This article was first published by LexisNexis in the Australian Construction Law Bulletin in November 2021.
1. Abstract
The Design and Building Practitioners Act 2020 (NSW) (“DBP Act”) is a key part of the New South Wales Government’s legislative response to concerns about accountability and consumer confidence in the residential apartment sector. One of the main reforms the DBP Act introduces is to extend the duty of care in tort to exercise reasonable care to avoid economic loss caused by defects, so that it is owed to owners of apartments. This reform will encourage practitioners to take individual and collective responsibility for their work, and will provide owners with an avenue of recourse in the event of a defect during the building’s life. However, as is sometimes the case when the legislature pulls on the levers of civil liability, uncertainty and unexpected consequences may ensue.1 Whilst we will need to wait for the courts to clarify the meaning and effect of the duty of care provisions of the DBP Act in due course, it appears as though, as a result of the DBP Act, exclusions and limitations of liability could (in some cases) fail to achieve their intended objective, and settlements of disputes involving breach of duty could fail to give rise to a binding release of liability. This suggests a need for careful consideration of the liability and risk implications of DBP Act duty both when negotiating contracts and when making or defending defects claims.
2. Background
When defects in construction work are discovered, a key (and often substantial) challenge for the owners is to establish that those responsible for the design and construction of the work are legally liable for the cost of rectifying the defects.
Establishing that those responsible owed the owners a duty of care in tort to prevent economic loss caused by defects (“duty of care in tort”) usually represents a substantial step towards recovery of this loss.
In 1995, in the decision of Bryan v Maloney2, the High Court of Australia found that a builder owed a subsequent owner a duty of care in tort. The owner in that case received a substantial award of damages representing the cost of rectifying the relevant defects. However, in later decisions,3 the Court appeared to suggest that the finding in Bryan v Maloney turned on the particular facts of that case, and did not establish a precedent that builders of residences will generally owe the duty.
In particular, in the 2014 decision of Brookfield Multiplex v Limited v Owners Corporation Strata Plan 61288,4 the Court found that the builder of a hotel development did not owe a duty of care in tort to the developer, lot owners or owners corporation. As a number of the key facts that led the Court to this conclusion5 would normally also be present in relation to apartment developments, the decision pointed towards the duty ordinarily not being owed by those responsible for the delivery of apartments.
3. The DBP Act duty
The DBP Act reverses this position. It imposes on builders, designers and suppliers6 a duty to exercise reasonable care to avoid economic loss caused by defects7 (“DBP Act duty”) – i.e. a statutory analogue of the duty of care in tort. The duty is owed to owners, which includes developers, lot owners, owners corporations, community associations and subsequent owners.8
In his Second Reading Speech,9 the Minister for Better Regulation and Innovation explained that this reform means “practitioners will need to accept individual and collective responsibility for their work” and “future occupants of buildings… [will] have an avenue of recourse available in the event of a defect during a building’s life”.
The duty is non delegable.10 It is owed retrospectively,11 although (due to limitation periods) it may be difficult to establish liability where: (i) the defects first became known or discoverable before 10 June 2010; (ii) proceedings were not commenced within six years of when the defects first became known or discoverable; or (iii) proceedings were not commenced within 10 years of the works being completed.12
If the DBP Act duty is breached, an owner is entitled to damages as if the duty were a duty established by the common law.13 This is likely to mean that owners may recover reasonably foreseeable losses they incur as a result of the breach of the DBP Act duty.
As the limitation periods applicable to the DBP Act duty are more generous than those in respect of the warranties under the Home Building Act 1989 (NSW) (“HB Act”),14 the DBP Act duty may, in some cases, provide owners with recourse where it would not have otherwise been available. However, liability for breach of the DBP Act duty (unlike liability for breach of the HB Act warranties) is apportionable15 – meaning that where (as is common in defects disputes) multiple parties are alleged to be responsible for the same defects, the liability of each defendant is limited to reflect its comparative responsibility for the defects.16
4. Prohibition on contracting out
The DBP Act expressly prohibits contracting out of Part 4 of the DBP Act, which contains the duty of care provisions. Section 40 of the DBP Act provides:
“(1) This Part applies despite any contracts or stipulations to the contrary made after the commencement of this Part [i.e. 10 June 202017].
