My understanding of this was that the builder got out of fixing the common areas because the contract wasn't with the Body Corporate? Is this correct?
Qualifier: I am not a lawyer, but I am a law student, and I'm just finishing this very subject right now (negligence actions based on PEL, pure economic loss).
There are several issues combined in this judgment, and yes, that's one of the issues.
If you buy a home, you have a contract with the builder for the whole home, and are protected by contractual (and statutory) warranties for the whole home. As stated, the body corporate didn't exist when the construction contract was entered into, so there's no contract between the body corporate and the builder that the body corporate could seek to enforce.
Therefore, being no contract between the parties, the body corporate had to rely on tort law, specifically negligence. (Tort law is sometimes called the "law of wrongs", and is usually resorted to when there is no contract. e.g. You and I don't have a contract that you won't mow me down with your car while I'm out walking my dog, but tort law imposes a duty on you, in the absence of contract, to take reasonable care not to mow me down.
The other main types of tort law, besides negligence - the biggie - are trespass and defamation.)
In negligence, the first question any court will ask is whether the aggrieved party (body corporate) was owed a duty of care by the builder, and the High Court has decided in the negative in this case.
If the defects alleged had actually resulted in damage to property or people - e.g. if a ceiling collapsed and damaged personal property within an apartment, or hurt a person in the apartment - then it's likely to be a very different scenario and a duty is much more likely to have been found. Economic losses that flow from damage - e.g. damage to property or injury - are much easier to establish, e.g. loss of earnings if you're in a car accident and can't work.
But in this instance, there was no damage or injury: the defects just mean that the defective items aren't worth as much, and need money spent on them to bring them up to standard, and to prevent future damage.
This makes the body corporate's claim a claim for "pure economic loss" - loss in the absence of damage/injury, i.e. they've suffered financial losses only - and for a lot of reasons, courts are very reluctant to impose liability for PEL. (It used to be even harder until the last couple of decades.)
There are about half-a-dozen factors that a court considers when deciding whether they'll impose liability for PEL, one of which is the vulnerability of the aggrieved party. So they ask: "is there anything the body corporate could have done to protect itself from this loss?", and the answer of the High Court seems to be yes.
The original developer (Chelsea) could have included contractual provisions in the construction contract that required the developer to provide a warranty for latent defects. (There was some coverage for latent defects, but I believe the period had expired by the time these defects were discovered.) Had Chelsea included a clause for latent defects that covered the discovery of the defects at issue, the body corporate may have been able to argue that they - as a subsequent owner to the party who contracted for construction - relied on such a contractual warranty.
But Chelsea had no such coverage in their contract, and the Court appears to suggest that not even Chelsea would have had an action in negligence against the builder, if Chelsea had still owned the common property at the time these defects were identified.
That being the case, a subsequent owner - the body corporate - can't have more rights than the party who negotiated the construction contract, and thus there's no duty of care and the body corporate lost.
What will be the consequences? Well, on the contractual side, I imagine the solicitors of OTP purchasers will be advising them to look hard at the original construction contract with respect to latent defects warranties.
If there's enough outcry, there may be statutory reform, i.e. Laws might be made that developers have to provide latent defects coverage for a certain number of years to body corporates.
The judgment is here:
http://www.austlii.edu.au/au/cases/cth/HCA/2014/36.html
Of particular note are paras 31-36 and 55-58 regarding a duty of care, and para 186 (suggesting that High Court considers legislative reform more appropriate than extension of negligence PEL claims to resolve this issue).
