The Pafburn Precedent: Navigating a New Era of Liability in Construction

The High Court has granted leave to appeal in the matter of The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWCA 301, which is to be heard later this month. The appeal will decide whether construction professionals and insurers can continue to rely on the proportionate liability regime to mitigate risk and minimise costs in litigation, as they have done for the past two decades. We have reviewed the submissions filed with the High Court and provide our views on the potential outcome below.

Key takeaways

• The Proportionate liability regime was originally introduced in 2004 in response to rising litigation costs and insurance premiums;
• Recent NSW caselaw has disrupted the status quo in relation to claims under the Design and Building Practitioners Act 2020 (NSW) (DBPA), leading to increased cross-claims, increased exposure for defendants, placing upward pressure on litigation costs and insurance premiums;
• The High Court appeal will determine whether s 37 breach of duty claims under the DBPA are apportionable.  Of particular interest, is whether proportionate liability defences are still available to consultants who have not sub-contracted out parts of their work.

Introduction of Proportionate liability

Before the proportionate liability regime was introduced, the doctrine of joint and several liability placed the onus on defendants in litigation to seek contribution from other parties[1]. However, if those parties were insolvent or untraceable, an unsuccessful defendant would be responsible for a plaintiff’s entire loss, irrespective of whether other parties were to blame too. This raised concerns that defendants, or their insurers, were being targeted for their deep pockets rather than their actual liability, ultimately contributing to increased insurance premiums.

Benefits of the proportionate liability regime

With the introduction of the proportionate liability regime in 2004 under the Civil Liability Act[2](CLA), defendants, in the right circumstances, no longer needed to issue cross-claims. Instead, defendants would identify parties as concurrent wrongdoers in their defences, detailing how each “concurrent wrongdoer” had contributed to the loss. If a defendant shared liability with an insolvent wrongdoer, it would not be responsible for the insolvent party’s share.  With these changes, the onus shifted to the plaintiffs, rather than the defendants, to decide whether to join the concurrent wrongdoers and assume the associated cost risks.

Notably, the recent Court of Appeal decision in Pafburn has disrupted the status quo.

A summary of Pafburn

• The Owners Corporation of a strata development at 197 Walker Street, North Sydney (Owners), sued Pafburn Pty Ltd (the Builder) and Madarina Pty Ltd (the Developer) for breaches of the statutory duty contained in section 37(1) of the DBPA. This section prescribes that a person who carries out ‘construction work’ (defined to extend to the preparation of designs for building works), has a duty to exercise reasonable care to avoid economic loss caused by defects in a building where the work is done, arising from the construction work.
• The Builder and the Developer advanced proportionate liability defences, naming subcontractors engaged by the Builder as “concurrent wrongdoers.”
• In response, the Owners contended that the section 37 duty of care was a non-delegable duty meaning that the Builder and Developer were wholly responsible for the subcontractor’s negligence.
• In advancing that argument, they relied firstly on section 39 of the DBPA that provides: “A person who owes a duty of care under this Part is not entitled to delegate that duty.”
• Secondly, they argued that section 39 of the DBPA operated in conjunction with section 5Q of the CLA to prevent the Builder and Developer from pleading a proportionate liability defence.
• Section 5Q of the CLA applied to claims made under the DBPA. This section[3] reads as follows (our emphasis):

“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.”

• In other words, section 5Q of the CLA prescribes that when a defendant has a non-delegable duty of care (as the Owners contended they did) for a task they have delegated to another person, their liability for any breach will be treated as ‘vicarious liability’.
• Consequently, the Owners contended that the Builder and Developer were vicariously liable for the negligent acts of the Builder’s subcontractors, and that proportionate liability defences were not available to them. This meant that the Builder and Developer were wholly responsible for the subcontractor’s negligence, in the same way that an employer is vicariously liable for the acts of its employee.
• At first instance, the Supreme Court held that the statutory duty created by section 37(1) of the DBPA was not a “tort” for the purposes of s 5Q of the CLA, such that the Builder and the Developer were not “vicariously liable”, and therefore could raise proportionate liability defences.

Pafburn Appeal Decision

• The Court of Appeal disagreed holding that:
  • liability for breaching the section 37[4] duty of care should be classified as “liability in tort” for the purposes of section 5Q of the CLA;
  • the liability of the Builder and the Developer should be regarded as a form of vicarious liability, which is not subject to apportionment between themselves and their subcontractors; and
  • the Builder and Developer were unable to rely on the proportionate liability provisions of the CLA and “…their apportionment defences must be struck out."

Impact of the Pafburn Appeal Decision

Cross-claims:

Construction professionals and contractors on larger projects, who have contracted out of proportionate liability, will already be familiar with managing litigation without the ability to plead proportionate liability defences. However, one of the clear impacts of the Pafburn Appeal Decision has been the onus shifting back onto the defendants to file cross-claims to pass on liability.

That can be a difficult exercise for a defendant at the start of a matter when they may not have an immediate understanding of the role on the project played by other third parties, the best cause of action to pursue, and may be wary to join third parties due to the consequent cost risk of doing so. This can give rise to limitation issues on longer-tail claims which can accelerate the need to join a cross-defendant without all the necessary material. 

Insurance impacts:

A secondary impact of the Pafburn Appeal Decision has been on the consultants that have been exposed to larger judgments or settlements in the absence of available proportionate liability defences. In recent years, the Australian construction market has been significantly impacted by insolvencies. In circumstances where an insolvent builder is liable for the plaintiff’s losses, without proportionate liability, plaintiffs look to consultants such as engineers, architects and certifiers (and their insurers) to make up the short fall.

This creates upward pressure on insurance premiums, making it difficult in our experience, for some professionals[5] , to obtain insurance cover at all. In that sense, the Pafburn Appeal Decision is giving rise to the same concerns that led to the introduction of the proportionate liability regime in the first place.

High Court Appeal

The upcoming High Court Appeal will provide necessary guidance regarding the future of proportionate liability for construction professionals in NSW.

As part of their appeal to the High Court, the Builder and the Developer contend in summary that:

In response, the Owners submit that the DBPA applies to anyone with substantive control, including developers, not just those performing the work. They agree with the Court of Appeal’s ruling that section 39 of the DPBA prevents delegating liability, and allowing proportionate liability would weaken this protection. Their position is that a non-delegable duty ensures that responsible parties, like head builders and developers, are fully liable for defects, even if they delegate work.

However, the Owners accepted before the Trial Judge that proportionate liability defences may still be available in some circumstances:

“If the Owners Corporation brought proceedings against the certifier [or other consultants], then … the certifier could apportion their liability against the defendants [i.e. Developer and Builder] and sub-contractors, as the certifier was not vicariously liable for them.”[6]

Potential outcomes

We are hopeful that the Court will provide guidance on whether proportionate liability defences are still available to consultants who have not sub-contracted out parts of their work, and to whom the non-delegable duty of care under section 39 of the DBPA would not apply.

In our view, that position is different to that of a Developer or Head Contractor (or even consultants who subcontract part of their work), to whom section 39 of the DBPA is directed.

Conclusion

The submission that proportionate liability ought to apply in some circumstances to claims under section 37 of the DBPA, but not to others, appears to have some force. 

Although the High Court appeal in Pafburn does not directly deal with the position of consultants, the breadth of the principle of non-apportionment is in issue.

Until that has been clarified, construction professionals and their insurers should proactively explore strategies to mitigate the risks, including considering bringing cross-claims in the event that proportionate liability defences are held to be unavailable under the DBPA.