(2) No contract or agreement made or entered into, or amended, after the commencement of this Part [i.e. 10 June 202018] operates to annul, vary or exclude a provision of this Part.”
As the sole focus of Part 4 is the DBP Act duty, section 40 appears to be saying that liability for breach of the DBP Act duty cannot be annulled, varied or excluded by any contractual provisions. This would be consistent with judicial decisions on a similarly worded provision of another statute (discussed later in this article).19 However, it would mean liability for breach of the DBP Act duty is treated differently to liability for breach of the duty of care in tort, which the parties may limit, exclude or release in a binding way.20
5. Exclusions and limitations of liability
As the developer entity that contracts with contractors and consultants sometimes (but not always) owns the land on which residential construction is being carried out, it may qualify as an ‘owner’ for the purposes of the DBP Act21 and accordingly be owed the DBP Act duty. If (as section 40 of the DBP Act appears to be saying) liability for breach of the DBP Act cannot be annulled, varied or excluded, it may come as a surprise to a contractor or consultant who specifically bargained with a sophisticated developer for an exclusion or limitation of liability, to find that liability is in fact unlimited.
Take, for example, a main contract (entered into after 10 June 202022) which provides that the contractor’s liability for ‘consequential loss’23 is excluded. On the current state of the Australian case law, ‘consequential loss’ could conceivably include losses that would be recoverable as damages for breach of the DBP Act duty.24 Accordingly, section 40 of the DBP Act suggests that, if the principal brings such an action against the contractor and succeeds, the contractor could be found to be liable for consequential loss, despite having specifically agreed an exclusion for such liability.
Moreover, exclusions and limitations of liability in a contract with a principal could not, on any view, operate so as to exclude or limit liability owed to lot owners and owners corporations who are not a party to the contract. Accordingly, contractors and consultants will need to prepare themselves for claims from owners in the event their work or designs are defective – in respect of which (if the claim is successful) their liability would be unlimited.
The apparent inability of the parties to limit liability for breach of the DBP Act duty in a binding way may have a particular impact on consultants, who typically limit their liability at an agreed amount that is covered by professional indemnity insurance. It also suggests that contractors and consultants may, through no fault of their own, find themselves under insured.
6. Agreed settlements
(a) Whether binding settlements can be agreed has practical significance
In practice, agreed settlements are an important means by which claimants can receive some measure of restitutio in integrum without having to go through the costly, formal and time consuming procedures of the courts.25 In cases involving defective apartment buildings, a settlement may involve an agreement to pay monetary compensation for items such as professional fees, alternative accommodation and remedial costs, or alternatively an agreement that those responsible for the defects will remediate the works to an agreed specification for no (or reduced) cost.
However, a question arises as to whether the prohibition in the DBP Act on contracting out means that, in relation to a dispute in which breach of the DBP Act duty is alleged, a settlement being agreed and a sum being paid may not give rise to a binding release of liability.
The point is illustrated by the decision of Joyner v Ricklar.26 Mr Joyner, a carpenter, was injured at work. Pursuant to the Workers Compensation Act 1926 (NSW) (“WC Act”), his employer was liable for compensation of £27, which Mr Joyner claimed. His employer paid him £19, and he signed a receipt acknowledging “full satisfaction and discharge of all present and future claims for compensation… in respect of the accident”. He then claimed the balance of £8. The Workers Compensation Commission found that, due to a prohibition in the WC Act on contracting out,27 the purported discharge of liability was of no effect. Mr Joyner was accordingly awarded the further sum of £8.28
Evidently, whether it is possible to enter into a binding settlement and release in respect of liability for breach of the DBP Act duty has substantial practical significance. The next section sets out a discussion of the case law touching on whether a prohibition on contracting out prevents the parties from being able to settle a dispute founded on statutory liability.
(b) Case law
Decisions of the High Court of Australia
On the question of whether a purported release of liability under a statute that prohibits contracting out is binding, the High Court of Australia’s answer is reasonably clear – namely, that it will not be binding. The Court has said:29
“a person upon whom a statute confers a right may waive or renounce his or her rights unless it would be contrary to the statute to do so. It will be contrary to the statute where the statute contains an express prohibition against ‘contracting out’ of rights.”
