Australia’s highest court delivers big win for building owners in Pafburn
Australia’s highest court has delivered a significant win to owners of apartments and other lots within strata schemes and owners of non-residential buildings with its decision in Pafburn v The Owners – Strata Plan No 84674. Not only did the court give effect to New South Wales’ new statutory duty of care to avoid economic loss arising from building defects, but it also held that the non-delegable nature of the duty meant that those who owed the duty could not discharge it by merely exercising care in selecting appropriate subcontractors to perform building work to which the duty applies. Instead, those who owe the duty must ensure that subcontractors and others entrusted to perform building work do so with due care.
The decision is controversial: the court split 4:3, differing primarily on the impact of the provision that states the duty cannot be delegated.
The decision is good for owners of apartments and non-residential lots within mixed-use strata developments because the owners corporation (which represents the interests of such owners in the strata scheme’s common property) will now have a right to sue in negligence if it suffers economic loss due to defects in the common property.
The decision is also good for subsequent owners of non-residential property because it confirms the new statutory duty of care fills a gap in the general law of negligence regarding the liability of builders and others involved in the design and construction of commercial and other non-residential buildings for economic loss arising from building defects.
The decision is bad for developers, builders and others involved in the design and construction of buildings within New South Wales because it effectively nullifies the NSW proportionate liability scheme by treating those who owe the duty as if they are vicariously liable for the negligence of the subcontractors they engage to perform tasks covered by the duty. The burden of bringing legal proceedings against the negligent subcontractors to recover their proportionate share of the loss will now fall on the person who owes the statutory duty of care rather than the building owner. The cost of professional indemnity insurance for those who owe the statutory duty of care will increase because of the High Court’s decision.
The decision should inform the drafting of the NSW Government’s new Building Bill, which is proposed to consolidate and replace various existing legislation, including the Design and Building Practitioners Act (the DPBA), the Home Building Act 1989, the Building and Development Certifiers Act 2018 and the Architects Act 2003.
Although the decision concerns NSW legislation, it has implications for other jurisdictions that are considering enacting a similar statutory duty of care, including Victoria.
Proportionate liability
Readers will recall that about 20 years ago, all Australian states and territories enacted proportionate liability schemes for claims for economic loss or property damage arising from negligence. The proportionate liability schemes were enacted as part of the overhaul of Australia’s negligence laws in response to the so-called “insurance crisis” of 1999-2002, during which the cost of public liability insurance and professional indemnity insurance rose to unsustainable levels.
Although the legislation differs in each state and territory, each scheme replaced the common law concept of solidary liability – where a wrongdoer who negligently caused a claimant loss was liable for the whole of that loss, even if the loss was also caused by other wrongdoers – with proportionate liability, where the liability of such a wrongdoer is limited to its proportionate share of the loss, as determined by the court having regard to each wrongdoer’s responsibility for the loss.
This was a fundamental change to Australia’s negligence laws, as its practical effect was to transfer from a defendant to the claimant the burden of recovering from other concurrent wrongdoers.
Gap-filling role of new statutory duty of care
The DPBA’s new statutory duty of care is a further fundamental change to Australia’s negligence law, in relation to liability for building defects. The new statutory duty of care overcomes a gap that emerged in the legal remedies available to subsequent owners of non-residential buildings containing latent building defects. To understand the intent of the new statutory duty of care, it is useful to understand the gap in Australia’s general negligence law that it fills.
The developer or the original owner of a building will typically be a party to the contract for its construction. Thus, the developer or original owner can protect itself against losses arising from building defects by including in the building contract a contractual promise or warranty from the builder that the building will be free of defects at completion and/or that all defects identified at or after completion will be rectified. Accordingly, the developer or original owner will ordinarily have a contractual remedy against the builder if the building is defective.
It is rare for the developer or original owner to transfer this contractual remedy to a subsequent purchaser of the land or an apartment, townhouse or other ‘lot’ within a strata scheme, or to the owners corporation for the common property. Accordingly, subsequent owners, including owners corporations, are typically left without a contractual remedy against the builder and are forced to rely on non-contractual remedies
Most Australian states and territories filled this gap for residential buildings by enacting legislation that:
implies statutory warranties into every contract to undertake residential building work, that the work will be done with due care and skill and in accordance with the contract’s plans and specifications, and will be fit for its intended purpose; and
makes these statutory warranties “run with the property”, so that the benefit of the warranties is available to subsequent owners who are not a party to the building contract; and/or
enables owners of defective buildings to access insurance funds if residential building work is incomplete or defective (in some jurisdictions) or if the owner is unable to have the work completed or rectified because of the contractor's insolvency, death, or disappearance (in other jurisdictions).
