Executive summary
Owners of projects in New South Wales enjoy a significant advantage over their interstate counterparts – they are owed a non-delegable duty of care by developers, builders, consultants, project managers and suppliers involved in the delivery of the project, to take reasonable care to avoid economic loss caused by defects. This is the duty under ss 37(1) and 39 of the Design and Building Practitioners Act 2020 (NSW) (DBPA). The DBPA duty provides owners with a clear path to recover their investigation, testing and rectification costs if the project contains defects.
In other jurisdictions, by contrast, there is (at the time of writing) no equivalent to the DBPA, and it is usually the case (following the decisions of the High Court in Woolcock Street Investments Pty Ltd v CDG Pty Ltd and Brookfield Multiplex Ltd1 v Owners Corporation Strata Plan 612882) that no duty of care is owed at common law. Accordingly, in those jurisdictions, owners’ primary recourse in relation to defects is against:
- those that it has a contract with, such as a head contractor. If the head contractor becomes insolvent (which is increasingly frequent, in this economy), then the owner may be out of pocket when investigating, testing and rectifying defects; or
- where the project involves residential building work, statutory warranties, which, again, may be owed by one, or a small number of, project participants.
On 11 December 2024, a decision of a majority of the High Court of Australia3 has caused New South Wales to be even more advantageous for owners, by finding that those who owe the DBPA duty (including, potentially, developers, contractors, subcontractors, project managers, supervisors and suppliers) cannot use the proportionate liability legislation in New South Wales (Part 4 of the Civil Liability Act 2002 (NSW) (CLA)) to reduce their liability.
When this legislation applies, it allows a party to limit its liability to ‘an amount reflecting that proportion… that the court considers just having regard to the extent of the defendant’s responsibility for the damage or loss’4. Because the part of the DBPA that contains the duty is expressed as being ‘subject to the Civil Liability Act 2002′5, it was surmised that liability for breach of the duty was apportionable. The majority decision in Pafburn confirms that this is not so: the proportionate liability legislation does not apply and consequently, if developers and head contractors in New South Wales breach the DBP Act duty, they ‘are 100% liable for any failure to exercise reasonable care to avoid economic loss caused by defects in the building on the part of wrongdoers who in fact carried out the work or task from which the defects arose’6.
Take the example of a hypothetical new build, high rise office project in Victoria. The owner has a contract with a head (design and construct) contractor, who, in turn, has contracts with an architect, fire engineer, certifier and various suppliers. If, after completion, it turns out that the cladding is highly combustible, then, if the contractor becomes insolvent, the owner might be out of pocket for the (expensive) investigation, testing and rectification costs that result from the specification and installation of combustible cladding. That is because (in this example) the owner has no contract with the other parties, and (in Victoria) it is likely that those parties do not owe the owner any duty of care.
If, instead, the project was in New South Wales, then the owner would have the benefit of the DBPA duty (the duty applies to all buildings in New South Wales, not just residential apartments)7. In this example, it would provide the owner with a clear path to recovery of its losses from those responsible for the combustible cladding, which may include the architect who specified the combustible cladding panels, the fire engineer who did not object to the use of the panels, the certifier who signed off on the cladding, and the suppliers who supplied the panels. Not only is the pool of defendants significantly larger; also, due to the decision of the High Court majority in Pafburn, the owner could potentially obtain judgment against each of these parties for 100% of its losses, allowing the owner to pick and choose who it enforces judgment against, until it has recovered 100% of its losses. Thus, the head contractor becoming insolvent could potentially have no effect on the amount that the owner can recover. As the majority noted, this result is consistent with the intention of the New South Wales legislature in enacting the DBPA that ‘practitioners will need to accept individual and collective responsibility for their work‘.
A further consequence of the majority’s decision is that developers and builders cannot reduce their liability by blaming their subcontractors and sub-consultants. As the DBPA duty is non delegable, developers and builders cannot ‘discharge, exclude or limit their… duty by delegating or otherwise entrusting their construction work to another competent person‘9. If those others (such as subcontractors) breach the DBPA duty (fail to exercise reasonable care to avoid economic loss caused by defects), the developer and builder may find themselves personally liable for 100% of the owner’s losses10.
If a developer or builder is found liable for 100% of the owner’s losses, it may then need to make a claim against others who are also responsible for the defects, to recover a proportion of the damages payable to the owner. A head contractor may be able to claim that a subcontractor is liable to the head contractor for breach of the subcontract. On the current state of the law in New South Wales11 (which is materially different to that in Victoria)12, depending on the term that is alleged to have been breached, it may be possible for the contractor to obtain judgment against the subcontractor for 100% of the head contractor’s liability to the owner.
