A "dramatic expansion" of liability? High Court considers liability of developers and contractors for negligent construction work

What you need to know

• The High Court of Australia has confirmed that a proportionate liability defence under Part 4 of the Civil Liability Act 2002 (NSW) (CLA) is not available in claims for breach of the duty of care under the Design and Building Practitioners Act 2020 (NSW) (DBPA).
• Owners can now potentially proceed with more confidence in bringing a single claim against a developer or head contractor for the entire loss arising from a breach of the duty of care under the DBPA.
• Developers and contractors are now more likely to be held liable for the negligence of their subcontractors. For developers or head contractors who supervise the construction of a whole building, the scope of the duty of care under the DBPA will extend to all defects in or related to the building, irrespective of whether they personally undertook the construction work.
• Developers and contractors potentially now face significantly increased exposure to risks, costs, and insurance premiums relating to construction work in New South Wales.

What you need to do

• Owners should consider whether it remains necessary to make separate claims against subcontractors for breach of the duty of care under the DBPA.
• Developers and contractors subject to claims will need to ensure that they make appropriate cross-claims against subcontractors where it is likely that the damage or loss claimed by the owner can be attributed to them.
• Watch this space – continue to take legal advice in relation to the duty of care under the DBPA, particularly given anticipated legislative developments.

Summary

Late last year the High Court of Australia handed down its highly anticipated decision in Pafburn Pty Limited & Anor v The Owners - Strata Plan No 84674 [2024] HCA 49 (Pafburn).

The case concerned the interaction between the DBPA and the CLA in New South Wales. Specifically, the High Court considered whether the proportionate liability scheme contained in Part 4 of the CLA applies to claims for damages for breach of the duty of care under the DBPA, such that a developer and head contractor "… can rely on the failure of another person to take reasonable care in carrying out construction work, or otherwise performing any function in relation to that work, to limit their liability under Part 4 of the CLA…".

The Court decided by a 4:3 majority that the proportionate liability scheme in the CLA does not apply for claims for damages for breach of the duty of care under the DBPA.

As the developer and head contractor supervised the construction of the whole building in question, they will be personally liable for the whole of the damage or loss suffered by the owners as a result of any breach of the duty of care. Their liability will be determined "as if the liability were the vicarious liability" of the developer and head contractor for the negligent work of the subcontractors to whom it was delegated.

Legislative background

The decision in Pafburn was highly anticipated because it marks another important milestone in the development of the common law and legislation concerning the liability of developers and contractors for negligent construction work.

The CLA

In Australia, each State and Territory jurisdiction has implemented proportionate liability schemes. These schemes provide that each concurrent wrongdoer will only be liable for their share of responsibility for the damage or loss suffered by an injured party for certain apportionable claims (including claims for negligence). An injured party must therefore join each concurrent wrongdoer to a single court claim to recover all of their loss and damage (or commence separate litigation against each concurrent wrongdoer).

The proportionate liability schemes are overlaid with provisions concerning vicarious liability and "non-delegable duties". For example, section 5Q of the CLA relevantly provides that:

"(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."

The CLA does not define "non-delegable duty". Accordingly, as the majority in Pafburn explained, the term takes its common law meaning, with the consequence that it is "a type of duty of care which, if owed by a person, means that the person cannot exclude or limit their liability… merely by the person exercising reasonable care in arranging for another person to perform the function to which the non-delegable duty attaches" (our emphasis).

Section 5Q of the CLA accordingly requires that "the extent of a liability of a person who has breached a non-delegable duty is to be determined as if the person were vicariously liable for the negligence of the person who in fact carried out the work or the task…". In the context of a construction project, this means that a developer or head contractor may still breach a non-delegable duty, even if they arrange for the work to be completed by a subcontractor, if the work is not carried out with reasonable care. In that circumstance, their liability will be determined "as if the liability were the vicarious liability" of them for the work of their subcontractors who in fact carried out the construction work. In other words, because the duty is non-delegable, even when the developer or head contractor does not personally do the work, they may nonetheless be personally liable for it, if it is not carried out with reasonable care.

The DBPA

The DBPA was enacted subsequent to the CLA and to address what the majority in Pafburn described as "a crisis of confidence of persons considering buying a unit in a residential apartment building in New South Wales."

The "crisis" was precipitated in part by the High Court deciding in 2014 that a builder who undertook the construction of a mixed use and serviced apartment project did not owe a duty of care to subsequent owners for latent defects in the building, and in part by the high-profile Opal and Mascot Towers incidents in 2018 and 2019 respectively.

