High Court’s Landmark Ruling in Pafburn : Shifting Liability and Risks for Construction Contractors and Developers
In this newsletter, we examine the High Court’s decision in Pafburn Pty Ltd v Owners – Strata Plan No 84674 [2024] HCA 49 (Pafburn) and its significant implications for the construction industry. This analysis explores the Court’s reasoning, the interaction between the Design and Building Practitioners Act 2020 (NSW) (DBP Act) and the Civil Liability Act 2002 (NSW) (CLA), and the debate between the majority and minority judgments. We also consider the broader impact on principal contractors, developers, and liability apportionment in construction disputes.
Introduction
The High Court’s recent ruling in Pafburn promises to have major ramifications for the Construction Industry throughout the country. In Pafburn, the High Court dismissed an appeal from the New South Wales Supreme Court of Appeal, holding that primary (head) contractors are unable to apportion liability under the CLA. Consequently, an inference of strict liability attaches to the duty found in section 37 of the DBP Act for Principal Contractors, that is the duty to exercise reasonable care to avoid economic loss caused by defects arising from building and construction. Ultimately, the decision in Pafburn exposes head contractors and developers to increased risk of litigation.
Procedural History
Factual Background
In December 2020, an owner’s corporation (the Plaintiff), as the registered proprietor for a Residential Strata building in North Sydney, commenced proceedings against a developer and head contractor (the Defendants), claiming damages under section 37 of the DBP Act for economic loss arising from defects in the building resulting from its construction. Section 37 of the DBP Act provides:
37 – Extension of Duty of Care
(1) A person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects—
(a)in or related to a building for which the work is done, and
(b)arising from the construction work.
(2)The duty of care is owed to each owner of the land in relation to which the construction work is carried out and to each subsequent owner of the land.
(3)A person to whom the duty of care is owed is entitled to damages for the breach of the duty as if the duty were a duty established by the common law.
(4)The duty of care is owed to an owner whether or not the construction work was carried out—
(a)under a contract or other arrangement entered into with the owner or another person, or
(b)otherwise than under a contract or arrangement.
An issue was whether the developer or head contractor should be solely liable for the consequential economic loss, or whether their liability could be limited to the parties specifically responsible for the construction work that resulted in the damages (‘concurrent wrongdoers’), through the apportionment of damages under Part 4 of the CLA.
The Defendants contended that each alleged concurrent wrongdoer owed a duty to avoid economic loss under section 37 of the DBP Act in respect of the work which they carried out in relation to the construction. The Defendants raised a defence under section 35(1)(a) of the CLA, which provides:
35 – Proportionate Liability For Apportionable Claims
(1) In any proceedings involving an apportionable claim—
(a) the liability of a defendant who is a concurrent wrongdoer in relation to that claim is limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the defendant’s responsibility for the damage or loss
The Defendant’s claimed that under section 35(1)(a) of the CLA, any liability they owed was limited to an amount that reflects their degree of responsibility over the defects giving rise to the economic loss in question.
Primary Decision
The Plaintiff brought a motion to strike out the Defendants defence of proportionate liability on the basis that under section 39 of the DBP Act, the duty of care established under section 37 of the DBP Act is non-delegable. Section 39 of the DBP Act provides:
39 – Duty Must Not Be Delegated
A person who owes a duty of care under this Part is not entitled to delegate that duty.
Importantly, s41(3) subjects’ part 4 of the DBP Act to the CLA. As such, the Plaintiff claimed that the Defendants were vicariously liable under section 5Q of the CLA. Section 5Q of the CLA provides:
5Q – Liability based on non-delegable duty
(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 primary judge held that due to the terms “liability in tort…for breach of non-delegable duty”, section 5Q is confined to common law torts and breaches of the common law. Consequently, the primary judge held that section 5Q does not apply to a statutory liability, such as that imposed by the DBP Act, and as such the apportionment of damages under Part 4 of the CLA applied for a breach of that duty.
Appellate Court
The plaintiff appealed the decision to New South Wales Court of Appeal, where the appellant court unanimously overturned the primary decision, concluding that section 5Q of the CLA applied to the non-delegable statutory duty under the DBP Act. The court found that the Defendants liability could not be apportioned between the concurrent wrongdoers as they were vicariously liable for their subcontractor’s work, as per section 5Q of the CLA. Further, the Court of Appeal also held that section 39 of the DBP Act was sufficient to exclude the application of Part 4 of the CLA.
Dissatisfied, the Appellants appealed this decision to the High Court of Australia, seeking to have the primary decision reinstated.
High Court Decision
In a 4:3 majority, the High Court dismissed the appeal, upholding the NSW Court of Appeal decision, ruling that a principal contractor cannot exclude or limit their liability under section 37 as a consequence of the operation of s 39 of the DBP Act. The majority emphasised that while the plain and ordinary wording of section 37 could not be interpreted to extend the duty to ensure that another person takes reasonable care, it should be interpreted in light of its context.
