Construction PI Update: Application of the Design and Building Practitioners Act to commercial buildings, and other issues not priced or bargained for

The statutory duty of care in the Design and Building Practitioners Act 2020 (NSW) was originally intended to protect apartment owners against builders. In recent decisions of the NSW Courts, this duty of care has been expanded beyond its original intent.

Despite the fact that the statutory duty of care was originally intended to protect apartment owners against builders, and not for the benefit of “…owners who are developers or large commercial entities,^[1]” recent decisions of the NSW Courts in Boulus, Goodwin, and Pafburn have expanded the duty of care in the Design and Building Practitioners Act 2020 (NSW) (DBPA) beyond its original intent. This means that duties are both owed by, and owed to, wider classes of people, including commercial owners. This equates to additional risk in construction and insurance contracts that was not adequately priced.

Key Takeaways from recent decisions

• Duty is owed by a wider category of person: A “person” that owes a duty of care is not confined to a builder or designer or the traditional supervisor of that work. The duty of care is not to be ‘read down’^[2] meaning that any person that has ‘substantial control’ over building works, including managing directors of companies, are now held to owe a duty.
   
• Duty is owed in respect of a wider category of buildings including commercial: The duty is not restricted to apartment complexes, or residential buildings. It is now owed to owners of commercial buildings, restaurants, workshops, night clubs, warehouses, and any other “building” types as defined under the Environmental Planning and Assessment Act 1979 (NSW) (EPAA). 
   
• Parties defending claims for breaches of the statutory duty of care are now able to identify concurrent wrongdoers and plead proportionate liability defences in the Civil Liability Act 2002 (NSW) (CLA) and seek to limit their liability in that way. 
   
• As a result of the recent decisions, section 37 duty of care claims will become more common for all owners together with the traditional basket of claims in contract, tort and the Australian Consumer Law (ACL). Claims under the DBPA may assist owners in overcoming limitation periods, and the challenges of bringing non-economic loss claims in tort.
   
• Typical construction contracts seek to mitigate risk such as via caps on liability. The expansion of the DBPA’s duty of care may now provide commercial owners with an avenue for circumventing these risk mitigation measures.

Practical risk mitigation strategies

• Insurers should ensure that their premiums are adjusted to reflect the increased risk profile. Builders and engineers may need to price this additional risk into their contracts.
   
• Insurers should tailor their questionnaires regarding the types of projects undertaken by insureds (i.e. domestic, commercial, industrial, etc.). They should also assess the specific roles of their insureds, as certain employees may be involved in a type of “building work” not anticipated by the relevant policy.
   
• For example, a director might be held to owe a duty because of its ability to substantively control building works, even if is not exercising that control. That means that a duty may arise in the absence of a specific conduct or service.
   
• Because of this, directors of construction companies face the risk of not being covered under both Professional Indemnity and D&O policies. PI policies will only respond to claims arising from the provision of professional services, whereas D&O policies typically exclude liability arising from the professional services being provided.
   
• Directors & Officers insurers should consider how their D&O policies will operate in the event of claims against directors, and whether additional exclusions should be incorporated. Brokers will need to ensure that adequate cover is arranged, and does not fall through the cracks. 

Boulus Constructions Pty Ltd v Warrumbungle Shire Council (No 2) [2022] NSWSC 1368

The Boulus decision clarifies what constitutes a “person” that owes a duty of care under the DPBA.

In doing so, Stevenson J reaffirmed his decision in The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659 (Pafburn 2022), where he held that a “person” who has “substantive control over the carrying out of any work” includes a person who was in a position to control “construction work”, irrespective as to whether this control was exercised. This allows owners of buildings subject to the DBPA’s duty of care to seek recourse against parties who controlled, or had an ability to control, the construction work, such as site supervisors and managing directors of construction companies. 

Background

Boulus Constructions Pty Ltd (Builder) brought proceedings against the Warrumbungle Shire Council (Council) for the construction of a retirement village known as the Three Rivers Regional Retirement Community in Dunedoo (Development).

In 2017, the Builder entered into a contract with the Council for the construction of the Development. The Builder initially claimed damages from the Council for breach of the contract and misleading or deceptive conduct, which resulted in the Builder not being paid what it asserts it was owed for the construction work. The Council brought a cross-claim in response against the Builder alleging defective works.

