Authors
Simon Lusk – Director
John Deegan – Senior Associate
Summary
In a significant decision clarifying the application of the statutory duty imposed on building practitioners by s37 of the Design and Building Practitioners Act 2020 (DBP Act), the High Court has ruled that the proportionate liability regime under Part 4 of Civil Liability Act 2002 (NSW) (CLA) cannot be relied on by principal and head contractors who delegate construction work to others, to limit their liability in a claim for damages for breach of that statutory duty.
The case concerned a claim brought by the Owners Corporation of a strata development in an apartment complex in North Sydney (the Building). The Owners Corporation sought damages against the developer and the builder for latent defects in the Building. The claim was advanced exclusively against those entities for breaches of duty under section 37 of the DBP Act.
In response, both the developer and the builder denied any breach of their statutory duty and further relied on proportionate liability defences pursuant to Part 4 of the CLA as against a multitude of subcontractors that had been engaged on the construction of the Building.
The Owners Corporation sought to strike out the proportionate liability defences of the developer and the builder and was successful in doing so on appeal to the Court of Appeal.
The developer and the builder then appealed to the High Court. In a split decision (4 v 3), the High Court dismissed the appeal, confirming that the liability imposed by s37 of the DBP Act (as it applied to the principal and head contractors) was not apportionable as those parties were held to be vicariously liable for any breaches of that duty occasioned by the acts or omissions of their subcontractors.
The Relevant Legislation
In response to public outcry over a number of high-profile defectively constructed residential apartment buildings, and growing concerns surrounding the lack of protections for resulting financial losses afforded to owners, the NSW Government passed the DBP Act in 2020. The act imposed a range of new obligations on construction practitioners including a statutory duty of care applying to all persons carrying out construction work. That duty is contained within section 37 as follows:
37 Extension of duty of care
(1) A person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects—
(a) in or related to a building for which the work is done, and
(b) arising from the construction work.
(2) The duty of care is owed to each owner of the land in relation to which the construction work is carried out and to each subsequent owner of the land.
(3) A person to whom the duty of care is owed is entitled to damages for the breach of the duty as if the duty were a duty established by the common law.
(4) The duty of care is owed to an owner whether or not the construction work was carried out—
(a) under a contract or other arrangement entered into with the owner or another person, or
(b) otherwise than under a contract or arrangement.
Section 39 of the DBP Act confirms that “A person who owes a duty of care under this Part is not entitled to delegate that duty”.
The duties prescribed by s 37 expressly apply to any person who carries out ‘construction work’ which is defined under s36(1) as any of the following—
(a) building work[1],
(b) the preparation of regulated designs and other designs for building work,
(c) the manufacture or supply of a building product used for building work,
(d) supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work referred to in paragraph (a), (b) or (c).
The Decision
Whilst the builder and developer acknowledged that each owed a non-delegable statutory duty under ss37 and 39 of the DBP Act, they submitted that as the principal and head contractors, the ‘construction work’ conducted by them was predominantly ‘supervisory’ (as defined by S36(1)(d)). As such, they argued that any personal liability for breaches of the non-delegable statutory duty under the DBP Act should be confined to any failures to exercise the required reasonable care arising from performing the function of ‘supervising’ the construction work. For the actual physical tasks of the construction work which they delegated to others, it was submitted that the developer and the builder were still entitled to rely on the proportionate liability provisions of the CLA to limit their own liability where acts or omissions of those delegates had caused or contributed to the same loss or damage.
The majority of the High Court (comprising Gageler CJ, Gleeson J, Jagot J, and Beech-Jones J) determined that notwithstanding the wording of s37(1), when read in its proper context (including in conjunction with s39), the substance of the duty was to ensure that reasonable care is taken by subcontractors in the carrying out of any work or task delegated or otherwise entrusted to them by the practitioner who delegated that work and who is subject to the s 37(1) duty.
Further, as the duties contained within the DBP Act are expressly stated to be “subject to the Civil Liability Act 2002“[2] it followed that s 5Q of the CLA would apply to any liability of the builder and developer for alleged breaches of the duties imposed by s37(1) of the DBP Act.
Section 5Q of the CLA provides as follows:
(1) 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.
(2) This section applies to an action in tort whether or not it is an action in negligence, despite anything to the contrary in section 5A.”
Therefore, the majority took the view that due to the interaction of the DBP Act and the CLA (and specifically the application of s5Q of the CLA), both the developer and the builder were to be treated as if they were vicariously liable for any failure on the part of their subcontractors to take reasonable care in connection with the performance of work or tasks involving construction work (as defined in s 36(1) of the DBP Act).
