Australian High Court confirms head contractors fully liable for building defects in NSW

This means they will be fully liable for economic loss suffered by owners due to defects in construction work caused by a subcontractor’s failure to take reasonable care. This is one of the first cases to test the apportionment of liability issue under New South Wales’s DBP Act. One of the main purposes of the DBP Act is to broaden property owners’ right to recourse against those involved in the construction of the building by creating a new statutory duty of care, which is ‘non-delegable’. The duty requires that all persons involved in construction work, including developers and head contractors must exercise reasonable care to avoid economic loss caused by defects in construction work.

The majority in the recent High Court ruling confirms that if a developer or head contractor is engaged in construction work over the whole of the building, they will be vicariously liable for the actions of all work occurring downstream, and they cannot discharge their duty by merely responsibly engaging others to do the construction work. The court clarified that the proportionate liability defence under the Civil Liability Act 2002 (NSW) is not available to the developer or head contractor if the claim is brought by the owners for breaches of the duty of care under the DBP Act. Its effect is that a developer or head contractor cannot exclude or limit their liability by “apportioning” any part of that liability to any of its subcontractors involved in the construction work which may have also failed to take reasonable care and contributed to the defective work.

Chris McGrath, construction disputes expert at Pinsent Masons, said that following this judgment a claim under the DBP Act may now be more appealing to owners corporations seeking damages for defective building work, as they no longer have the onus of joining concurrent wrongdoers identified by the developer or builder.

Before this ruling, if a builder was to plead proportionate liability in its defence and name its subcontractors as concurrent wrongdoers, it was up to the owners corporation, as the claimant, to join those subcontractors to the claim. “The process of joining concurrent wrongdoers immensely complicates the matter and opens the owners corporation up to potential adverse costs orders against multiple parties, in the event that its claim is unsuccessful. There is an additional risk for the claimant if a concurrent wrongdoer is insolvent. This leaves an owners corporation with virtually no way to recover that proportion of the loss which the court finds the concurrent wrongdoer liable,” he said.

But he added that the decision raises concerns about the increased liability for builders and developers. “It is important to note that for builders and developers, the scope of damages under the DBP Act is quite broad, when compared with an owners corporation’s claim for breach of statutory warranty against the developer and builder under the Home Building Act 1989 (NSW) (HB Act)”. The decision will likely lead to a flurry of activity in the courts, with developers and builders filing cross-claims against subcontractors instead of simply relying on the proportionate liability regime,” he said.

The underlying claims in the recent High Court case were brought by the owners of a residential building in North Sydney against the builder Pafburn Pty Ltd and the developer Madarina Pty Ltd for breach of duty under the DBP Act arising from defects in the building.

Both defendants relied on the proportionate liability defence, pleading that the liability had been delegated to nine of Pafburn’s subcontractors as “concurrent wrongdoers”. In response, the owners corporation filed an application to strike out the proportionate liability defence, arguing that Pafburn and Madarina were vicariously liable for the conduct of the subcontractors given the duty was ‘non delegable’ and, therefore, the proportionate liability regime did not apply.

In this first instance judgment at the Supreme Court of NSW, the court sided with the defendants’ proportionality liability defence and dismissed the claimant’s application. The claimant then appealed the decision to the NSW Court of Appeal. The Court of Appeal concluded that the legislative intent of the DBP Act was for the duty of care to be treated as a form of vicarious liability which cannot be delegated out of. The court, therefore, held that Pafburn and Madarina owed a non-delegable duty of care to the owners corporation, and their proportionate liability defence was struck out.

Pafburn in turn appealed that decision to the High Court of Australia, which dismissed the appeal by majority. The reasoning of the majority judgment started by identifying the context of the enactment of the DBP Act, which “was a crisis of confidence of persons considering buying a unit in a residential apartment building in New South Wales, particularly in the Sydney metropolitan area”, referring to the widely published cases of defective buildings in Sydney, such as at Mascot and Opal towers.

The majority of the judges found that the duty of care is personal to the person who is the subject of the duty, and that neither Pafburn or Madarina could discharge their duty by exercising reasonable care in respect of arranging for another person to carry out any work or task. Given Pafburn and Madarina were engaging in “construction work” over the whole of the building, they were both vicariously liable for the actions of all work occurring downstream.

Despite the recent judgment, the underlying proceedings of the Pafburn case are still in the pleading stage. For the claims to succeed, the owners corporation needs to prove the alleged breaches by the defendants. The judgment also noted that if the owners corporation establishes such alleged breaches but fails to establish that those breaches caused the whole of the claimed economic loss, Madarina and Pafburn will be found liable only to the extent that their breaches caused the loss.

“Although the High Court of Australia has made it clear that a person who undertakes construction work cannot discharge their duty by merely engaging others, it still remains unclear what an owners corporation needs to establish to show that a builder or developer has failed to discharge their duties,” McGrath said. “Owners corporations may still be faced with a situation where the easiest case to prove is against the subcontractor who actually did the work, even though the subcontractor may have the smallest pockets.”

While the majority of the judges hearing the appeal were in favour of the owners corporation, the minority considered the real-world implications if a claim for breach of duty of care was not apportionable. The dissenting judgment noted that it would be an “odd result”, if a builder was liable for a breach of duty of care if it had engaged a specialist subcontractor to undertake work who then did that work carelessly. It also identified the significant increase in risks, costs, and insurance premiums for head contractors if the DBP Act was to operate in such a way.

McGrath said that the increased liability for builders and developers is a significant concern shared by the industry. Prior to the introduction of the DBP Act, an owners corporation’s recourse for defective work was ordinarily limited to a claim for breach of statutory warranty against the developer and builder under the Home Building Act 1989 (NSW) (HB Act). Under the HB Act, where there is a breach of statutory warranty, an owners corporation will be entitled to the reasonable cost of rectification. This could include the actual works done together with supervision and certification, and potentially, a claim for alternative accommodation in the event that occupiers are required to move out during the repair work.

However, under the DBP Act, an owners corporation is entitled to damages suffered for economic loss if the developer or builder was found to have breached the statutory duty of care. “It is reasonable to suggest that this would not only include the reasonable cost of rectification and alternative accommodation, but potentially additional claims for increased insurances, rent loss, refinancing costs, loss of opportunity and perhaps more. These additional claims could far outweigh the actual cost to fix the defects,” he explained.

“Builders and developers should, as best they can, contract with companies of substance that are more likely to still be solvent by the time a claim under the DBP Act is brought by an owners corporation. When contracting, they should also carefully consider any limitation of liability clauses in their downstream contracts,” he said.

The effect of exclusions for consequential loss in a contract is that subcontractors are generally only liable for losses that naturally flow from the breach of contract instead of indirect losses such as loss of profits. These exclusion clauses may result in a situation where a builder and developer can successfully claim the reasonable costs of rectifying the defects, which directly arise from the breach, but are unable to recover additional consequential losses in their cross-claims against the responsible subcontractors. This could leave them exposed to a financial shortfall.