Design and building practitioners act 2020 (NSW): how to improve your expert evidence

Legislative changes applicable to NSW Projects

Design practitioners, engineers and builders working in NSW need to be across the forthcoming changes to their statutory obligations applicable to NSW projects under the NSW Design and Building Practitioners Act 2020 (DBP) and Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (RAB).

Building works commenced on or after 3 July 2023 will be impacted by the changes to the DBP Act which expand the appliable classes of buildings from class 2 (multi-unit residential) buildings to include class 3 (residential buildings such as boarding houses or hostels, that provide either short- or long-term accommodation) and 9c (buildings cater to residents that may need care, such as physical assistance in conducting daily activities or help to evacuate in an emergency) buildings.

You cannot contract out of these obligations which require:

• Design practitioners, building practitioners and professional engineers to be registered under the DBP Act to complete certain work on class 2, 3 and 9c buildings;
• Design practitioners and professional engineers to meet the eligibility criteria and complete a competency assessment before 31 December 2023 to be registered under the DBP Act;
• Certain designs to be accompanied by a declaration that the design is compliant with the Building Code of Australia (‘declared design‘) and for the declarations to be lodged on the NSW Planning Portal before building work can start;
• Builders must construct according to declared designs; and
• Developers must provide notice and pay a levy before the works are completed.

Next year, in July 2024, the statutory obligations in these classes will be expanded to include any alteration or renovation work to existing buildings.

Case Note: The Oxford decisions

In one of the few decisions to consider the DBP Act, the NSW Supreme Court in Oxford (NSW) Pty Ltd v KR Properties Global Pty Ltd trading as AK Properties Group ABN 62 971 068 965 (No 2) [2023] NSWSC 680 (No 2) [2023] NSWSC 680 (21 June 2023) and Oxford (NSW) Pty Ltd v KR Properties Global Pty Ltd trading as AK Properties Group ABN 62 971 068 965 [2023] NSWSC 343 (06 April 2023) (collectively, the Oxford decisions) confirm experts must comply strictly with the requirements of the DBP Act and specifically identify the relevant risk to be managed or the precautions that should have been taken as to each defective item in order to establish a claim for breach of duty of care under s.37 of the DBP Act.

What happened?

Oxford (NSW) Pty Ltd (Builder) was engaged to construct a six-unit apartment building for $2,090,000 incl GST.  The Builder suspended the works on 20 March 2018 but continued to work on the project thereafter. By October 2018, the Builder ceased all work on the Site.  On 22 May 2018 and again on 20 March 2019, KR Properties Global Pty Ltd and AS Coaching Pty Ltd (together, the Owners) issued notices of breach and subsequently terminated the Contract on 5 April 2019.

The Builder commenced proceedings against the Owners, as well as the two personal guarantors who had guaranteed the Owners’ payment, to recover unpaid invoices for a total sum of about $322,090.  The Owners’ cross claimed about $1,032,840 seeking damages for defective and incomplete works, interest, and breaches of the duty of care prescribed under s.37 of the DBP Act against the Builder and the Builder’s sole director.

The decision

In the first Oxford decision, Stevenson J held the Builder was not entitled to payment for any of the outstanding invoices claimed.

The builder abandoned three invoices valued at about $71,500 as it was established that they related to a retaining wall that was not built, a lift that was not installed and a scaffolding subcontractor who was insolvent some 15 months prior to issuing the relevant invoice. The remaining invoices valued at about $250,500 were held by the Court to be not payable as they related to incomplete or defective works.  The Court noted the significant issues with the Builder’s works including failing to build within the property’s boundaries¹ and building a foyer which dramatically departed from the drawings.²

The NSW Supreme Court held the Builder was unable to rely upon its suspension notice to terminate the contract because the Builder continued to perform work after it was issued.  The Owners’ termination of the contract was upheld, and the Builder was required to pay the Owner the costs to rectify defective and incomplete works.