In the wake of the majority’s decision, the courts will need to grapple with whether a developer or builder could also potentially claim contribution from others under section 5(1) of the Law Reform (Miscellaneous Provisions) Act 1946 (NSW). The legislation provides a ‘tortfeasor‘ (person who commits a tort) with a right to contribution against other ‘tortfeasors‘ who are, or if would if sued have been, liable in respect of the same damage. Whilst the DBPA duty is provided for by statute, the majority seemed to consider breach of the duty to be a tort13, seemingly opening the door to this type of contribution claim. The dissenting minority also raised the spectre of a defendant needing to make this type of contribution claim14.
Whilst the majority’s decision is overwhelmingly positive for owners of all types of projects in New South Wales, it is not a foregone conclusion that, just because there are defects, the owner will be able to recover all, or any, of its investigation, testing and rectification losses. A significant amount of care and attention is required to succeed in a claim for breach of DBPA duty. The majority alluded to this, when it said:
“(a) if the owners… fail… to establish the alleged breaches by [the developer and builder], [the developer and builder] will not be found liable at all for the claimed loss; (b) if the owners… establish… such alleged breaches but fail… to establish that those breaches caused the whole of the claimed economic loss, [the developer and builder] will be found liable only to the extent that their breaches caused the loss …”
As to (a) above, the liability that is imposed by the DBPA duty is care based, not strict. In other words, a party is not liable just because its design or workmanship turned out to be defective; instead, there needs to have been a failure to exercise reasonable care. At least in cases involving a failure by a professional (such as an architect or engineer), this is likely to require expert evidence16.
Owners may also not be able to recover the full amount of their losses where the rectification work procured by them was not a reasonable course to adopt17. For example, under a contract between an owner and a builder, a swimming pool in England was required to be c.2.2m deep but the builder delivered a pool that was only c.1.8m deep (a difference of c.40cm). The owner paid £21,540 to rectify the depth so that it was c.2.2m. The House of Lords only awarded damages of £2,500 for loss of amenity, on the basis that a pool that is c.1.8m deep can still be used as a plunging pool, and incurring £21,540 to rectify the depth was not a reasonable course to adopt18.
Facts of Pafburn
The owners corporation of a strata development (OC) sued Pafburn Pty Ltd (Builder) and Madarina Pty Ltd (Developer) for breach of duty under section 37(1) of the DBPA. Section 37(1) of the DBPA provides that a person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects in a building where work is done, arising from construction work.
The Builder and the Developer pleaded proportionate liability defences under section 34 of the CLA in that:
- the Developer had alleged that the Builder was a “concurrent wrongdoer” because it had delegated or entrusted to the Builder to perform the construction works and in doing so, supervise etc. the whole of that construction work; and
- the Builder alleged that its subcontractors were “concurrent wrongdoers” because it had delegated and entrusted many kinds of construction work to others.
The OC pleaded that section 37(1) of the DBPA was a non-delegable duty (i.e. that the Builder and the Developer were wholly liable for the OC’s damages) because:
- section 39 of DPBA states ‘a person who owes a duty of care under this Part is not entitled to delegate that duty‘; and
- section 5Q of the CLA states ‘the extent of liability in tort of a person (“the defendant” ) for breach of a non-delegable duty to ensure that reasonable care is taken by a person in the carrying out of any work or task delegated or otherwise entrusted to the person by the defendant is to be determined as if the liability were the vicarious liability of the defendant for the negligence of the person in connection with the performance of the work or task’.
At first instance, the Supreme Court of New South Wales held that the Builder and the Developer could raise proportionate liability defences to claims made under section 37(1) of the DBPA.
The New South Wales Court of Appeal overturned the primary judgment on the basis that liability for breach of the DBPA duty is non delegable, and the Developer and the Builder cannot therefore use the proportionate liability legislation to reduce their liability (to take account of other ‘concurrent wrongdoers’ who caused or contributed to the defects).
Decision of the High Court majority
In a split (4:3) decision, the High Court upheld the decision of the New South Wales Court of Appeal. The majority found that the DBPA duty extends to all defects in or related to a building arising from all construction work in relation to the building, whether or not the person in fact performed any of the physical acts comprising that construction work. Section 39 of the DBPA states that the DBPA duty is non delegable. The majority found that the effect of this provision (read together with a related provision, s 5Q of the CLA) is that a developer or builder cannot use the proportionate liability legislation to reduce its liability on the basis that they delegated or otherwise entrusted an aspect of the works to someone else. It is insufficient for the developer or builder merely to exercise reasonable care in supervising or arranging for subcontractors to carry out building work19.