However, these statutory warranties and insurance schemes only apply to residential building work (as variously defined in the relevant jurisdictions). There are no statutory warranties that run with the property for non-residential building work or for the non-residential components of mixed-use developments that incorporate both residential and commercial components.
Further, these statutory warranties are generally given only by the builder and its subcontractors. They are not generally given by a building certifier or surveyor who issues statutory building approvals or by a superintendent, architect, engineer, or other person who administers a residential building contract. Whether developers give the warranties depends on the circumstances and the jurisdiction.
The only remedy available to most subsequent owners of non-residential buildings (or the non-residential parts of mixed-use buildings) was in negligence. However, there was a significant gap in the remedy that negligence law provided. The DPBA’s new statutory duty of care sought to fill this gap.
The gap arose because the law of negligence draws a distinction between:
financial loss suffered because of personal injury or property damage; and
financial loss suffered other than because of personal injury or property damage, which the law refers to as “pure economic loss”.
Subsequent owners of defective buildings can suffer both forms of loss. For example, if the defect causes the building to collapse or catch fire, this could cause personal injury to the subsequent owner or damage to the subsequent owner’s other property (e.g., furniture and other contents within the building). However, most building defects won’t lead to collapse, fire or other dangerous outcomes, and most dangerous defects are discovered before the building collapses or catches fire. As such, it is more common for the loss to take the form of
diminution in the value of the building;
rectification costs;
additional operating or maintenance costs; and/or
the loss of rent and/or the cost of alternative accommodation while the defects are repaired.
The law categorises these more common forms of loss as pure economic loss.
The distinction is important because negligence law provides a remedy for pure economic loss in fewer circumstances than for personal injury or property damage.
Recovering pure economic loss in negligence
Negligence law only provides a remedy when a duty of care is owed.
A duty of care is owed to a subsequent owner who suffers personal injury or property damage if the injury or damage was a reasonably foreseeable consequence of failing to carry out the construction work with reasonable care.
However, for pure economic loss, the fact that it may have been reasonably foreseeable is not enough for a duty of care to be owed. Negligence law in Australia requires ‘something more’ than reasonable foreseeability to impose a duty of care to avoid pure economic loss. Defining exactly what more is required has proven to be an elusive quest for Australia’s highest court (and courts in other countries) – the High Court’s approach continually evolves as new factual circumstances come before it for a decision.
Its current approach considers whether the relationship incorporates one or more ‘salient features’ that point to a relationship in which such a duty of care should be owed. The claimant’s vulnerability, in terms of its ability to protect itself from the economic consequences of the defendant’s lack of care, weighs heavily in the analysis. As does the degree to which the defendant has assumed responsibility to the claimant for pure economic loss flowing from latent defects, and known reliance on the defendant by the claimant. The extent to which the building contract details the builder’s responsibilities for defective work and/or limits the builder’s liability in tort to the original owner can significantly influence the outcome of the analysis.
The current approach is generally considered to be highly unsatisfactory, including by Australia’s High Court. In the most recent High Court case involving a claim in negligence for pure economic loss, one High Court judge described the initial High Court decision that allowed the recovery of pure economic loss in negligence as a mule, from which no further breeding should occur (see Mallonland Pty Ltd v Advanta Seeds Pty Ltd per Edelman J).
Remarkably, in 1995, the High Court found that a builder of a residential house owed a duty of care to a subsequent owner to avoid pure economic loss caused by building defects in the case of Bryan v Maloney, contrary to weighty authority to the contrary. This decision has been the subject of sustained criticism, and courts (including the High Court) have generally backpedaled from it ever since.
For example, in 2004, the High Court in Woolcock Street Investments Pty Ltd v CDG Pty Ltd noted that Bryan v Maloney had been overtaken, at least to a significant extent, by statutory protections for purchasers of residential dwellings that turn out to be defective; and that its decisions in subsequent cases had caused Bryan v Maloney to rest on a defective doctrinal basis. Indeed, one court member went further, saying there was reason to question the correctness of Bryan v Maloney.
In Woolcock, the High Court found that the engineering firm that carelessly designed the faulty foundations of a commercial building did not owe a duty of care to avoid pure economic loss because of defects to subsequent purchasers of the building. The ability of both the original and subsequent owners to take steps to protect themselves from the engineer’s negligence and, therefore, their lack of vulnerability was a decisive factor in the court’s decision.
The issue of a builder’s liability in negligence to subsequent owners for building defects came before the High Court most recently in the 2014 case of Brookfield Multiplex Ltd v Owners Corporation Stata Plan 61288. This case concerned a high-rise mixed-use retail, residential and serviced apartment building in Chatswood, New South Wales. The relevant defects concerned the common property for the serviced apartments, which vested in the owners corporation when the strata plan was registered. Because the serviced apartments were for commercial use, the statutory warranties for residential building work did not apply, and the owners corporation was left only with a negligence claim against the builder.