Any invoices after an incomplete stage were found to be unclaimable.  The Contract provided both general and specific provisions concerning when the Owners were required to pay for stage 9 of the works.  The Court held the specific provision would “prevail over the general provisions to the extent of the inconsistency“.³

The Owners were awarded damages against Builder of $308,866.33 for incomplete works in stages 2 to 9, $303,254.73 for incomplete works for stages 9 and 10 and $420,719.44 for defective works.

The Owners were also found to have a right to liquidated damages, in addition to, and not in substitution for, their common law rights, such as interest because the Contract failed to remove in “clear unequivocal words” the Owners’ right to common law remedies.  The Owners obtained about $500,000 for interest against the Builder at common law. These damages represent the interest paid by the Owners’ on borrowings used to fund the completion and rectification of the works.⁴ The interest awarded was from the date the Owners demanded for the Builder to resume work on 20 March 2019.

Stevenson J was asked to provide a supplementary judgment in accordance with the principles in Cavasinni v Cavasinni (No 2) [2007] NSWSC 957.  An additional written judgment can be provided where the final orders have not yet been made.  In the second Oxford decision, Stevenson J held that the director of the Builder was not liable for a breach of duty of care under the DBP Act and accordingly, interest could not be awarded against the director of the Builder.

The DBP Act – What did the Supreme Court SAY?

The Owners’ claim against the Builder and the director of the Builder for breaches of duty of care under the DBP Act was not established due to unclear expert evidence. For the purposes of establishing their case, the Owners’ had obtained an expert report from the architect engaged by the Owners’ to design and supervise the works.

The expert report failed to clearly identify why each specific item was allocated to a particular column, being incomplete works relating to stages 2 to 8, incomplete works for stages 9 and 10 and rectification works. The report failed to clearly explain why items of work were distinguished as relating to incomplete works or rectification works.  As only defective works can be relied upon by the Owners to make a claim under s.37 of the DBP Act, the Court found that it could not rely on the expert report due to its lack of clarity.

It was also unsatisfactory for the expert to allocate some invoices to both incomplete and rectification works. The expert failed to provide any explanation of why particular invoices (including the architect’s own project fees) were allocated in this way. The Builder argued and the Court agreed that the expert failed to state the implicit assumptions or material facts relied upon which informed the experts opinions and the allocations that he made in respect to each specific item of incomplete and defective work.

In respect to the DBP Act, Stevenson J highlighted the decision in Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 3) [2012] VSC 99 (Dura) referencing paragraph 598 of that decision, which stated:

“[The builder’s] first challenge to this process was that it failed to sufficiently identify the costs of particular enhancements and rectification works. [The expert’s] allocation of the total costs between rectification, costs to complete, and enhancements could not therefore be checked. A global assessment was impermissible and an item by item assessment of costs was necessary”.

His Honour distinguished the current facts with the facts from Dura. In Dura, the expert apportioned the costs on an elemental basis, allocating the costs by reference to a particular element of the project and the builder did not challenge the apportionments made.

The expert’s evidence was deemed insufficient for the purposes of the DBP Act, as the Owners’ expert report could not be relied upon by the Court as evidence to differentiate between which costs had been incurred and paid for incomplete works as opposed to rectification works, the Court was unable to determine if the Builder and the director of the Builder had breached their duty of care under s.37 of the DBP Act.

The legislative context

The context for this decision lies in s.37 of the DBP Act.

The DBP Act does, relevantly, two things:

1. Section 37 creates a statutory duty of care; and
2. Section 39 prescribes that the statutory duty is non-delegable;⁵

The legislative purpose of the DBP Act was to overturn the effect of the High Court decisions such as Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 (2014) 254 CLR 185 (Brookfield) and Woolcock Street Investments v CDG Pty Ltd (2004) 216 CLR 515 (Woolcock) in which the High Court found that builders and engineers owed a duty of care to the developer and the first purchaser of an apartment but did not owe a duty of care to subsequent purchasers of commercial property or to the owners’ corporation.

