Articles

By Justin Cotton, Director, and Jordan Davies, Senior Paralegal, Lovegrove & Cotton – Construction and Planning Lawyers

Introduction

The Design and Building Practitioners Act 2020 (NSW) has now been enacted in New South Wales. The legislation has made key changes to the regulation of Building and Design practitioners in the state. This is particularly with regards to registration requirements, and by entrenching a duty of care owed by those practitioners to owners and subsequent owners for professional services carried out with respect to a building development.

Some of the provisions of the legislation including many of those pertaining to registration are yet to come into operation, but importantly, the statutory duty of care is, as of 11 June 2020, operative and may be used by consumers of as-built product in proceedings commencing (or that have commenced) after 11 June 2020 for loss that became apparent from up to 10 years ago.

This statutory duty of care, therefore, has profound impacts, particularly in light of its retrospective operation of up to 10 years and the fact that practitioners are unable to contract out of the statutory duty of care.[1] It has significant impacts for aggrieved owners, particularly those who have purchased units in multi-residential buildings.

The Jurisprudential Context: Brookfield

In common law jurisdictions, many relationships between certain parties are said to give rise to a “duty of care”. This phrase is often over-used, particularly in light of the fact that certain elements are needed to be shown to exist prior to there being found a duty owed. These aspects are known as “salient features”, and have proven, in certain high profile cases, as substantial obstacles for plaintiffs seeking compensation even in circumstances where there has been significant damage. A principal obstacle in building-related negligence claims has been the salient feature of “vulnerability” in claims arising in circumstances of what is known as “pure economic loss”.

The decision of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor [2014] HCA 36 (“Brookfield”) has served for some time now as a substantial hurdle in the face of occupiers of multi-purpose multi-residential apartment blocks in regards to arguing the existence of a duty of care owed by a builder to subsequent owners of multi-residential buildings. Pursuant to the Brookfield decision, a duty of care owed by a builder (and arguably other building practitioners) may be denied where it is shown that there was either:-

• contractual means available for protection (such as Vendor’s warranties and contractual assignment of builder’s warranties), and the claimant was ‘commercially sophisticated’ enough to protect themselves; or
• a statutory consumer protection regime that singled out certain classes of consumers as being in need of protection whilst being silent on other classes of consumers, and the plaintiff belonged to a class not included as needing protection under the regime – essentially the legislative ‘silence’ is taken to be intentional.

The case also reaffirmed that a Court will be loath to impose duties owed by builders to subsequent owners that have a greater scope than duties owed to first owners, who are often developers.

The Brookfield decision, therefore, was considered a very substantial hurdle for multi-residential building defects negligence claims, as Owners Corporations, particularly in mixed-use developments, are considered sufficiently ‘commercially sophisticated’ to avail themselves of the likes of contractual warranties. It was also noteworthy that certain components of multi-residential building developments are exempt from building industry consumer protection statutes such as the Domestic Building Contracts Act 1995 (VIC) and Home Building Act 1989 (NSW).

Design and Building Practitioners Act 2020 (NSW)

Arising partly out of concerns for the ramifications of the Brookfield decision, the New South Wales government has now passed new statutory provisions entrenching a duty of care like the one denied in Brookfield in the Design and Building Practitioners Act 2020 (NSW)^[2].

In the New South Wales legislation, legislators have seen fit to impose a duty specifically for persons “who [carry] out construction work” as regards pure economic loss, and this duty extends to builders, designers, building product suppliers or anyone “having substantive control over the carrying out” of such work.^[4] Importantly the relevant Section provides that “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”.^[5] The provision expressly circumvents the hurdles in Brookfield in regards to the availability of contractual protection and the existence of a statutory consumer protection regime militating against the existence of a duty.

The provision giving rise to this statutory duty of care is contained in Section 37 of the Design and Building Practitioners Act 2020, and reads verbatim as follows:-

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.

It follows therefore that the duty is quite expansive particularly given that it dispenses with the common law position that a builder does not necessarily owe subsequent owners a duty of care to avoid economic loss.

The provision leaves issues of breach and causation, pursuant to subsection (3), to be decided by way of established common law as altered by the Civil Liability Act 2002 (NSW) – i.e. what has been now the established test for breach and causation for negligence claims in NSW for well over a decade.

A Large Net of Practitioners and Actors Subject to the Duty

Importantly, pursuant to Section 36, “construction work” is defined as:-

(a) building work;

(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).

This means there is a very broad net of actors that are captured by the provisions and owe a duty of care to owners and subsequent owners. This includes: builders, engineers, designers, architects, project managers and even manufacturers and suppliers of product for building work, or any actor having “substantive control”.

Naturally, broad definitions will need to be tested in Court systems before it is known precisely what actors possess “substantive control” over building work, design work and product manufacture and supply work.

A Potentially Expanded Suite of Claimable Defects

The types of defects captured by the provision are very broad by virtue of Section 37 (1)(a) and (b) in that they are not confined to the likes of structural defects.

This means that unlike the statutory warranty regime in Part 2C of the Home Building Act 1989 (NSW), there is no distinction between “major” building defects and “other” building defects and “major elements” of buildings.[6] The distinction in the Home Building Act had previously left some claims for non-structural defects and defects concerning non-load bearing elements of buildings vulnerable particularly in light of the Brookfield decision.

It follows that certain defects that were formerly subject to short 2-year statutory limitation periods,[7] which often barred claims under the statutory warranties, may now be able to be claimed under the new statutory duty of care which has a much longer limitation period.