This principle has been stated or affirmed by the Court in four decisions.30 However, in June 2021, two Justices of the Court expressed the principle somewhat more softly, saying that renouncing rights ‘may be’ contrary to the statute where there is an express prohibition on contracting out.31
Whilst the principle refers to statutory rights being ‘renounced’ (rather than released as part of a settlement), settlement is plainly in view, as the statement originated from a decision in which the Court found that a purported settlement and release was contrary to public policy and was not binding.32
As the Court has not yet decided a case involving a purported release of liability under a statute that prohibits contracting out, its guidance on this point is, for present purposes, obiter dicta.
Decisions of the New South Wales Court of Appeal
The New South Wales Court of Appeal has decided a number of cases that are directly on point (i.e. involving a purported settlement and release in relation to liability arising under a statute that prohibits contracting out) and accordingly are (arguably) binding on the question of whether it is possible to enter into a binding settlement and release in respect of liability for breach of the DBP Act duty. Moreover, these decisions are consistent with the decisions of the High Court of Australia referred to above.33
The decisions of the New South Wales Court of Appeal in Australian Iron and Steel Pty Limited v McAuley34 (“McAuley“) and Ashenden v Stewarts & Lloyds (Australia) Limited35 both involved the liability of an employer arising under the WC Act following an injury at work. In both decisions, the Court found that, as the WC Act prohibits contracting out, a purported settlement of a claim under the WC Act is not binding unless and until an award is made by the Workers Compensation Commission reflecting the terms of the settlement.36 In other words, it is possible for a worker to receive settlement proceeds and then sue the employer for the balance of the compensation due to him or her. This is what happened in McAuley.37
In the decision of Ku-ring-gai Council v Chan,38 a provision in a sale contract by which the purchasers agreed the vendors would have no liability in the event the property was unfit for occupation. The Court commented that, due to the prohibition in the HB Act on contracting out, this provision could not prevent the purchasers from pursuing a claim against the vendors for breach of the HB Act warranties.39
The decision of the New South Wales Court of Appeal in Qantas Airways Limited v Gubbins,40 (“Gubbins“) is not entirely straightforward. It relates to liability under the Anti-Discrimination Act 1977 (NSW) (“AD Act“) for discriminatory conduct. A majority of the Court commented (obiter) that, as a matter of interpretation, the AD Act (i) impliedly prohibited parties agreeing in advance that they could discriminate against one another with no liability consequences, but (ii) once disputes involving discrimination had arisen, the statute allowed and encouraged the parties to resolve their disputes consensually.41 The majority described point (i) above as an implied prohibition on contracting out of the AD Act. At first glance, this may suggest that, notwithstanding a prohibition on contracting out, parties may release liability once a dispute has arisen. However, on closer examination, the majority’s reference to an implied prohibition on contracting out appears to be shorthand for its interpretation of the AD Act as summarised above.42 Accordingly, it is submitted that the majority’s comments were particular to the AD Act and are not inconsistent with the other judicial guidance discussed above.
Accordingly, the weight of authority points towards the prohibition in the DBP Act on contracting out rendering ineffective a purported release of liability for breach of the DBP Act duty.
(c) Practical consequences
If the courts confirm that liability for breach of the DBP Act duty cannot be released – which, it must be emphasised, is not a foregone conclusion – this would have a number of practical consequences.
In the short term, it may mean that contractors and consultants who believed they entered into binding settlements (on or after 10 June 2020) may find that the owners receive the settlement sum (purportedly in exchange for a release of liability) and then proceed to claim the balance of their alleged loss. This is what happened in the decision of Joyner v Ricklar and a number of other decisions.43
In the longer term, if it is established that the parties may not enter into a binding settlement and release, contractors and consultants may have little incentive to enter into settlements. Accordingly, the options available for the resolution of a defects claim might potentially be narrowed to (i) the defendant(s) paying compensation reflecting their full (or proportionate) liability, (ii) the defendant(s) fully rectifying the defects at its own cost, or (iii) the parties proceeding to trial.