The Council sought leave to amend its cross-claim to allege that the managing director of the Builder, Mr Boulus, and the project site supervisor, Mr McCarthy, were “persons” that owed a duty of care under section 37(1) of the DBPA.

The Council alleged that Mr Boulus exercised control over the building works by way of appointing and controlling project delivery staff, supervising the adequacy of the works performed by project delivery staff, and providing overall supervision and acceptance of the building works. The Council further alleged that Mr McCarthy engaged in the coordination and direction of how the Builder’s works were performed, including by directing and engaging with subcontractors in the performance of their works. On the facts of the case, it does not appear as though Mr Boulus or Mr McCarthy engaged in any building work.

Section 37 provides that a duty is owed by a person “who carries out construction work”.^[3] The definition of construction work includes what is typically considered to be construction work (i.e. preparation of designs and actual building work) and the supervision of it.

The definition of construction work also includes “having substantial control” over the preparation of designs and building work.

The Council asked the Court to find that persons (especially in the case of Mr Boulus) who were not engaged in traditional building work should be liable under the DBPA because they had substantial control over it.

In response the Builder argued that:

1. Mr Boulus and Mr McCarthy were not “persons” falling within the ambit of the DBPA’s duty of care because “every person on a construction site has substantive control or supervision over some building work performed at that site”,^[4] and that the DBPA’s duty of care should only apply to “a person who carries out construction work in their own capacity”; and
    
2. the Development was illegal because no Development Consent or Construction Certificate was issued, and therefore the Builder had a complete defence of illegality to any claim under section 37 of the DBPA.

Decision 

Stevenson J determined that Mr Boulus and Mr McCarthy were “persons” for the purposes of section 37, finding that:

• a person “having substantive control over the carrying out of any work” for the purposes of clause (d) of the definition of “construction work” in s 36(1) of the DBPA included a “person” able to control how the work was carried out, such as a managing director a building company who oversees the selection of the staff working on a development; and
   
• clauses (a) – (c) of the definition of “construction work” clearly denoted a corresponding type of person/practitioner, whereas clause (d) that referred to ‘otherwise having substantial control’ did not.

In response to the Builder’s submission that the construction works were illegal, Stevenson J found that the alleged illegality of the constructions works had no impact on the existence of a statutory duty of care. Despite this, Stevenson J did note that the effect of illegality on the relief sought by Council was not a matter that arose on this application, implying that the illegality of the development may impact the relief that Council will seek later on. 

Roberts v Goodwin Street Developments Pty Ltd [2023] NSWCA 5

In our previous Construction PI Update, we considered Stevenson J’s decision in the matter of Goodwin Street Developments atf Jesmond Unit Trust v DSD Builders (in liq) [2022] NSWSC 624 (Trial Decision). This decision expanded the scope of DBPA such that the DBPA’s duty of care applied to additional classes of buildings other than just class 2 buildings (or mixed-use buildings with a class 2 element).

The Court of Appeal has recently handed down the decision of Roberts v Goodwin Street Developments Pty Ltd [2023] NSWCA 5 (Appeal Decision), dismissing the appeal and confirming that the statutory duty of care applies to all classes of buildings.

Background

The background to this case was canvassed in our previous Construction PI Update which can be found here discussing the Trial Decision.

In brief, the Trial Decision concerned a claim made by Goodwin Street Developments Pty Ltd (GSD) against the first defendant, DSD Builders Pty Ltd (DSD), and the second defendant, Mr Daniel Roberts (Mr Roberts). GSD contracted DSD to construct three residential boarding houses, with this work being overseen by Mr Roberts as a representative for DSD.

The completed works resulted in various defects and damage to the boarding houses. GSD brought a claim against DSD and Mr Roberts seeking compensation for economic loss caused by the defects. In determining whether the DBPA applied to the boarding houses (which were not a class 2 building), Stevenson J found that:

1. the definition of “building work” in section 4(1) of the DBPA that specified Class 2 apartment buildings, has no relevance to the definition of “building work” referenced later in Part 4 of the DBPA (that included residential building work within the meaning of the Home Building Act 1989);
    
2. the Part 4 definition of “building work” was intended to apply solely to Part 4 by virtue of section 36(2);^[5]  and
    
3. the definition of “building” in section 36(1) had the practical effect of expanding the Part 4 definition of “building work”, such that a boarding house (being a non-class 2 building)  could be caught within the tendrils of the section 37 duty of care. 