How to Improve your expert evidence

The Oxford decisions clearly highlight the need for certainty and particularity when quantifying damages. The mere fact that a building suffered from defects will not automatically establish a breach of the statutory duty of care in s.37 of the DBP Act.⁶ As in the Oxford Decisions, failing to clearly set out the facts and assumptions relied upon may undermine the conclusions reached in the expert report.

An expert preparing a report for proceedings seeking to prove negligence must address each defective item and consider if the relevant design practitioner, engineer, or builder failed to take precautions against:

• a foreseeable risk (that is, it is a risk of which the person knew or ought to have known), and
• a risk that was not insignificant, and
• a risk, in respect to which a reasonable person, in the same circumstances, would have taken those precautions.⁷

The expert report needs to provide the Court with enough information to determine (amongst other relevant things):

• the probability that the harm would occur if care were not taken,
• the likely seriousness of the harm,
• the burden of taking precautions to avoid the risk of harm,
• the social utility of the activity that creates the risk of harm.⁸

Invoices that are apportioned by percentages between incomplete and defective works will not be considered.  An important reminder for Principals / Owners to keep clear records of costs incurred to rectify defective work as distinct from costs incurred to complete the works.

There is no shortcut in relation to how a breach of such a duty might be established, the above issues need to be addressed specifically for each item of defective work claimed against the relevant design practitioner, engineer or builder.⁹ Any broad and generalised statements in an expert report will not be satisfactory.

Implications

Parties to a Contract are reminded of the importance to act on notices or risk being found to have elected to forgive the breach and so lose rights under the Contract.

By reference to other cases, the Oxford decisions also reminds those working in the construction industry that the following established principles will be applied when dealing with damages:

1. the fact that the Owners did not seek competing quotations to complete the works and rectify the defects did not harm their claims;
2. it is not for the contract breaker to dictate how the innocent party responds to its breach;¹⁰
3. where works could be completed and/or rectified within a range of costs, the wrongdoer cannot complain if the loss is found at the upper end of the range;¹¹ and
4. where a principal / owner is put in a position of extreme inconvenience and annoyance of needing to complete the work, the principal / owner is allowed a large discretion in the way in which the works are completed, even if done in an uneconomical manner.¹²

As such, owners / principals are awarded a wide range of discretion when left to complete works or rectify damages itself.

This article was written by Leighton Moon, Partner, Patricia Oman, Senior Associate, and Sophie Pinkus, Solicitor.

¹Oxford (NSW) Pty Ltd v KR Properties Global Pty Ltd trading as AK Properties Group ABN 62 971 068 965 [2023] NSWSC 343 (06 April 2023) at [47] to [51].

²Ibid at [59].

³Ibid at [15].

⁴ Ibid at [321].

⁵The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWSC 116 (23 February 2023) (Rees J) at [48].

⁶The Owners – Strata Plan No 89005 v Stromer (No 3) (15 December 2022) [2022] NSWSC 1707 (Ball J) at [4]; See also The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068 at [22].

⁷Section 5B of the Civil Liability Act 2002 (NSW).

⁸Ibid.

⁹The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068 at [38].

¹⁰Dura (Australia) Constructions Pty Ltd v Hue Boutique Living Pty Ltd (No 3) [2012] VSC 99; Oxford (NSW) Pty Ltd v KR Properties Global Pty Ltd trading as AK Properties Group ABN 62 971 068 96 [2023] NSWSC 343, 280.

¹¹McCartney & Ors v Orica Investments Pty Ltd & Ors [2011] NSWCA 337; Oxford (NSW) Pty Ltd v KR Properties Global Pty Ltd trading as AK Properties Group ABN 62 971 068 96 [2023] NSWSC 343, 284.

¹²Fulton v Dornwell (1885) 4 NZLR 207; Oxford (NSW) Pty Ltd v KR Properties Global Pty Ltd trading as AK Properties Group ABN 62 971 068 96 [2023] NSWSC 343, 285.