However, these impacts are tempered somewhat by the fact that an action for breach of the DBP Act duty is an apportionable claim.44 In cases where (as is common) multiple parties are responsible for the same defects, it is conceivable that, where a defendant pays substantially less than the owners’ total loss by way of settlement, the owners might not have any further recourse against this defendant (irrespective of whether the purported release of liability was binding) but rather must pursue the other defendants for the balance of the loss.
7. Conclusion
The duty of care provisions in the DBP Act will undoubtedly achieve their objective of improving accountability and providing owners with an avenue of recourse in the event of a defect during the building’s life. However, the impact that this civil liability reform will have in practice remains to be seen. Whilst we will need to wait for the courts to clarify the meaning and effect of the relevant statutory provisions, signs are pointing towards a range of contractual arrangements not having their intended effect, with considerable practical consequences for contractors, consultants and owners. Both at the contract negotiation stage and in defects disputes, construction participants and their legal advisors would do well to give careful consideration to the liability and risk implications of the DBP Act duty.
This article was written by Alex Ottaway, Special Counsel.
Publication Editor: David Jury, Partner.
1 See, e.g., the discussion by Professor Barbara McDonald in “Legislative Intervention in the Law of Negligence: The Common Law, Statutory Interpretation and Tort Reform in Australia” (2005) 27(3) Sydney Law Review 443 in relation to the Civil Liability Act 2002 (NSW).
2 (1995) 182 CLR 609.
3 Including Woolcock Street Investments Pty Limited v CDG Pty Limited (2004) 216 CLR 515 and Brookfield Multiplex Limited v Owners Corporation Strata Plan 61288 (2014) 254 CLR 185.
4 (2014) 254 CLR 185.
5 For example, the presence of detailed construction contracts entered into by sophisticated parties and of detailed sale contracts, and the use of strata title (which is associated with various legal relationships regulated by statute).
6 DBP Act, sections 4 (definition of ‘building work’), 36(1) (definitions of ‘building work’ and ‘construction work’), 36(2) and 37.
7 DBP Act, section 37.
8 DBP Act, section 36(1) (definition of ‘owner’) and 37(2).
9 Legislative Assembly Hansard, 23 October 2019.
10 DBP Act, section 39. This is likely to mean that practitioners may be liable for the acts and omissions of their subcontractors, consultants and suppliers: Kondis v State Transport Authority (1984) 154 CLR 672 at 679 per Mason J (as he then was).
11 DBP Act, section 37 and Schedule 1, clause 5.
12 DBP Act, section 2, commencement of section 37 (i.e. 10 June 2020) and Schedule 1, clause 5; Limitation Act 1969 (NSW), section 14(1)(b); Sutherland Shire Council v Heyman (1985) 157 CLR 424 at 505 per Deane J; Woolcock Street Investments Pty Limited v CDG Pty Limited (2004) 216 CLR 515 at 555 [103] per McHugh J; and Environmental Planning and Assessment Act 1979 (NSW), section 6.20.
13 DBP Act, section 37(3).
14 An action for breach of the DBP Act duty may be commenced within six years of the defects first becoming known or discoverable, up to a maximum of 10 years after completion: Limitation Act 1969 (NSW), section 14(1)(b); Heyman per above; Woolcock per above; Environmental Planning and Assessment Act 1979 (NSW), section 6.20. An action for breach of the HB Act warranties may (ordinarily) be commenced six years from completion of the relevant work (in the case of major defects) or two years from completion of the relevant work (in any other case): HB Act, section 18E(1).
15 DBP Act, section 41(3); Civil Liability Act 2002 (NSW), Part 4; compare HB Act, section 18C(2).
16 Moreover, the owners can only recover their full losses if they claim against all responsible parties (concurrent wrongdoers).
17 DBP Act, sections 2 and 40 and date of assent 10 June 2020; Interpretation Act 1987 (NSW), section 36.
18 ibid.
19 Section 45(1) of the Workers Compensation Act 1926 (NSW) provides that “this Act applies, notwithstanding any contract to the contrary made after the commencement of this Act”. In the decision of Australian Iron and Steel Pty Limited v McAuley, unreported, 21 December 1984, BC8400103 at 6, Mahoney JA said that section 45(1) “has, no doubt, a general application to [invalidate provisions of] contracts which relate to liability to pay compensation arising in the future”.
