A fundamental shift in who carries risk.
The Design and Building Practitioners Act ("the Act") has been described by the Supreme Court of NSW as "labyrinthine" and "fiendishly difficult" to interpret. Recent events show that these may be understatements.
The Act is one result of the Shergold Weir Report, commissioned in mid-2017 following the Lacrosse and Grenfell Tower fires. The report identified serious and widespread compliance failures in the NSW construction industry, including the implementation of the National Construction Code and a lack of clarity around accountability.
Following the report, the NSW Government announced its intention to implement four major reforms across the construction industry. The duty of care provisions of the Design and Building Practitioners Act are one of those reforms.
Section 37 of the Act establishes a statutory duty of care on those who carry out construction work to not cause loss to the end user by defects arising from that work.
The duty of care is owed whether or not the construction work was carried out under a contract or other arrangement entered into with the owner or another person. It cannot be delegated to another person, nor can it be excluded by contract.
The provisions commenced in June 2020 and are given retrospective operation for the preceding 10 years.
The devil, as they say, is in the detail. Two questions in particular have proved irksome.
- What is the "construction work" to which the duty applies?
- Who is "a person who carries out construction work"?
"Construction work" is defined as 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).
Although not defined "building work" is said in Section 36(1) to include residential building work within the meaning of the Home Building Act 1989.
A "building" is defined as having the same meaning as in the Environmental Planning and Assessment Act 1979. That is a wide and somewhat circular meaning, being: "[P]art of a building, and also includes any structure or part of a structure."
"Person" is not defined. Nor is any of "supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work".
What would a reasonable person think?
Given the background to the Act (which is a response to numerous defective residential apartment buildings) and that its other provisions are stipulated to relate only to residential apartment buildings, one might reasonably assume that the duty of care applies only to residential building work.
One might also reasonably assume that where the contracting party is a corporation, the "person who carries out construction work" is that corporation, rather than any people it employs. For more on this, see the rules for interpretation of "person" in the Interpretation Act 1987.
Recent case law suggests that using the "what-a-reasonable-personmay-think" rule in relation to the Act is a pathway to disappointment.
In Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq), the Supreme Court held that "building work", so far as it relates to the duty of care, is not confined to residential building work.
Rather, it covers construction of any building that comes within the meaning given to that term in the Environmental Planning and Assessment Act 1979.
The Court drew on the amendments which gave effect to the current definitions of "building" and "building work". It said:
"Amendment No. 1 provides that the duty of care applies to all buildings and includes a definition of "building" for the purpose of the duty of care and that "building" has the broad meaning of "building" in the Environmental Planning and Assessment Act. Amendment No. 2 makes clear that the duty of care extends to building work, including residential building work within the meaning of the Home Building Act. This amendment will ensure that the duty of care amendments will have broad coverage, which is the intent."
So the duty of care does, in fact, include construction of public, commercial and industrial buildings, as well as residential buildings.
As for who has that duty of care, recent rulings from the Supreme Court have also undone notions of what a "reasonable person" may think.
The Act places the duty of care on anyone engaged in "supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work".
Those words "substantive control" are where things get interesting. While supervising, coordinating and project managing may be fairly obvious, what exactly constitutes substantive control?
An answer was provided in The Owners - Strata Plan No 84674 v Pafburn Pty Ltd, where an owners corporation sued developer Madarina Pty Ltd for defective works.
The question that arose was whether it was necessary to show the developer exercised "substantive control over the carrying out of" the building work, or whether it was sufficient to show only that they had the ability to exercise such control.
The Court held that having the ability to control how the work was carried out was sufficient to constitute "substantive control".
(Whether a person is in a position to control how work is carried out would be a question of fact in each case.)
That raises important issues for government agencies. Consider a NSW Government agency employee who is superintendent of a building project, and their duty to act fairly (and not in the interests of either the principal or the contractor) is specifically excluded in the contract.
Is the agency able to control how the work is carried out in this situation? It seems the answer is likely to be yes.
Further relevant cases include Goodwin Street Developments Pty Ltd, where the husband of the sole director of the company that had contracted to construct the work was held to be personally liable under the Act.
That was because he not only engaged in project managing, but he also supervised construction.
He was neither an officer nor an employee of the builder, and nor does it appear that it was argued he was the agent of the builder. So one might think that his actions (and omissions) should be imputed to the builder, thus relieving him of liability.
Not so, however. Boulus Constructions Pty Ltd v Warrumbungle Shire Council (No 2), tells a different story.
Here, the plaintiff Council sued a builder who had constructed a retirement village on its behalf.
After the new Act came into force, the Council applied to amend its summons to include a claim for breach of the duty of care against the builder's managing director and its project site supervisor. It alleged both were both able to, and in fact did, exercise control over the carrying out of the building work.
Counsel for the two employees pointed to the potentially wide-ranging consequences of construing "persons" in Section 37 to cover a director or employee of a builder:
"Every person on a construction site has substantive control or supervision over some building work performed at that site [so]. every such person could potentially come within the ambit of a 'person who carries out construction work', and be the subject of an automatic statutory duty of care .Such a broad interpretation could make hundreds, or on a very large job even thousands, of people personally liable."
Counsel submitted that "person" should be construed as "a person who carries out construction work in their own capacity" and should not include a person who acts as agent for another, such as an officer of a company or an employee.
However, the Court held that "person" could not be interpreted to mean a person acting "in their own capacity". Parliament has used the expression "person" in Section 37(1). That must mean someone who is not necessarily a building practitioner (as defined in the Act) and not necessarily a person acting in their capacity as a building practitioner; nor necessarily acting "in their own capacity".
So, any individual who supervises, coordinates, project manages or is able to control how building work is carried out owes the duty of care under the Act and is potentially liable, even if they are an employee, including of a NSW Government agency.
The Act represents a fundamental change in the principles and scope of liability for defective construction work and appears to lend itself to wide-ranging unintended consequences.
It remains to be seen whether the legislature will adjust the provisions to remedy this.
Proposed new legislation is currently in the public consultation stage. Its aim is to further overhaul the legislative framework for the construction industry, including Part 4 of the Act, which provides for the duty of care.
Until this legislation is finalised, we anticipate a large shift in the appetite for risk of participants in the NSW construction industry, including government agencies and their employees and consultants
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.