Owners Corporations

Owners Corporations have traditionally been viewed by Courts as commercially sophisticated which has proven to be a hurdle in establishing duties of care owed by builders and other building practitioners. Now, Owners Corporations suffering damage by way of defects to common property have had this substantial obstacle cleared.

This important extension of the duty of care arises by virtue of Section 38 of the Act, which states that “an owners corporation or an association is taken to suffer economic loss for the purposes of this Part if the corporation or association bears the cost of rectifying defects (including damage caused by defects) that are the subject of a breach of the duty of care imposed under this Part.”

This means many Owners Corporations who were previously advised they were barred from attaining compensation under negligence for pure economic loss, may now commence proceedings under the new statutory regime for claims in negligence against builders and other practitioners, against whom they had no contractual warranties nor statutory protections [such as statutory warranties under the Home Building Act], for loss or building defects that have appeared within the 10 years preceding 11 June 2020.

Economic loss under the provision includes economic loss for damage caused as a consequence of defects and loss associated with the provision of alternative accommodation for the likes of occupiers, but importantly is not limited to these kinds of economic loss.[8]

This legislation, therefore, is very beneficial for New South Wales Owners Corporations seeking redress for defects that have arisen due to want of care on the part of either builders, engineers, designers, architects, project managers and even manufacturers and suppliers of product for building work, or any actor having “substantive control” over such work.

It may be prudent for Owners Corporations who may have previously considered taking action, and had not proceeded due to the legal impediments outlined in Brookfield, to consider consulting an expert construction lawyer and potentially reconsider taking action in light of these new changes. For owners and Owners Corporations making future claims, the new duty of care will serve as a strong alternative argument for claims in contract or under statutory warranties.

Building Actors and a New Risk Profile in New South Wales

On the other side, the provisions profoundly alter the risk profile of carrying out professional services in relation to building work in New South Wales. This is particularly the case in light of the retrospective application of the statutory duty of care and the inability for those subject to the duty to contract out of it.[9] The duty of care adds to existing duties, statutory warranties and other obligations under the likes of the Home Building Act and the common law.[10] It means actors involved in building projects in New South Wales will need to reassess the risk profile of their work.

Considerations for Building Practitioners Going Forward

A Non-Delegable Duty of Care

A crucial consideration for those subject to the new duty of care is found in Section 39 of the Act, namely that the duty of care is non-delegable. This means that principal contractors will be unable to delegate the duty of care to their subcontractors if they engage them for certain components of building or design work or the supply and manufacture of building products.

Concerns have therefore been raised regarding this inability to delegate the duty of care to subcontractors as it may leave principal contractors effectively vicariously liable for the subcontractors they engage on projects.^[11] This will have clear financial risk impacts upon principal contractors going forward.

It will thus behove principal contractors to ensure they adequately contractually protect themselves to account for the risks they will now assume with subcontractors. Prudence will dictate that in doing so, those carrying out building work, design work, or the supply or manufacture of building products, and those who have “substantive control over” such work, as a principal contractor, should consult an expert construction lawyer. The objective will be to fashion contractual provisions within their subcontract agreements to indemnify them for liability under the new provisions, in the event of want of care on the part of subcontractors.

Insurance Ramifications

Building practitioners affected by the new duty of care will need to turn their minds to ramifications for their insurance arrangements, particularly their professional indemnity cover, as it is projected that there will be an increase in litigation as an eventual result of the new enactment.^[12] This may have quite a taxing impact on the industry in light of other external factors including diminished insurability and the current economic slowdown.

Conclusion

The new statutory duty of care enshrined under the Design and Building Practitioners Act 2020 (NSW) therefore has a profound impact upon the building industry in New South Wales. Whilst the duty benefits owners and Owners Corporations by removing what have been viewed as undesirable common law hurdles in negligence claims for pure economic loss, they also radically shift the risk paradigm for building practitioners and other non-registered actors that provide services in the New South Wales building industry.

Owners and Owners Corporations who have previously been advised that a claim for negligence would not succeed may wish to check if there may now be a successful claim made in light of the coming into effect of these provisions.

Professionals involved in the provision of services in relation to building and design and the supply and manufacture of materials will need to consider the risk impacts involved with this new duty of care and will need to ensure they adequately protect themselves.

Regardless of whether one is an owner or a building professional, it will be prudent for one to consult with an expert construction lawyer to ensure you are appropriately apprised of your rights and obligations under the new law.

Footnotes:-

[1] See Design and Building Practitioners Act 2020 (NSW), s 40.

[2] s 37.

[3] s 74AF.

[4] Design and Building Practitioners Act 2020 (NSW), s 37(1).

[5] Ibid, s 37(3).

[6] See: Home Building Act 1989 (NSW), s 18E.

[7] See ibid.

[8] See Design and Building Practitioners Act 2020 (NSW), s 38(4).

[9] Design and Building Practitioners Act 2020 (NSW), s 40.

[10] Design and Building Practitioners Act 2020 (NSW), s 41.

[11] Design and Building Practitioners Act 2020 (NSW), s 39; Aiden Davey, Fighting chaos with chaos: an analysis of the Design and Building Practitioners Bill 2019 (NSW) — (2020) 31(4) ACLB 49; Michael Bleby, ‘NSW opens door to thousands of defect claims’, AFR, June 15, 2020.

[12] See Michael Bleby, ‘NSW opens door to thousands of defect claims’, AFR, June 15, 2020.