High-rise to risk: Design & Building Practitioners Act (NSW) update

The Supreme Court of NSW has delivered two judgments[1] in quick succession that provide guidance as to the meaning and scope of the statutory duty of care imposed in relation to “construction work” regulated by the Design and Building Practitioners Act 2020 (NSW) (DBP Act).

The nub of those judgments is that the scope of the duty of care imposed by the DPB Act and the class of persons to whom it applies is very broad and therefore construction professionals’ exposure to litigation has increased.

The increases in litigation risk to insurers and insured’s is unwelcome in what is a very difficult insurance market. The timing of the DBP Act, and now the decisions that are flowing from it could not have come at a worse time. All this being exacerbated by extrinsic issues from COVID-19 causing soaring material prices, labour shortages and delay. Throw in interest rate rises and likely further legislative reform (to clarify the current DBP Act imposing some say even further regulation)[2] and you have the “perfect storm” of conditions that insurers are likely to stay away from.

Withdrawals from key participants in the market, a tightening of coverage and more onerous contracting provisions from principals will not help design and construction contractors or construction professionals generally from soaring insurance costs.

In our article of November 2020 The Building Practitioners Act – Implications for Construction Professionals and their insurers in an already hardening insurance market we foreshadowed implications the Act would have for construction professionals, their insurance requirements and insurance.

As we outlined in that article:

1. The imposition of a duty of care on persons who carry out construction work to avoid economic loss caused by defects.[3] This new duty of care is additional to others at law, cannot be contracted out of and, expansively, is owed to each owner of the land in relation to which the construction work was carried out and to each subsequent owner of the land.[4] The duty applies regardless of whether there was any contract between an owner and the person carrying out construction work.[5]
2. The extended duty of care is imposed retrospectively. It applies to any construction work if the defect became apparent after 10 June 2010, whether or not proceedings were issued in relation to that defect, and to any defect that becomes apparent after commencement of the Act.[6] Contractual provisions in an agreement that were in place prior to the commencement of the Act that limit potential liability for negligence are of no effect.[7]

The DBP Act was enacted to alleviate the need for a party like the Owners Corporation to prove a duty of care owed to it by the Builder. This reform was seen as being needed in light of the building failures at Opal Tower and Mascot Tower and High Court decisions in cases such as Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288[8] and Woolcock Street Investments v CDG Pty Ltd[9] in which the High Court found that builders and engineers did not owe a duty of care to subsequent purchasers of commercial property.[10]

The statutory duty of care in s 37 of the DBP Act provides that “a person who carries out[11] “construction work” has a duty to exercise reasonable care to avoid economic loss caused by defects in or related to a building for which the work is done; and arising from “construction work.”

In somewhat colourful circumstances where there was “bad blood” between a builder and his principal developer[12] that arose in relation to a project for the development of three residential university boarding houses, Stevenson J was called on to perform the difficult task of deciding the scope of the statutory duty of care set out in s 37 of the DBP Act.[13] The issue was whether a boarding house was a “building” under the DBP Act when a “boarding house” is not caught by the Home Building Act 1989 (NSW). This question hinged on the definition of “building work” for the purpose of s 37 of the DBP Act.

As an unfortunate stroke of legislative drafting genius, but very confusingly, the DBP Act defines the term “building work” in different parts of the DBP Act differently (but does not make it clear that is the case) and defines other important terms in s 37 of the DBP Act by adopting the definitions of such terms found in no less than five other different Acts.[14]

The definition of “building work” relevant to the statutory duty of care in s 37 is not, as one would intuitively believe, “building work” as is defined in s 4 of the Act, but is instead contingent upon the meaning of “building” in s 36 of the DBP Act.  In s 36 of the DBP Act, a “building” is defined to mean the same as it does in the Environmental Planning and Assessment Act 1979 (NSW)[15]. The definition of building work in s 36 also includes, but does not exclude and is not confined to, “residential building work” as that term is defined in the Home Building Act.[16]  His Honour held that the statutory duty in s 37 applies to any “building work” that is done on any part of a building[17] or any structure or part of a structure of such a building.