Appeal Decision 

The Trial Decision was appealed by Mr Roberts on the grounds that the trial judge:

Ground 1) denied Mr Roberts procedural fairness by allowing GSD to reframe their claim in trespass as a claim in in the case, as this claim was not pleaded;

Ground 2) made an error in assessing the damages payable by Mr Roberts; and

Ground 3) made an error in construing “construction work” and “building work” in section 36, within Pt 4 of the DBPA, by including boarding houses.

We have focussed on Ground 3, relating to the Court’s statutory interpretations of “construction work” and “building work” within Part 4 of the DBPA.

Kirk JA and Griffiths AJA found that Ground 3 should be rejected. Whilst the Court of Appeal applied different reasoning, the Judges found that the trial judge correctly construed and interpreted “construction work” and “building work” within Part 4 of the DBPA. Before making its decision, the Court of Appeal considered the legislative development of the DBPA and its intended scope, finding that:

• although the duty of care under Part 4 of the Design and Building Practitioners Bill 2019 (NSW) (Bill) was intended to relate to class 2 residential buildings, this was later expanded to all classes of buildings by way of amendments in the Legislative Assembly to include classes 1 – 10;
   
• the amendments resulted in the removal of the definition of “building” in the Bill, then defining “building” by reference to the EPAA’s definition, which included effectively all residential and commercial building types;^[6] and
   
• Part 4 of the DBPA was always intended to apply to the wider range of buildings per the EPAA definition, rather that other narrower definitions found elsewhere in the DBPA.

In contrast to the trial judge’s findings that the Part 4 definition of “building work” should be interpreted solely by reference to the definition with that Part, i.e. residential building work within the meaning of the Home Building Act 1989, the Court of Appeal preferred a different construction.

It held that the definition in section 4(1) of the DBPA, applied when interpreting the Part 4 definition, but only to the extent that it determined the type of work undertaken, as opposed to determining the type of work undertaken and the types of buildings to which that work relates.

The Court of Appeal’s reasoning outlined the clear intention of the legislature when drafting the DBPA. This was to ensure that the scope of the Part 4 duty of care would cover all classes of buildings, including boarding houses.^[7]

While the intention of the DBPA’s duty of care was to apply to all buildings aside from those owned by developers or large commercial entities, and boarding houses were explicitly intended to be included, the amendments that ultimately made their way into the DBPA do not provide any limitation on the duty of care being owed to developers or large commercial entities as the duty is owed to owners of all types of buildings.

The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWSC 116

The decision of The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWSC 116 (Pafburn 2023) follows on from the previous matter of Pafburn 2022 as discussed here. This decision handed down by Rees J confirmed Stevenson J’s obiter comments in Boulus,^[8] namely that the DBPA was expressed to be subject to the proportionate liability regime within Part 4 of the CLA.

Background

The background to this decision can be found in our earlier Construction PI Update. 

The initial claim was brought by the plaintiff (Owners Corporation) against the builder (Pafburn) and the developer (Madarina) for defective building work in relation to a strata development in North Sydney (Strata Development). 

Pafburn and Madarina had pleaded proportionate liability defences against nine concurrent wrongdoers who were involved in construction work with respect to the Strata Development. The Pafburn 2023 proceedings concerned the Owners Corporation’s application to strike out the proportionate liability defences.

The Proportionate Liability Regime 

The proportionate liability regime allows for a concurrent wrongdoer to limit their liability to the proportion of the damage or loss that the court considers them to be responsible for and a court cannot award damages exceeding this amount. In NSW, the proportionate liability regime is housed within Part 4 of the CLA, applying to:

• claims for economic loss or damage to property in an action for damages arising from a failure to take reasonable care (not including personal injury claims); and
   
• claims for economic loss or damage to property in an action for damages under section 42 of the Fair Trading Act 1987 (NSW) or section 18 of the ACL.

