Until recently, little case law had emerged on the application of the statutory duty to exercise reasonable care to avoid economic loss in respect of building defects which was introduced by section 37 of the Design and Building Practitioners Act 2020 (NSW) (DBP Act).
The Courts have now provided some clarification on the scope of that duty of care and confirmed the need for a plaintiff to prove a failure to take reasonable care by the defendant in order to be successful.
What is the duty of care?
The DBP Act introduced a duty on any person who carries out construction work to exercise reasonable care to avoid economic loss caused by defects:
- in or related to a building for which the work is done; and
- arising from the construction work.
This duty of care is owed by that person to any current or future owner of the property on which the construction work is carried out, regardless of whether the owner entered into a construction contract relating to that work.
To what 'construction work' does the duty of care apply?
The duty of care applies to 'construction work' which is broadly defined in the DBP Act to include most activities involved in the design and construction of a 'building', being:
- building work, including residential building work to which the Home Building Act 1989 (Cth) applies;
- the preparation of regulated designs and other designs for building work;
- the manufacture or supply of a building product used for building work;
- supervising, co-ordinating, project managing or otherwise having substantive control over the carrying out of any of the above work.
In the recent decision of Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq)  NSWSC 624, Justice Stevenson determined that section 37 of the DBP Act applies the duty to all building work, that is, both residential and commercial projects, albeit only to the construction of a 'building' as defined in the Environmental Planning and Assessment Act 1979 (NSW) (EPA Act).
If a structure is not classed as a 'building', or the work undertaken relates to matters separate to the construction of a 'building', the duty will not apply. However, noting the expansive definition of 'building' in the EPA Act, the application of the duty is far reaching.
Who owes the duty of care?
In Goodwin, the Court found that an employee of a construction company (in liquidation) who carried out project management services owed the relevant duty of care.
This clarifies that the duty will apply to any 'person' engaged in construction work. For example, employees, directors and agents of a company that entered into a design and/or construction contract will owe a duty of care if they themselves were involved in 'construction work'. It does not matter that they did not themselves enter into the construction contract or were mere employees.
The recent judgment of Justice Stevenson in The Owners – Strata Plan No 84674 v Pafburn Pty Ltd  NSWSC 659 clarifies that the duty of care can apply to directors of construction companies if they are in a position to control how construction work is carried out, regardless of whether they are actively engaged in doing so.
The decision in Pafburn also confirm that owners of the land who also carry out construction work (including developers) will owe the duty of care to subsequent owners.
Following a spate of liquidations and collapses, there is an increasing trend amongst plaintiffs to allege breach of duty under the DBP Act against key employees of construction companies. The aim being to maximise funds available to meet an adverse judgment and reduce the risk of a company divesting its assets or entering into administration.
To whom is the duty of care owed?
The duty is owed to each owner of a property on which the offending building work was conducted. This includes the owner at the time the building work was undertaken and any future owner.
The duty will not be owed to a lessee or manager of the property, even if they entered into the construction contract. However, it will be owed to the owner of that property, regardless of whether they were a contracting party.
Breach must be proved
The Court in The Owners, Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2)  NSWSC 1068 clarified that a plaintiff must allege and prove, in relation to each defect, the risks that the builder was required to manage and the precautions that should have been taken to manage those risks.
That is, it is essential that a breach of the duty of care be properly pleaded and established by evidence before any liability will flow.
These recent cases highlight the significantly expanded liability risk faced by construction industry participants, individuals and their insurers following the introduction of the DBP Act. Industry participants, particularly subcontractors, should view risk involved in a project from a holistic perspective, and not just limited to their risk to their head contractor when pricing and undertaking work.
Construction companies should ensure that their insurance is sufficient and appropriate, and cover their employees and directors, as well as the company itself.
Insurers should take steps to ensure that their premiums are adjusted to meet the risk implications associated with the expansive scope of 'building work' to which the DBP Act applies, and the increase in claims against individuals who may be covered as additional insureds or under an expanded definition of 'insured'.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.