Gageler CJ, Gleeson, Jagot and Beech-Jones JJ held that:
‘Section 41(3) of the DBPA, in providing that Pt 4 of the DBPA “is subject to the Civil Liability Act 2002”, ensures that Pt 4 (including ss 37(1) and 39) is subject to, amongst other provisions of the CLA, s 5Q of the CLA. The consequence is that, in the present case, the extent of the liability of [the Developer] and [the Builder] for their alleged respective breaches of the duty imposed by s 37(1) of the DBPA, if liability is established, “is to be determined as if the liability were the vicarious liability of [each of the Developer and the Builder] for the negligence of the person in connection with the performance of the work or task” involving construction work … delegated or otherwise entrusted to any other person in respect of the Building’.
The majority also noted that to the extent that the Developer and the Builder are found liable to the OC, sections 37(1) and 39 of the DBPA do not prevent them from cross-claiming against other persons who they allege breached any applicable duty of care owed to them.
Key take-aways
The proportionate liability regime was introduced so that, among other things, defendants could identify in their defences the concurrent wrongdoers and their contributions to the plaintiff’s loss and damage. The onus was on the plaintiff to join any concurrent wrongdoer so that it could recover all its loss and damage. If the plaintiff did not join a concurrent wrongdoer, then it could only recover from the defendant that it chose to proceed against the portion of the owner’s loss and damage that this defendant had caused, and the plaintiff would be out-of-pocket for the remaining amount. Joining all concurrent wrongdoers was therefore a necessary step to recover 100% of the owner’s loss, although even if the owner did so, it was not assured of recovering 100% (for example, if a concurrent wrongdoer was insolvent).
However, the decision of the majority of the High Court in Pafburn somewhat closes the door to defendants seeking to use the proportionate liability legislation to reduce their liability for breach of the DBPA duty. Instead, defendants will be liable for the whole of the plaintiff’s loss irrespective of whether other parties also caused or contributed to it, and defendants may need to issue cross-claims against others who were responsible for the defects. This may lead to increased litigation costs and insurance premiums as insurers may need to pay out the plaintiff in full before (exercising rights of subrogation) they can recover from other concurrent wrongdoers.
For owners, this decision is extremely beneficial because (provided that they can establish that a breach of duty occurred, which is no small achievement) they can potentially use the DBPA duty to recover their losses against the developer, builder and a host of others. In its decision, the majority considered the purpose of enacting the DBPA, which was to restore consumer confidence after a number of high-profile cases in New South Wales involving allegations of serious defects. The conception of the DBPA duty, reflected in the majority’s decision, provides further ‘safeguards’21 for rights of owners and establishes the ‘individual and collective responsibility’22 of a range of project participants (including developers, contractors, subcontractors, consultants, project managers, supervisors and suppliers), who owe the duty and are ‘not entitled to delegate that duty’23.
This article was written by Alex Ottaway, Partner, Kevin Lock, Partner, and Tara Nelson, Senior Associate.
1 [2004] HCA 16.
2 [2014] HCA 36.
3Pafburn Pty Limited v The Owners – Strata Plan No 84674 [2024] HCA 49 (Pafburn).
4 CLA, s 35.
5 DBPA, s 41(3).
6 Ibid (n 3) 57.
7Roberts v Goodwin Street Developments Pty Ltd [2023] NSWCA 5.
8 Ibid (n 3) 41-42, 64.
9 Ibid (n 3) 56.
10 Ibid (n 3) 45, 62.
11Rahme v Benjamin & Khoury Pty Ltd [2019] NSWCA 211,135– 136 per Macfarlan JA (Bathurst CJ and McCallum JA agreeing).
12 Godfrey Spowers (Victoria) Pty Ltd v Lincolne Scott Australia Pty Ltd [2008] VSCA 208,109 per Ashley JA (Nettle and Neave JJA agreeing).
13 Ibid (n 3) 21.
14 Ibid (n 3) 99.
15 Ibid (n 3) 65.
16Uniform Civil Procedure Rules 2005 (NSW), r 31.36.
17Bellgrove v Eldridge [1954] HCA 36.
18Ruxley Electronics and Construction Ltd v Forsyth [1995] UKHL 8.
19 Ibid (n 3) 51.
20 Ibid (n 3) 55.
21 Ibid (n 3) 41.
22 Ibid (n 3) 41.
23 Ibid (n 3) 43.