Issue 

The issue before the Court in determining the Owners Corporation’s application was whether the proportionate liability regime applied to the DBPA’s duty of care. The Owner’s Corporation argued firstly that, as section 39 of the DBPA provides that the section 37 duty of care is non-delegable,^[9] the proportionate liability defences put forward by Pafburn and Madarina would run counter to section 39 of the DBPA, as this would be effectively delegating the duty to other concurrent wrongdoers.

Secondly, the Owners Corporation submitted that the operation of section 5Q of the CLA determines liability for breaches of non-delegable duty of care. As such, parties who have sought to delegate certain duties (in this case, Madarina and Pafburn) to other parties (i.e. the concurrent wrongdoers) should be liable for the acts of the concurrent wrongdoers in the same way that an employer is vicariously liable for an employee. 

Decision 

The Court did not fully engage with the issue that the duty of care was non-delegable under section 39 of the DBPA.

Rees J focussed on section 5Q of the CLA that related to a defendant’s “liability in tort”, as opposed to a liability under statute. The section 37 duty of care, while giving rise to a cause of action in tort, was a statutory duty of care as opposed to a tortious duty of care. Therefore, section 5Q did not apply.

Bolstering this interpretation, Rees J turned her attention to the Ipp Report,^[10] which was the report providing the recommendation for the inclusion of section 5Q into the CLA. In her consideration, Rees J stated that the “Ipp Report was clearly concerned with tortious claims for breach of a non-delegable duty, as developed by the common law and potentially expanded by the Courts,” and therefore was not concerned with non-delegable duties created by statute.

Conclusion and implications

While these decisions may seem isolated with respect to their modification of the DBPA, the cumulative effect of each of these decisions bears an impact much greater than the sum of its parts.

The duty of care is now owed by a wider class of persons than initially assumed. Furthermore, the duty of care is owed to a wider class of owner. When applying Stevenson J’s interpretation of the DBPA’s duty of care, which applies to “buildings” as defined under the EPAA, the duty of care applies to owners of all classes of buildings, including boarding houses and commercial buildings, in addition to class 2 residential buildings.

While the duty of care was not intended to protect sophisticated commercial entities, we expect to see DBPA claims now be included in the basket of standard claims (contract, tort, ACL) by commercial owners against builders and designers.

The DBPA further strengthens the prospect of longer tail claims against builders and consultants. For example, previously an owner may have had 6 years from a breach to bring a claim. However, the DBPA provides an avenue for recovery within a 10-year timeframe from the completion date of the construction work. Such an action will not have the same challenges (i.e. requiring vulnerability and reliance) as a negligence action for pure economic loss either.

The question remains as to whether the duty of care will allow for circumvention of contractual limitations of liability in construction contracts in the same way that is argued in ACL claims under the auspices of public policy and consumer protection.

Moving forward, insurers and construction professionals should be aware of the expanded scope of the duty, as the duty is owed by a wider range of “person” to a wider range of “owner”, taking care to factor any potential liability of insureds into their policies, and construction contracts, as the duty of care now attaches to all buildings^[11] and is owed by all parties who engage in construction work as defined.

The practical strategies outlined at the start of this article will hopefully be of some value to insurers, brokers, and construction professionals.

---

[1] New South Wales, Parliamentary Debates (Hansard), Legislative Assembly, 23 October 2019, page 1663 (The Honourable Kevin Anderson).
[2] Boulus at [61].
[3] Section 37(1) of the DBPA.
[4] Boulus Constructions Pty Ltd v Warrumbungle Shire Council (No 2) [2022] NSWSC 1368 at [30].
[5] Section 36(2) relevantly provided that, in Part 4, a reference to “building work” applies only to building work relating to a building within the meaning of Part 4.
[6] An “associated structure” is defined under the Local Government Act 1993 (NSW) as a “carport, garage, shed, pergola, verandah or other structure designed to enhance the amenity of a moveable dwelling and attached to or integrated with, or located on the same site as, the dwelling concerned.”
[7] New South Wales, Parliamentary Debates (Hansard), Legislative Assembly, 23 October 2019, page 1663 (The Honourable Kevin Anderson).
[8] Boulus at [64].
[9] Section 39 of the DBPA states that “A person who owes a duty of care under this Part is not entitled to delegate that duty”.
[10] Review of the Law of Negligence (Final Report, September 2002).
[11] Other than those defined manufactured homes, moveable dwellings or associated structures under the Local Government Act 1993 (NSW).