It must be remembered that anyone who engaged in the above activities after 10 June 2010 may be liable to suit for up to 10 years after the work was completed. Accordingly, exposure to liability for a failure to take reasonable care to avoid economic loss caused by defects applies to a very wide class of persons for works done over an extended period of time.

What is meant by “substantive control over carrying out” the work was considered in The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659 (“Pafburn”).

In the above case Pafburn Pty Ltd was the builder of the development. Another company, Mandarina Pty Ltd was the developer. The shareholders and directors of the builder were a husband and wife. The builder owned all the shares in the developer and the husband was the sole director of that company. In short, the companies were closely held and ultimately controlled by the husband and wife.

The subsequent Owners Corporation alleged that each of Pafburn and Madarina acted in breach of the statutory duty of care prescribed by s 37 of the DBP Act because, as to Pafburn, it constructed the building defectively, and as to Madarina, it engaged in “construction work” for the purposes of s 37 of the DBP Act in that it “… supervised, coordinated, project managed and substantively controlled … the building work carried out by [Pafburn].”.[18]

In considering what was meant by the words “otherwise having substantive control over the carrying out of any work”, Stevenson J held that a person does not need to have actually exercised substantive control over the “construction work” but that it is sufficient to enliven the definition to establish that “the person was in a position where it was able to control how the work was carried out.” This is so “notwithstanding the fact, at any particular moment in time, the person was not actually doing anything to cause that control to be exercised; provided the person had the ability and the power to control how the work was carried out”.[19] That is a question of fact in each case.

His Honour went on to observe that the fact that, say, a developer owned all the shares in a builder, and had common directors, might lead to an inference of such an ability to control. Where the position is the other way around, namely that the builder owns all the shares in the developer, that inference may be less easily available.

What his Honour appears to have had in mind in the above example is the concept of “corporate control” but the consequence of his Honour’s judgment is not limited to the circumstances described. For example, if a developer owns more than 50% of the shares in a building company, arguably, it also has substantive control over the building company even if it does not take any part in the work. The concept of “control” is itself a complex area of corporate and agency law and will be the subject of litigation as plaintiffs seek to cast the net to capture as many defendants as possible.

Alternatively, the developer might undertake only “project management” services and have no shareholding or corporate control over the subcontractors or the works actually done in any direct sense but it may still be liable, at least in part,[20] if the works are defective. The Act does not define what is meant by “project management” or the scope of that concept.

Further, if, say a residential homeowner very closely supervises their builder while the builder undertakes work on their home or “project manages” the building works themselves by coordinating when subcontractors are engaged or paid and coordinates which works the tradesmen are doing and when on their home (but does not actually pick up a hammer themselves) that (possibly lay) person may also be subject to the statutory duty of care. Stevenson J rejected the notion that “a person” in s 37 of the DBP Act does not include the owner of the land, albeit clearly that person cannot owe a duty to themselves, but they do owe a duty to subsequent owners to take reasonable care to avoid economic loss caused by defects in or related to the building that arise from the construction work.

That homeowner, if the duty applies to them, is not entitled to delegate that duty to a professional builder and cannot contract out of that duty.[21] A court may well relieve a homeowner in these circumstances from liability via a finding that the homeowners did not “substantively” control the actual construction works being carried out or via a reduction in liability via proportionate liability legislation,[22] but that will not protect a homeowner from possibly being sued and defence costs incurred so that the requisite factual findings can be made.

Insurance impacts are likely to put further strain on the segment.

Construction Insurers (material damage and liability) are already cautious in relation to large residential development works, and carefully monitor legal decisions to consider their ongoing risk. Early decisions suggest that insurers will seek to further limit coverage in respect of defect workmanship exclusions under contract works (LEG3/ DE5) as well as ensuring any professional services exposure is removed entirely under liability policies. Whilst many direct insurers have already removed such cover, some underwriting agencies continue to provide this cover as wording updates haven’t filtered through. There is no doubt insurers will be looking to eliminate exposure to the DBP Act under general construction policies.