As the Second Reading Speech of the DPBA said: 

• "Members would be aware of the recent devastation caused by defective buildings, such as at Mascot and Opal towers. These incidents, coupled with a number of legal cases, have reduced consumer confidence and provided uncertainty about the extent of protections available for financial damages or pure economic loss."
• "The bill continues to safeguard the rights of owners… by preventing a person who performs construction work from delegating or contracting out of their duty… practitioners will need to accept individual and collective responsibility for their work."

Section 37(1) of the DBPA imposes a duty of care on a person who carries out construction work 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 the construction work. Section 37(2) ensures that this duty of care is owed to subsequent owners. Section 38(1) deems an owners corporation to have suffered economic loss if it bears the cost of rectifying the defects the subject of the breach of the duty of care. Section 39 provides that a person who owes the duty of care "is not entitled to delegate that duty…". Section 40 provides that "[t]his part is subject to the Civil Liability Act 2002."

The factual and procedural background

In Pafburn, the owners corporation of a building in North Sydney claimed damages from the developer and head contractor for the construction of the building, alleging breach of the duty of care under the DBPA. The owners argued that, by the operation of section 39 of the DPBA and section 5Q of the CLA, the developer and head contractor owed them a duty of care to ensure that reasonable care was taken by a person carrying out any work or task delegated to them, and that any liability for breach of that duty is to be determined "as if the liability were the vicariously liability of [developer and head contractor]" for the negligent work of their subcontractors.

The developer and head contractor pleaded a proportionate liability defence under the CLA, arguing that the owners' claim was an "apportionable claim" under the CLA and that there were various concurrent wrongdoers, including their subcontractors, the principal certifying authority and the local council.

The decision

The High Court decided in two judgments and by a 4:3 majority that the proportionate liability scheme in the CLA does not apply to claims for damages for breach of the duty of care under the DBPA.

The majority concluded that the duty of care under the DBPA "is precisely the kind of non-delegable duty which s 5Q of the CLA contemplates." That being the case, the developer and the head contractor could not discharge, exclude, or limit their duty of care – or apportion their liability for breach of the duty of care – by delegating or otherwise entrusting the construction work to subcontractors.

The majority found that they were "to be treated as if they are vicariously liable for any failure to take reasonable care by [their subcontractors]…". As the developer and head contractor supervised the construction of the whole building, the majority considered that they were personally liable for the whole of the damage and loss caused by their breach.

The minority notably concluded the opposite: that the duty of care under the DBPA "is not, in its terms, a duty of the kind with which s 5Q of the CL Act is concerned, namely a non-delegable duty of strict liability to ensure that reasonable care is taken."

Comments

Whilst the decision in Pafburn will be welcomed by owners, the minority considered that it may "dramatically" expand the liability of persons who carry out construction work, warning of "real-world considerations" such as "significantly increased risks, costs and insurance premiums."

Regardless of whether these concerns come to pass, the immediate impact of the decision is that owners, developers and contractors alike should carefully consider their rights and obligations under the DBPA before making, or attempting to defend, claims for breach of the duty of care. In particular, now that the proportionate liability regime has been held not to apply, developers and contractors subject to DBPA claims will need to ensure that they make appropriate cross-claims against subcontractors where it is possible that any loss or damage claimed by the owner may be attributable to them.

Developers and contractors may also consider requiring additional contractual protections from their subcontractors, such as warranties and additional security, and consider undertaking financial due diligence on their subcontractors before engaging them to ensure that they can meet any claims for breach of the duty of care. It may also be prudent for them to review their insurances and make additional effort when supervising their subcontractors given their potential liability for any damage or loss that the subcontractors may cause to the owner.

All parties involved in the construction industry should continue to watch this space and take appropriate legal advice in relation to the implications of duty of care under the DBPA. The split decision in Pafburn demonstrates that the common law concerning the liability of developers and contractors for negligent construction work is likely to continue to develop. Further legislative developments are also expected when the Building Bill passes the New South Wales parliament. This legislation aims to consolidate various Acts concerning building law – including the DBPA – into a single Act.

The national construction disputes team at Ashurst has significant experience advising owners, developers and contractors in relation to their rights and obligations under the DBPA and equivalent legislation across Australia.

Authors: Luke Carbon, Partner; Bryce Wray, Senior Associate and Diana Chen, Graduate.