In a recent split decision of the Australian High Court,[1] it was held by 4:3 majority that developers and head contractors in NSW cannot rely on either proportionate liability defences nor the fact that they delegated the performance of the construction work to reduce or limit their statutory liability[2] for defects in those works.
This decision also looked at the scope of the statutory duty in NSW to exercise reasonable care to avoid economic loss caused by defects. It concludes that developers and head contractors are “100%” personally liable for the performance of those works despite those parties not physically performing the work and having a role limited to supervision of the work performed by others.
As is suggested in the minority decision of the Court, this decision has potential “dramatic” and “real-world” consequences in the form of increased risks, costs and insurance premiums for developers and head contractors subject to the Act. We expect it may also bring about a change in the manner in which developers and head contractors attend to processes associated with quality assurance, works inspections and defect administration.
Background
Madarina, the developer, and Pafburn, the head contractor (together the defendants) had contracted with each other to carry out residential building work. Madarina and Pafburn were related entities and had a common director and shareholder. The plaintiff was the Owners Corporation for the residential development and the successor in title to the developer.
The Owners brought a claim against Madarina and Pafburn alleging they owed the Owner’s a statutory duty[3] to exercise reasonable care to avoid economic loss caused by defects. The Owners said the defendants had breached that duty as a result of unremedied defects existing in the construction works.
The defendants said that if they were liable, then liability for the Owner’s claim was apportionable. The defendants said that sub-contractors, manufacturers, installers, architects, certifiers and local councils were all ‘concurrent wrongdoers’. As such, the defendants alleged that they should only be held responsible for an amount which properly reflects their responsibility for the alleged defects.[4] The plaintiffs sought to have that defence struck out.
The High Court’s Decision
In a 4:3 decision, the majority of the Australian High Court determined that the plaintiff’s claim for damages arising from a breach of the statutory duty was not apportionable. Key to the Majority’s decision was a determination that it is irrelevant whether or not a developer/head contractor acted in a supervising capacity. The Court said whether the developer or head contractor exercised appropriate and reasonable supervisory functions (such as selecting a competent contractor, carrying out appropriate quality assurance inspections etc.) did not matter as the scope of the duty imposed by the Act extends to all defects arising from the carrying out of construction work, even if the relevant entity did not engage in the physical construction of the works itself.[5]
Key takeaways
We expect that, absent legislative change, the Court’s determination of the broad application of the duty imposed by the Act on entities such as developers and head contractors will bring about change in the NSW building industry. Practically it may mean developers and head contractors will need to:
- perform more thorough due diligence processes when engaging subcontractors and consultants, particularly where there are specialist disciplines or design-related elements being passed to sub-contractors; or where the engagement terms are of limited recourse, capped or not capable of being insured;
- more closely monitor the performance of sub-contractors and consultants during each stage of the construction work to mitigate the likelihood of defects presenting at later stages of those works; and
- consider utilising more rigorous quality assurance processes such as peer reviews, third party inspections and verifications, together with more robust contract administration to proactively seek rectification where issues are identified with the construction works as they arise.
Further, should litigation ensue in respect of allegedly defective work, the manner in which a developer and head contractor must conduct any litigation will also change procedurally. In the absence of proportionate liability defences, developers and head contractors will be responsible for joining potentially liable third parties to the proceeding and will bear any solvency risks associated with an inability to recover from those parties.[6]
Pafburn Pty Ltd & anor v The Owners – Strata Plan No 84674 [2024] HCA 49.
Design and Building Practitioners Act 2020 (NSW) (hereafter the Act).
Pursuant to s 37(1) of the Act.
The defendant’s contention that the claim is apportionable was made pursuant to section 34 of the Civil Liability Act (2002) NSW which states concurrent wrongdoers in relation to ‘apportionable claims’ will only be liable for the part of the loss reasonably attributable to them.
Pafburn Pty Ltd & anor v The Owners – Strata Plan No 84674 [2024] HCA 49 [45]-[46], [56]-[57]. In contrast, the minority of the Court held that developers/head contractors cannot be said to have ‘carried out construction work’ (as is required by s37(1) of the DPBA for the duty to apply) if their functions are limited to merely procuring specialised entities to carry out the construction works.
The Majority confirmed defendants can make cross claims in this regard at paragraph [65] of the decision.
