Introduction

The High Court determined that the duty of care under the DBPA is a non-delegable duty. This means that developers and head contractors cannot rely on proportionate liability defences under the Civil Liability Act 2002 (NSW) (CLA) to limit their liability for breach of this duty by delegating work to subcontractors. Consequently, developers and head contractors in NSW are now more likely to be held personally liable for the full economic loss caused by building defects arising from the negligent construction work of subcontractors. This expansion of liability has considerable implications for the construction industry in NSW.

Background to the Pafburn Case and Building Defects

The case of Pafburn Pty Limited & Anor v The Owners – Strata Plan No 84674 arose from a claim by the owners corporation of a residential building in North Sydney against the developer, Madarina, and the head contractor, Pafburn. The owners corporation alleged that Madarina and Pafburn breached their statutory duty to exercise reasonable care to avoid economic loss caused by defects in the building’s construction. It was claimed that unremedied building defects existed in the residential development, leading to the litigation.

The Central Legal Question: Proportionate Liability and Non-Delegable Duty

The core legal question in Pafburn revolved around the interaction between the Design and Building Practitioners Act 2020 (DBPA) and the Civil Liability Act 2002 (CLA) in NSW. Specifically, the High Court considered whether developers and head contractors could rely on the proportionate liability scheme under Part 4 of the CLA to limit their liability for breaches of the duty of care under the DBPA. The defendants argued that if they were found liable, their liability should be apportioned with other concurrent wrongdoers, such as subcontractors, certifiers, and the local council. This defence was based on the premise that they should only be responsible for their share of the blame for the alleged building defects.

Key Findings of the High Court in Pafburn

High Court Dismisses Proportionate Liability for Developers under DBPA

In Pafburn, the High Court delivered a significant judgment regarding proportionate liability for developers and head contractors in NSW. In a 4:3 majority decision, the High Court ruled that the proportionate liability scheme within the CLAdoes not extend to claims brought under the DBPA. This means developers and head contractors cannot rely on the proportionate liability defence to reduce their liability for breaches of the DBPA duty of care.

The High Court determined that developers and head contractors cannot limit their liability by arguing that other parties, such as subcontractors or certifiers, also contributed to the defects. The court’s split decision clarifies that developers and head contractors are potentially liable for the full extent of losses arising from breaches of their duty under the DBPA. This ruling marks a departure from previous understandings and has significant implications for liability in construction defect claims.

DBPA Duty of Care as Non-Delegable Duty

The High Court’s majority in Pafburn clarified that the duty of care imposed by section 37(1) of the DBPA is a non-delegable duty. This classification means developers and head contractors cannot avoid or limit their liability by delegating construction work to subcontractors. The Court’s view is that the duty requires developers and head contractors to ensure reasonable care is taken in construction work, regardless of who performs the work.

The High Court reasoned that because the duty is non-delegable, developers and head contractors are to be treated as if they are vicariously liable for any failure to take reasonable care by their subcontractors. Therefore, if subcontractors are negligent, the developer or head contractor who owed the duty of care is liable for the resulting defects and economic loss. This interpretation reinforces that the responsibility for ensuring building work meets the required standards ultimately rests with the developer and head contractor, irrespective of delegation.

Significant Expansion of Liability for Developers & Contractors

Developers Now Liable for Subcontractor Negligence

The High Court’s decision in Pafburn has significantly broadened the scope of liability for developers and head contractors in NSW concerning building defects in residential building work. Due to the ruling that the duty of care under section 37(1) of the DBPA is non-delegable, developers and head contractors can no longer rely on the defence that the defective work was carried out by subcontractors. This means that they cannot delegate their duty to ensure reasonable care is taken to avoid economic loss caused by defects.

Developers and head contractors are now likely to be held fully liable for the negligence of their subcontractors. The High Court determined that their liability for breach of the duty of care is to be determined “as if the liability were the vicarious liability” for the negligent work of subcontractors. Effectively, developers and head contractors are considered “100% personally liable” for defects arising from construction work, even if they delegated the actual work to subcontractors and only had a supervisory role. This represents a major shift from previous understandings of proportionate liability in construction defects claims.

