Six Years After the Opal Tower: The High Court’s Pafburn Decision Brings Construction Law Full Circle

From crisis to reform, this landmark judgment honours the DBPA’s objectives, while leaving key questions for consultants unresolved.

The handing down of the High Court judgment in Pafburn nearly six years to the day of the Christmas Eve evacuation of the Opal Towers feels symbolic.  That event was one of many in 2018 that signified a building defects crisis in NSW, which in turn led to various investigations that ultimately spawned the Design and Building Practitioner’s Act in 2020. Its remit? “To address the broader public concerns regarding widespread and serious defects in high rise residential construction in New South Wales.”[1]

In the context of those historical issues the High Court has done its best to wrestle with, and ultimately fulfil the consumer protection objectives underlying the DBPA. 

In doing so, the High Court[2] dismissed the applicants’ appeal to plead proportionate liability defences under Part 4 of the Civil Liability Act 2002 (NSW) (CLA) regarding claims for damages arising from a breach of section 37 of the Design and Building Practitioners Act 2020 (NSW) (DBPA).[3] Whilst the judgment  doesn’t provide an answer as to the extent that sub-contractors or other consultants  may be entitled to rely on proportionate liability defences, it has provided some much-needed clarity on how section 37 operates following our earlier article The Pafburn Precedent: Liability in Construction | Clyde & Co. In this article, we outline some practical steps each stakeholder can take to adapt to the new legal landscape.

Key takeaways

• Personal liability for subcontracted work: Builders will be fully responsible for economic loss caused by construction defects, regardless of subcontractors’ involvement.

• Proportionate liability unavailable: Under the DBPA, a builder or developer who is responsible for a whole project, cannot apportion liability to subcontractors for breaches of section 37, even for specialised work  which is not within their experience.

• Increased reliance on cross-claims: Builders and developers should (continue to) file cross-claims to transfer liability for defective building work performed by subcontractors.

• Impact on consultants: No concrete determination has been made regarding consultants’ ability to plead proportionate liability defences, but arguably they can for defective construction work that was not within their scope.

• Rising costs and risks: Head contractor builders and developers should expect increased exposure to claims under section 37 of the DBPA as the ‘buck stops with them’, along with rising litigation costs and higher insurance premiums.

• Insurance response: Insurers (and builders) must assess and scrutinise the financial positions of their insureds and contracting counterparties, to manage risks posed by insolvencies. Builders should also ensure that their interests are noted on all sub-contractor insurance policies.

A Summary of Pafburn

The Owners Corporation (Owners) of a strata development 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 (Section 37 Duty). The Builder built the development, and the Owners alleged that the Developer supervised, co-ordinated and project managed and had substantive control over the carrying out of the building work by the Builder.

The Section 37 Duty specifies that (our emphasis):

(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.

The DBP Act defines ‘construction work’ to mean any of the following:

(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).

The Builder and the Developer advanced proportionate liability defences, naming several concurrent wrongdoers engaged by the Builder, including the waterproofing sub-contractor, the aluminium composite panel manufacturer, the architect, the principal certifying authority, and the local council.

We note that proportionate liability defences are less onerous than cross-claims, as they allow a party to shift liability without the added financial risks, such as the costs of pursuing a cross-claim against potentially impecunious cross-defendants. Proportionate liability means that a party will only be responsible for its proportional share of the loss and damage that it caused. So that, if, for example, a plumbing subcontractor is held responsible for defects but enters liquidation, the builder would not be liable for the plumbing subcontractor’s proportion of liability, but instead the principal would be left to recover that amount in the liquidation.

In response, the Owners contended that the Section 37 Duty was a ‘non-delegable duty’, meaning the Builder and Developer were wholly and vicariously responsible for the subcontractor’s negligence.

At first instance, the Supreme Court held that the Section 37 Duty was not a “tort” for the purposes of s 5Q of the CLA,[4] such that the Builder and the Developer were not “vicariously liable”, and therefore could raise proportionate liability defences.

On appeal, the Court of Appeal disagreed determining that:

• liability for breaching the Section 37 Duty 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."

This changed the way parties ran construction disputes. Namely, parties stopped pleading proportionate liability defences and started issuing cross-claims.

High Court Decision

The question before the High Court was whether the proportionate liability scheme under the CLA applies to a claim for damages for a breach of the Section 37 Duty.

In simple terms, the Owners’ position was as follows. (1) Section 37 of the DBPA gives rise to the Section 37 Duty; (2) Section 39 of the DBPA dictates that the Section 37 Duty “must not be delegated” and is in effect a “non-delegable duty”; (3) Section 40 of the DBPA precludes the Section 37 Duty from being contracted out of;(4) Section 41 of the DBPA confirms that the Section 37 Duty is subject to the CLA; (5) Section 5Q of the CLA governs the Section 37 Duty specifically as it is a “non-delegable duty,” meaning that a builder who subcontracts works to another party, retains responsibility for that work, just as if the builder had done the work itself.