Insofar as the decision in Goodwin Street and Pafburn those who have interests as owners and builders, who are involved in carrying out work on any part of a building, designing a building (or part thereof); manufacturing or designing building products to be used on a building; supervising, coordinating or project managing construction work; and who otherwise have substantive control over the works, will have a statutory duty of care.

Where any policies of building professionals providing these services are claims made, policyholders should ensure:

1. The description of professional services is adequate to extend to the scope of work being undertaken project management.
2. Designers and manufacturers of products used in construction should consider risk transfer under a professional indemnity or errors and omissions extension to their general liability policy – see our article here.
3. Where they have been providing the relevant services their retroactive date is at least 10 June 2010.

Owners ought to consider procuring their own policies of insurance. In our opinion where there is such a duty of care imposed, the services of the owner and duty attaching to those services will differ from what is being performed by the principal contractors. So even in circumstances that the owner considers they have the benefit under a principal’s indemnity clause provided by their principal contractor, that would not in our opinion extend to cover the owner in respect of liability arising from their (as distinct to the contractor’s) duty of care.

Careful considerations need to be had to the nuances presented by these decisions. The team at Bellrock works with our clients and their legal advisors to ensure that coverage, where possible, dovetails to transfer the ever changing landscape of risk being presented to the construction/development industry.

Footnotes:

[1] Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624; and The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659

[2] The emergence of serious defects in the 22 storey Imperial Towers complex in Parramatta and the 960 apartment Skyview Towers development at Castle Hill in mid 2021, as well as the commencement of litigation against the developers of the near new Riviera apartments along the Parramatta River, has provided the catalyst for the NSW Public Accountability Committee to revisit the regulation and oversight of both building certification and flammable cladding in New South Wales. It can be expected that further reforms will follow. , Public Accountability Committee, Report 11 – Further inquiry into the regulation of building standards, February 2022.

[3] S 37(1) Design and Building Practitioners Act 2020 (NSW)

[4] S 37 (2)

[5] i.e. it also applies to work done, for example, on a quantum meriut basis.

[6] [8] Schedule 1, Part 2(5)

[7] [9] s 40 & Schedule 1, Part 2(4)

[8] (2014) 254 CLR 185; [2014] HCA 36 (French CJ, Hayne, Crennan, Kiefel, Bell, Gageler and Keane JJ).

[9] (2004) 216 CLR 515; [2004] HCA 16 (Gleeson CJ, McHugh, Gummow, Kirby, Hayne, Callinan and Heydon JJ).

[10] The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068; 250 LGERA 114 (Stevenson J);

[11] Section 37(1) of the DBP Act speaks of a person who “carries out construction work”: that is, actually “carries out” such work – The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659

[12] The builder allegedly when the dispute arose, inter alia, made circular saw cuts through structural floor beams and wall structures; poured concrete down inserted pipes and drilled holes in the walls, water and sewer pipes.

[13] In Stevenson J’s own words, the interpretation of the legislation “appears to have been drafted so as to make comprehension of it as difficult as possible”.

[14] See the definition of “building work” in s 4 and compare with the definition of “building work” in s 36.

[15] Which is defined as, “[P]art of a building, and also includes any structure or part of a structure … but does not include a manufactured home, moveable dwelling or associated structure within the meaning of the Local Government Act 1993 [(NSW)].”

[16] Under the Home Building Act, “residential building work” means, relevantly, work involved in “the construction of a dwelling”, but does not include a boarding house as that is excluded from the definition of “dwelling”.

[17] As defined in the Environmental Planning and Assessment Act.

[18] The claim was commenced 5 days before the expiry of the 10 year limitation period – i.e. almost 10 years after the work was completed.

[19] Pafburn at [25]

[20] Subject to the proportionate liability regime in the Civil Liability Act 2002 – DBP Act s 41(3).

[21] s 38 and s 39 DPB Act

[22] S 41(3) – Part 4 of the DBP Act, which imposes the statutory duty of care, is subject to the Civil Liability Act 2002.