who originally constructed the strata building can be contentious at times, especially where hidden defects in workmanship are affecting the property. What makes this issue challenging in the legal realm, however, is the inability of owners corporations to bring an action for breach of contract, since the contract is typically between the builder and the original property developer.

Recent case law in New South Wales has moved back and forth on the issue of whether an Owners Corporation is able to bring an action for negligence against a builder, with a pending High Court appeal in the Mantra Chatswood case hopefully offering a final resolution on this crucial issue, both here in New South Wales and across the country.

The legal precedent prior to the most recent appeal comes from two separate but related Supreme Court cases, the Star of the Sea and Chatswood Mantra, both decided by the same judge. In the first case, the Owners Corporation of the Star of the Sea, a residential building, was unable to establish a duty of care owed to them by the builder as a result of the existence in New South Wales of statutory warranties for residential buildings under the Home Building Act. Since the Owners Corporation had other avenues for rectifying the situation, it was held that they were not ‘vulnerable’ in the legal sense, a necessary precondition to establishing a duty of care in a negligence case.

In the second case, the Owners Corporation of the Chatswood Mantra, a commercial building to which statutory warranties in New South Wales do not apply, was also unable to establish a duty of care at the initial trial. However, in this case, the reason for not allowing a negligence claim was different. It was held due to the very fact that commercial buildings do not receive statutory warranties that they ought not to receive the protection of a duty of care, citing the arms-length nature of the relationship and the possibility of creating a “novel duty of care” between two businesses, as well as the presumed legislative intent that withholding statutory warranties implies a policy decision not to protect commercial Owner Corporations.

These decisions left commercial Owners Corporations in a difficult position. However, the Owners Corporation of the Chatswood Mantra successfully appealed, with a new ruling finding that a duty of care does exist, although not to the full extent of what the developer may have been able to sue for under the original building contract. Although minor defects such as incorrect or lower quality building materials would not be covered by the duty of care, defects of a more serious character, such as those which put people’s safety at risk and require expense to rectify, would be covered.

It remains to be seen which decision will be favoured by the High Court, and the outcome will have a profound effect upon the ability of Owners Corporations of any type of property in Australia to be compensated for expenditure repairing negligent defects by builders. Watch this space for more strata title news.