The key argument advanced by the Developer and Builder was that the Section 37 Duty is focused on who carries out the construction work. And construction work can mean several things from physically doing the building work, to supervising, or co-ordinating that building work. Thus, if a principal contractor only ‘supervises’ or ‘coordinates’ the carrying out of building work and arranges for a subcontractor to carry out the work, then the Section 37 Duty is owed by the principal contractor for ‘supervising, coordinating etc,’ but not in respect of the carrying out of the building work itself.[5]

Majority Judgment

By majority, Gageler CJ, Gleeson, Jagot and Beech-Jones JJ agreed with the Owners and held that the proportionate liability scheme is not available for the following reasons:

• Contrary to the Builder’s and Developer’s claims, Section 37 creates a duty that cannot be delegated. This means the person responsible must ensure that anyone doing the work takes reasonable care.[6] For example, if a head contractor hires a subcontractor to install electrical systems, the head contractor must ensure the work is done correctly. If the subcontractor’s work is faulty and causes damage, the head contractor is still liable;

• as the Builder and Developer were responsible for supervising / co-ordinating construction of the entire building, their duty extended to all defects arising from the construction works, even if they didn’t physically do the work. By comparison, a plumbing sub-contractor, on the other hand, would only be liable for plumbing defects within their scope of work[7].

The majority therefore held that:

• If the Developer and Builder are liable under Section 37 of the DBPA, their liability is to be treated as if they are directly responsible (vicariously liable) for the negligence of the subcontractors that they engaged to perform their work;[8]

• apportionment, as between the Builder and Developer on the one hand and their subcontractors on the other, is not available in circumstances where the Builder’s and Developer’s responsibility concerned construction of the building as a whole. This duty cannot be discharged by the exercise of reasonable care in the selection of skilled sub-contractors, so that the Builder and Developer are left with cross-claims for contribution against those other parties who they say breached a duty to them;

• Whilst the majority did not specifically address whether proportionate liability defences remain available to consultants and other subcontractors,  we infer that restrictions on apportionment are not intended to apply.[9]

Dissenting Judgment

In dissent, Gordon, Edelman and Steward JJ, considered the proportionate liability regime applied to claims regarding damages for breach of the Section 37 Duty.

In summary, their Honours:

• disagreed that the term “carrying out construction work” under section 37 should extend beyond the actual carrying out of construction work by a person or their agent to include strict liability for work carried out by a sub-contractor;[10] and

• disagreed with the view that section 39 of the DBPA, which prohibits the delegation of the duty of care under section 37, elevates that duty into a common law "non-delegable duty",  Instead, their Honours held that section 39 had a more limited purpose, which was: “to ensure that a person cannot escape liability by assigning any part of the work that the person is carrying out to another person.”[11] 

Impact of High Court Decision

The High Court’s decisions means that:

• building practitioners and developers who are sued for breach of duty under section 37 of the DBPA will be held personally liable for all economic loss resulting from any defective work performed by their subcontractors;

• accordingly, building practitioners are not able to raise a defence of proportionate liability in respect of defective work of their subcontractors. However, the decision does not comment on the ability or otherwise of sub-contractors or other consultants to raise proportionate liability defences against head-contractors, etc.;

• to pass on liability for defective building works carried out by a subcontractor, building practitioners would be well advised to consider filing cross-claims or commencing separate proceedings for contribution; and

• to limit personal liability, building practitioners need to precisely define their scope of work by contract, to make it clear what work they are and are not performing.

The minority, Gordon, Edelman and Steward JJ, alluded to the real-world challenges practitioners will now face in light of the majority’s decision. For instance, principal contractors who often lack expertise in specialised trades, such as plumbing or electrical work, but depend on carefully chosen subcontractors. Their Honours considered it would be “an odd result” if a principal contractor, who had carefully chosen a specialist subcontractor, was held personally liable for any careless work that a specialist subcontractor performed. [12] As such, unless the field of a specialised sub-contractor’s work is written out of the builder’s scope of work, the builder’s inability to plead a proportionate liability defence exposes them to “significantly increased risks, costs and insurance premiums”.[13] We refer to our assessment of similar impacts in our previous article.

Conclusion

Construction professionals and insurers should take proactive steps to mitigate the risks associated with the High Court’s decision in Pafburn.

The decision confirms that head contractors and developers retain vicarious liability for the work of their sub-contractors and need to consider filing cross-claims or commencing separate proceedings to pass on liability for defective work.

Other construction professionals may wish to follow suit in terms of cross-claims, until the court clarifies the extent to which proportionate liability defences may be available.

Additionally, it remains important that head contractors clearly define by contract their scope of work for which they are prepared to accept responsibility, undertake rigorous financial scrutiny of all subcontractors, and ensure that their interests are properly noted on all applicable sub-contractor insurance policies.

Only by taking such steps will construction professionals be able to protect their interests in the face of increased personal exposure, as they navigate the ever-evolving world of construction reforms.