Increased Risks, Costs, and Insurance Implications for the Construction Industry

The Pafburn decision is expected to have “dramatic” real-world consequences for the construction industry in NSW. The expansion of liability for developers and head contractors will likely lead to increased risks and costs associated with residential development. As the minority in the High Court suggested, this ruling may result in significantly increased insurance premiums for developers and contractors.

This is because developers and head contractors can no longer limit their liability by arguing that subcontractors were responsible for the defects. They now face a greater exposure to financial risks associated with building defects litigation and claims for breach of the duty of care under the DBPA. To mitigate these increased risks, developers and head contractors may need to implement more rigorous due diligence processes when selecting subcontractors and enhance their supervision of construction work. They may also need to review their contractual protections and insurance coverage to address the expanded scope of their liability.

Practical Implications and Steps for Developers and Head Contractors

Enhanced Due Diligence in Subcontractor Selection and Supervision

In response to the High Court’s decision, developers and head contractors should enhance their due diligence processes when selecting subcontractors. Given the expanded scope of liability, it is crucial to engage subcontractors and consultants with a proven track record of quality work. This is particularly important when specialist disciplines or design-related elements are subcontracted, or when engagement terms offer limited recourse or insurance coverage.

To mitigate risks associated with subcontractor negligence, developers and head contractors should:

• Perform thorough due diligence: Conduct comprehensive checks on potential subcontractors, assessing their expertise, past performance, and financial stability. This process should be particularly rigorous for subcontractors handling critical aspects of the construction work.
• Closely supervise subcontractor performance: Implement robust monitoring systems to oversee subcontractors throughout each stage of the construction work. Regular inspections and quality assurance checks can help identify and rectify defects early, reducing the likelihood of significant issues arising later.

By implementing enhanced due diligence and supervision, developers and head contractors can proactively manage risks and ensure higher standards of construction work, thereby mitigating their expanded liability for building defects.

Review and Strengthen Contractual Protections and Insurance

The decision necessitates a review of existing contractual protections and insurance arrangements for developers and head contractors. With the increased risk and potential costs associated with building defects litigation, it is essential to reassess and strengthen these safeguards.

Developers and head contractors should consider the following actions:

• Strengthen contractual protections: Seek additional contractual protections from subcontractors, such as comprehensive warranties and robust security measures. These provisions should clearly define subcontractor responsibilities and liabilities in relation to construction defects.
• Review insurance coverage: Reassess insurance policies to ensure adequate coverage in light of the expanded liability for subcontractor negligence. It may be necessary to increase coverage limits or obtain specific insurance products that address the risks highlighted by the decision.
• Utilize rigorous quality assurance processes: Implement more stringent quality assurance measures, including peer reviews and third-party inspections. Proactive identification and rectification of defects during construction can minimise potential claims and associated costs.

By proactively reviewing and strengthening contractual protections and insurance coverage, developers and head contractors can better manage the financial and legal risks arising from the High Court’s decision.

Conclusion

The High Court’s decision in Pafburn has significantly altered the landscape of liability for developers and head contractors in NSW. This ruling clarifies that the duty of care under the Design and Building Practitioners Act 2020 is non-delegable, preventing developers and head contractors from using proportionate liability defences under the Civil Liability Act 2002  to limit their responsibility for building defects. As a result, developers and head contractors are now more likely to be held fully liable for economic losses caused by defects arising from negligent construction work, even when subcontractors are at fault.

Given these significant implications, it is crucial for developers, head contractors, and owners corporations to fully understand their rights and obligations under the DBPA and in light of the Pafburn decision. For expert guidance on navigating these complex changes and ensuring you are well-positioned to manage risks and liabilities, contact our team at PBL Law Group today for tailored legal advice.

Frequently Asked Questions