Majority Decision
The Majority emphasized the context of the DBPA’s enactment when interpretating ss37 and 39. The DBP Act was enacted in the wake of two incidents and cases involving the evacuation of high-rise residential buildings because of serious construction defects. Its purpose was to restore consumer confidence’ in relation to residential apartments.
Accounting for this context, the Majority considered that s39 was included to qualify the duty imposed by s37(1). By preventing those owing the duty from delegating it, s39 provides a safeguard for the rights of owners through establishing the individual and collective responsibility of building practitioners.
As such, it was held that the substance of s37 was to impose a duty on the principal contractor or developer to ensure reasonable care was taken by those to whom work was delegated to.
The court further considered s40 of the DBPA, noting that the provision buttressed their conclusion by prevented those owing the duty from contracting out of those obligations.
Turning to s41(3) of the Act, which provides that Pt 4 is subject to the operation of the Civil Liability Act 2002 (NSW), the Majority found that the duty imposed under s37 was subject to s5Q. Having concluded the duty was non-delegable, under s5Q those owing a s 37 duty are taken to be vicariously liable for the negligence of the party delegated or entrusted work that may have resulted in the defect.
Consequently, the court concluded that Pafburn was vicariously, i.e. 100% liable, for the work undertaken by subcontractors. In essence, the duty imposed by s37 attaches solely the principal contractor or developer and cannot be apportioned, creating a nexus of vicarious liability for the actions of third parties. This decision ultimately eradicates the ability for Principal Contractors and Developers to rely on the defence of proportionate liability.
Minority Decision
Despite the consequences of the majority decision, the dissenting judgements offer a glimmer of hope for the decision to be overturned. The minority concluded that the prohibition of delegation in s39 did not transform the duty found under s37 into a common law non-delegable duty. Rather, the operation of s39 was more limited, ensuring that liability attached to the work personally carried out by a party. As such, s39 ensures that the duty in s37 is personal, in that they cannot merely escape liability for their involvement in the construction, through contracting that responsibility to another. As such, it ‘does nothing to create strict liability for the head contractor for the defective work of a sub-contractor’ [81].
In reaching that conclusion, the minority noted that given the operation of s35, which mandates specialist authorisation or accreditation requirements, the imposition of a duty upon the head contractor to ensure reasonable care is taken by the specialist parties would effectively render the provision obsolete. Further, the minority noted that under s37(4), the duty arises irrespective of whether there was a contract or not.
However, perhaps the most interesting contention made by the minority was in relation to s7(3). The minority noted that there is no mention of the phrase ‘building practitioner’ within s37(1) [84]. This implies that s37 does not apply solely to a principal contractor, giving more breadth to the provision by extending it to other parties.
When read in light of the majority judgement at paragraph 48, this opens the door for a future challenge to this decision. As noted by the majority, the appellants contended that the operation of s7(2) and s7(3) of the DBPA means that a ‘building practitioner’ will automatically be ‘taken to do building work’ if they are ‘the principal contractor for the work’. The appellants contend that ‘taken to do building work’ by virtue of being a principal contractor, does not mean that they have in fact ‘carried out’ the building work [48]. The majority then noted, but declined to answer, the potential interaction between ss7(3) and 37(1), as to whether a principal contractor is, by virtue of being a principal contractor, automatically taken to have carried out that building work [49].
Noting the minority’s decision, it would not be farfetched to suggest that the absence of ‘building practitioner’ within s37(1) answers the question posed at paragraph 49. Section 7(1)(b) specifically references a ‘principal contractor’ as a ‘building practitioner’ in situations where more than one person agrees to do building work. In contrast, the absence of mentioning specific duties of a ‘building practitioner’ under s37(1) would indicate that it was the legislative intent of Parliament that the s37 duty attached directly to the individual personally responsible for ‘carrying out’ the construction work, and not directly to the building practitioner.
Ultimately, the minority concluded that the effect of s39 was to prevent the person who specifically performed the construction work from delegating or contracting out their duties in relation to that work [85]. In their view, this did not ‘otherwise extend the duty in s 37 to the work of independent contractors’ [85].
Takeaways
Considering the minority judgement, the decision ultimately rests on shaky foundations. The appeal was overturned by a small majority, which ultimately conceded that there was potential for a challenge through s7(3) of the DBPA. It would not come as a shock if the decision were to be overruled in later judgements.
Nonetheless, it currently stands as authority, meaning that Developers and Builders are exposed to far greater liability. Developers and builders who owe a s37 duty are no longer able to rely on the defence of proportionate liability. Developers and Builders must be aware of the liability they now bear, and ensure they are adequately insured for it ahead of undertaking any construction works. As was made clear in this case, attempting to simply delegate or contract out of liability will expose oneself to significant litigation risk and costs.
In the wake of Pafburn, Crisp Law can help you navigate the increased liability under the DBP Act which now applies due to the inability to apportion liability under the CLA.
Contact Crisp Law for advice and information at:
Telephone: +61 2 8042 8701
Email: admin@crisplaw.com.au