The court unanimously held that the builder did not owe the owners corporation a duty of care to avoid pure economic loss resulting from defects in the common property. The detailed provisions concerning defects in the building contract meant the builder did not assume, and the developer could not be taken to have relied upon the developer assuming, responsibility for pure economic loss beyond that contemplated by the building contract. Similarly, the contractual promises from the developer in the sale contracts regarding the quality of building work and the repair of defects for the serviced apartments demonstrated the subsequent purchasers were not sufficiently vulnerable.
The current Chief Justice of the High Court remarked that the continuing authority of Bryan v Maloney should be confined to the category of case in which the building is a dwelling house and the subsequent owner falls within a class of persons incapable of protecting themselves from the consequences of the builder’s want of reasonable care. Outside that category of case, he said it should now be acknowledged that a builder has no duty in tort to exercise reasonable care in executing the building work to avoid a subsequent owner incurring the cost of repairing latent defects in the building. That is because there is no reason to consider that subsequent owners cannot ordinarily be expected to be able to protect themselves against incurring economic loss of that nature by virtue of the freedom they have to choose the price and non-price terms on which they are prepared to contract to purchase
Noting that the remedy provided to subsequent purchasers of dwelling houses by Bryan v Maloney had been overtaken by the statutory warranties contained in residential building legislation, the now Chief Justice further remarked that “if legal protection is to now be extended, it is best done by legislative extension of those statutory forms of protection.” In other words, the Court declared that it was up to Parliament, not the Court, to decide whether builders and others involved in the building of non-residential buildings should be liable to subsequent owners for the economic cost of building defects arising from their lack of care.
DPBA Act’s new duty of care
The NSW Parliament responded to this challenge by enacting Part 4 of the Design and Building Practitioners Act 2020 (the DPBA).
It is apparent from the second reading speech in the Legislative Assembly that the new statutory duty of care established by Part 4 was designed to overcome the effect of the High Court’s decision in Brookfield Multiplex and provide subsequent owners and owners corporations with a right to recover economic loss arising from building defects in non-residential buildings.
The new duty of care is owed by every “person who carries out construction work”. The broad definition of construction work means the new duty is owed by:
the builder;
its subcontractors;
designers of building work;
manufacturers or suppliers of building products used for building work; and
project managers and others who coordinate, supervise or otherwise substantively control the above-mentioned work.
The responsible minister’s second reading speech explained how the new duty would entitle an owner to damages for the breach of the duty as if the duty were established by the common law. He said, “[t]his means that while a duty of care will be automatically owed, any person who wants to proceed with litigation will be required to meet the other tests for negligence established under the common law and the Civil Liability Act 2002. This includes determining that a breach of the duty occurred and establishing that damage was suffered by the owner as a result of that breach. The hurdle of establishing that a duty is owed, however, will no longer be required, saving valuable court time and expense for the owner.”
There is no reference, however, in the second reading speech or the Hansard concerning the proposed amendments to Part 4 that Parliament wanted to deny a person who owed the duty its right, if it is one of a number of concurrent wrongdoers, to limit its liability to its proportionate share of the loss. Indeed, the last sub-section of Part 4 simply states: “[t]his Part is subject to the Civil Liability Act 2002.” If Parliament had intended that those who breach the new duty would bear solidary liability, rather than proportionate liability, for loss arising from the breach, you would expect Parliament to have expressly said so.
But Parliament has achieved something quite close to this outcome, by making the new duty “non-delegable”.
Non-delegable duty
Part 4 of the DPBA also includes section 39, which states: “[a] person to who owes a duty of care under this Part is not entitled to delegate that duty.”
This does not mean that the person who owes the duty cannot delegate the tasks to which the duty of care attaches. Rather, it means that the person who owes the duty:
may procure the performance of the tasks by another person, but
cannot discharge the duty merely by taking reasonable care in arranging for another person to perform the tasks, because the content of the duty is to ensure that the other person who actually performs the task takes reasonable care.
The law calls such a duty a “non-delegable duty”. As explained by the High Court, liability for breach of a non-delegable duty is generally considered to be “direct” or “personal” liability because the person subject to the duty is taken to have breached it by not ensuring that reasonable care is taken by the person who actually performs the task. This direct or personal liability differs from “vicarious” liability in which a person (e.g, an employer) is taken to be liable for another person’s (e.g, an employee’s) breach of a duty of care owed by that other person (i.e the employee) in respect of the act or omission constituting the wrong.
However, the concept of vicarious liability is relevant to an apportionable claim involving a breach of a non-delegable duty because of section 5Q of the Civil Liability Act 2002. This section, which is headed “Liability based on non-delegable duty”, states:
“(1) 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.