20 See, e.g., Roman Catholic Trusts Corporation for the Diocese of Sale v WCB [2020] VSCA 328 at [118] and [124] per Beach, Kaye and Osborn JJA, in which, in exchange for a substantially discounted settlement sum, a release of liability for breach of a duty of care in tort was given, which, if not for certain statutory interventions, would have been binding.
21 DBP Act, section 36.
22 DBP Act, sections 2 and 40 and date of assent 10 June 2020; Interpretation Act 1987 (NSW), section 36.
23 Whether or not that term is defined.
24 See, e.g., Sherrin Hire Pty Limited v Tidd Ross Todd Limited (No 2) [2016] FCA 891 at [20] per Edelman J. In the decision of Macmahon Mining Services Pty Limited v Cobar Management Pty Limited [2014] NSWSC 731 at [17], McDougall J found that the exclusion under consideration focused on the causal relationship between the breach and the damage, not on questions of foreseeability à la Hadley v Baxendale (1854) 9 Exch 341.
25 Australian Iron and Steel Pty Limited v McAuley, unreported, 21 December 1984, BC8400103 at 6 per Kirby P and Priestley JA.
26 (1926) 43 WN (NSW) 179.
27 Which was worded very similarly to section 40 of the DBP Act.
28 For a similar scenario and outcome, see Australian Iron and Steel Pty Limited v McAuley, unreported, 21 December 1984, BC8400103.
29 Westfield Management Limited v AMP Capital Property Nominees Limited (2012) 247 CLR 129 at 143-144 per French CJ, Crennan, Kiefel and Bell JJ.
30 Brooks v Burns Philp Trustee Co Limited (1969) 121 CLR 432 at 456 per Windeyer J; Felton v Mulligan (1971) 124 CLR 367 at 386 per Windeyer J; Westfield Management Limited v AMP Capital Property Nominees Limited (2012) 247 CLR 129 at 143–144 per French CJ, Crennan, Kiefel and Bell JJ; Price v Spoor [2021] HCA 20 at [12] per Kiefel CJ and Edelman J and at [76] per Stewart J.
31 Price v Spoor [2021] HCA 20 at [12] per Kiefel CJ and Edelman J.
32 Albeit not due to any prohibition on contracting out. The decision is Brooks v Burns Philp Trustee Co Limited (1969) 121 CLR 432 at 456 per Windeyer J.
33 Although, strangely, they do not refer to the High Court of Australia’s guidance on this point.
34 Unreported, 21 December 1984, BC8400103.
35 [1972] 2 NSWLR 484.
36 Ashenden at 489G per Jacobs JA; McAuley BC8400103 at 12 per Kirby P and Priestley JA.
37 McAuley BC8400103 at 12 per Kirby P and Priestley JA.
38 [2017] NSWCA 226.
39 At [28] per Meagher JA (McColl JA and Sackville AJA agreeing).
40 (1992) 28 NSWLR 26.
41 Gubbins at 31D–F per Gleeson CJ and Handley JA, in obiter dicta. Moreover, due to the binding character of the release, the Equal Opportunity Tribunal could decline to make an order for damages despite the fact that the complaint in question would have otherwise been substantiated: at 29C–D per Gleeson CJ and Handley JA.
42 Which did not contain any express prohibition on contracting out.
43 Including McAuley, Brooks v Burns Philp Trustee Co Limited (1969) 121 CLR 432 and Foakes v Beer (1884) 9 AC 605. In the latter decision, following a judgment debt, a creditor agreed not to take any proceedings on the judgment provided the debtor repaid the debt in certain instalments of principal (but not interest). Once the debtor repaid all instalments, the creditor sued to recover interest. The House of Lords found that the debtor had supplied no consideration (as he had an existing obligation to repay the debt). Accordingly, the purported agreement was of no effect and the creditor was entitled to interest on the debt.
44 Design and Building Practitioners Act 2002 (NSW), section 41(3); Civil Liability Act 2002 (NSW), section 34(1)(a).