In rejecting the appeal by the developer and the builder, the majority of the High Court stated that:
‘the duty created by ss 37(1) and 39 of the DBPA is precisely the kind of non-delegable duty which s 5Q of the CLA contemplates. Within the framework established by s 5Q of the CLA, and on the contentions of the owners corporation: (a) Madarina (as developer) “delegated or otherwise entrusted to” Pafburn the construction of the Building and, in so doing, “supervised etc” the whole of the construction work; and (b) Pafburn (as head building contractor) constructed the whole of the Building and, in so doing, delegated or otherwise entrusted many kinds of construction work to others. Neither Madarina nor Pafburn, however, could discharge, exclude, or limit their s 37(1) duty by delegating or otherwise entrusting their “construction work” to another competent person. On that basis, the liability of each of Madarina and Pafburn is “as if the liability were the vicarious liability of” them for the whole of the construction work in relation to the Building’.
Because the Court determined that the developer and the builder should be treated as vicariously liable for the failures of the persons who carried out the physical construction works (including their subcontractors), it followed that this made the notion of ‘apportioning’ any liability between them and those subcontractors, meaningless.
The Intention of the Legislation
In reaching the decision, the majority also had regard to the context in which the DBPA had been enacted, being the real and apparent ‘crisis of confidence’ for owners in residential apartment buildings, particularly in Sydney. It was recognised that the purpose of the legislation was to address the lack of safeguards for the rights of owners (and subsequent owners) for latent defects in apartment buildings to whom developers and builders had been found previously by the High Court not to owe a duty (i.e. Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 (2014) 254 CLR 185).
The Court referred to the stated intention of the parliament in introducing the legislation. Specifically, to address the lack of safeguards by establishing an “individual and collective responsibility” for building practitioners to avoid scenarios where those practitioners could exclude or limit their liability by arguing they had delegated or entrusted any part of their duty to another person.
‘Anomalous Position’ of Councils and Certifiers
The Court acknowledged the ‘seemingly anomalous position’ of local council planning authorities and principal certifying authorities, both of whom owe duties arising under common law and separate planning legislation. The Court did not need to determine whether local councils and certifiers carry out “construction work” within the meaning of the DBP Act or whether they owed a statutory duty pursuant under s37. However, it was observed that, even if a local council or a certifier did in fact carry out “construction work’ as defined by the DBP Act, those duties had still been delegated by the developer and/or the builder and remained within the scope of the non-delegable duties under the DBP Act, again making each of the owner and developer vicariously liable for any alleged failures (pursuant to s 5Q of the CLA).
Dissenting views
In a compelling dissenting judgment, the minority of the Court questioned whether parliament had in fact intended such a significant expansion of liability for construction practitioners under the DBP Act and whether such a result was at odds with the original object and purpose of the CLA, as follows:
“…s37 of the DBP Act dramatically increases the liability of persons who carry out construction work for defects caused by sub-contractors no matter the care taken by the person in selecting that sub-contractor. If Parliament had intended to expand the liability of persons who carry out construction work in such a dramatic manner contrary to the real-world considerations that Pt 4 of the CLA sought to address (such as significantly increased risks, costs and insurance premiums arising from joint and several liability), then it would be expected that such a change would have been identified at the time it was introduced.
Implications of the Decision
This decision will likely have wide reaching implications for principal and head contractors, their insurers, and the construction industry at large. Whilst the decision is significant, it is important to bear in mind that even though principal contractors may not be able to limit their liability for breaches of duty under the DBP Act through the proportionate liability provisions of the CLA, those practitioners are still able to seek contribution and indemnity against negligent subcontractors for any breaches of duty (both at common law and under the DBP Act), by way of separate cross claims. However, and unfortunately, this will inevitably result in additional cross-claims, counter cross-claims and defences being filed in multi-party construction disputes. This will add more expense and complexity to an already difficult field of litigation.
The High Court did not make any final determination as to the position of other types of construction practitioners ‘further down the chain’ (such as certifiers and specialised engineers), who do not generally delegate their work to others and are not responsible for the building “as a whole” but only responsible for specific aspects of the construction.
As it stands, it still would appear to remain open to practitioners further down the contracting chain to rely on the proportionate liability provisions of the CLA in defence of building defect claims, but only for any defects which arise outside of the scope of the construction work to which that practitioner’s non-delegable s 37 duty applies.
[1] ‘Building work’ was in turn defined in s26(1) as including residential building work within the meaning of the Home Building Act 1989.
[2] Pursuant to section 41(3) of the DBPA.
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