The effect of section 5Q, on the liability created by the new statutory duty of care, is that a person who owes the duty who arranges for the relevant work to be performed by someone else will be treated as if they are vicariously liable for any failure to take reasonable care by such persons.
By way of example, suppose the court had determined in Pafburn that each of the alleged concurrent wrongdoers had breached their duty of care to the owners corporation and that the body corporate’s economic loss arising from building defects was to be apportioned between the wrongdoers as shown in the boxes for each party:
Let’s also assume that the principal certifier and local council were exercising their statutory functions, rather than a task delegated or entrusted to them by the developer and/or or builder. In this scenario:
the builder would be treated as vicariously liable for waterproofing subcontractor’s share of the loss (10%) and for the ACP subcontractor’s share of the loss (10%), as well as directly liable for its own share of the loss (50%), bringing its total liability to the owners corporation to 70% of the loss;
the developer would be treated as vicariously liable for the builder’s share of the loss (70%) and for the architect’s share of the loss (10%), as well as directly liable for its own share of the loss (10%), bringing its total liability to the owners corporation to 90% of the loss;
the principal certifier would be liable to the owners corporation for 5% of the loss; and
the local council would be liable to the owners corporation for 5% of the loss.
The owners corporation would be entitled to recover the 70% for which the Builder is liable from either the builder or the developer, but not both.
Both the builder and the developer can limit their liability to the owners corporation by apportioning liability to the principal certifier and the local council, as neither delegated the construction work to these parties. But they cannot limit their liability by apportioning part of their liability to those persons to whom each delegated or otherwise entrusted with part of the construction work.
An odd result?
The minority in Pafburn observed that it would be an ‘odd result’ if a head contractor without expertise in a specialist area of construction work might be personally – or even criminally – liable for the careless work of a specialist subcontractor that the main contractor had carefully chosen.
But is it really an odd result that a head contractor assumes responsibility for the acts and omissions of its subcontractors? Head contractors contractually assume this liability to their clients every day. The fact that the liability is also assumed towards subsequent owners under the new statutory duty of care isn’t odd, given the liability gap that the NSW Parliament decided to fill by enacting the new duty.
The suggestion that the head contractor could be exposed to criminal liability under the DPBA for the acts or omissions of its subcontractors is mistaken. As the majority explained, the obligations under the DPBA to which criminal liability attaches are not imposed on a person who carries out construction work by “supervising, coordinating, project managing or otherwise having substantive control over” the work. Rather, the offence provisions are imposed only on the persons specified in the provisions, which operate according to their own terms.
The future
The enactment of the DPBA’s new statutory duty of care attracted significant attention given the gap in the remedies available under Australian negligence law that it sought to fill. Less attention-grabbing was the associated provision that prohibited the delegation of the duty. Few foresaw that this provision would effectively oust the effect of the proportionate liability scheme.
The NSW Government is proposing to simplify its building legislation by enacting a new Building Bill that will consolidate and replace various existing legislation, including DPBA. A draft of the new Building Bill was published for consultation purposes on 6 August 2024, before the High Court’s decision in Pafburn.
Parliamentary Counsel ought to take the opportunity to further clarify the drafting that split the High Court, for example, by amending the section that imposes the new duty as follows:
A person who carries out building work has a duty to:
(a) exercise reasonable care to avoid economic loss caused by defects—
(ai) in or related to a building for which the work is carried out; and
(bii) arising from the building work; and
(b) ensure that reasonable care is taken by any other person to whom the building work is delegated or otherwise entrusted.
The non-delegation section could also be clarified (including by way of a note), as follows:
A person who owes a duty of care under this part:
(a) is not entitled to delegate the duty; and
(b) cannot discharge the duty by merely exercising reasonable care in arranging for another person to carry out the building work.
Note—
Section 5Q of the Civil Liability Act 2002 provides that 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.
Although the proportionate liability impact of the non-delegable nature of the duty may not have been fully appreciated by the politicians when it was enacted, it would be a courageous move for them to now seek to wind back the pro-consumer outcome of the High Court’s decision.
What you should do when contracting
The statutory duty of care applies broadly. As already mentioned, it is owed by:
the builder;
its subcontractors;
designers of building work;
manufacturers or suppliers of building products used for building work; and
project managers and others who coordinate, supervise or otherwise substantively control the above-mentioned work (including developers)
If the proposed new Building Bill is enacted in the form of the consultation draft, the statutory duty of care will be extended to building certifiers, local councils as approval authorities, and professional engineers.
Although those who owe the statutory duty of care cannot contract out of it, they can seek indemnification from their liability under it from those to whom they subcontract the work.
Subcontractors who are asked to provide such an indemnity should seek to cap their liability (risk) under the indemnity to an appropriate amount based on the rewards available to them under the subcontract.
