Retrospective duty of care imposed on builders in New South Wales

Out-Law Analysis | 18 Sep 2020 | 10:14 am | 4 min. read

Construction companies could face claims for economic loss stemming from defective building work they were responsible for over the past 10 years under legislation recently introduced in New South Wales, Australia.

The Design and Building Practitioners Act 2020, which took effect on 10 June, imposes a duty of care for builders, and others carrying out construction work, to exercise reasonable care to avoid economic loss caused by defects. The duty is owed to both owners of the land where construction work was carried out, and all subsequent purchasers.

The new statutory duty revives a common law duty that previously existed in New South Wales but which the High Court in Australia abolished. It has significant implications, particularly in terms of extending the limitation period for any claims.

Historical position: no duty of care owed

In 2014 the High Court of Australia overturned a New South Wales Court of Appeal decision which had found that a contractor owed a duty of care for pure economic loss for defective work to a successor in title to the developer of a commercial development. At the heart of the Court of Appeal's decision, in the case of Brookfield Multiplex Ltd v Owners Corporation Strata Plan, was the consideration that the owners – subsequent purchasers of the development – were placed in a vulnerable position, and that a developer, and any subsequent purchasers, were vulnerable specifically in terms of the physical elements making up the loss, because latent defects would only arise some time after completion of the building development.

In the appeal in the Brookfield case, the High Court upheld the principle of vulnerability established in earlier case law, including the cases of Woolcock Street Investments Pty Ltd v CDG Pty Ltd in 2004 and Perre v Apand in 1999.

In the Woolcock case, the court found that engineers did not owe a duty of care to subsequent purchasers of commercial property. While the High Court agreed on the point that vulnerability concerns the subsequent purchaser's inability to protect itself from the consequences of the builder's failure to use reasonable care, it concluded that the owners in the Brookfield case were well placed to protect themselves from pure economic loss. It came to that conclusion after analysing whether the subsequent purchaser was vulnerable and reviewing both the statutory framework and the relationship between the Owners Corporation and Brookfield.

The court held that the owners could have introduced provisions regulating the quality of the building work to be received in return for payment of the price, and had the "freedom to choose the price and non-price terms on which they were prepared to contract to purchase". The facts of the case and those presented in the Woolcock case were similar in that both concerned a commercial property. In that vein, the owners could have protected themselves against latent defects by commissioning expert investigations of the building prior to purchase, the High Court said. As a result, it held that the lack of a contractual relationship between the owners and Brookfield did not place the owners in a position of vulnerability, and so no duty of care to avoid pure economic loss was owed by builders to developers or to subsequent purchasers.

New statutory duty owed to owners and subsequent purchasers

The Design and Building Practitioners (DBP) Act 2020 in New South Wales came into effect on 10 June 2020. It creates a duty of care owed to owners, subsequent purchasers, and owners corporations by people carrying out "construction work."

Persons carrying out construction work must exercise reasonable care to avoid economic loss caused by defects which are:

  • in or related to a building for which the work is being done, and;
  • arises from the construction work.

The definition given for "construction work" is very broad and covers building work, design work, the manufacturing and supply of building products for building work, and the supervision, project management or coordination of construction work.

The scope of economic loss stemming from this duty is also wide-ranging. It may include defect rectification costs, costs incurred in further preventing damage or diminution in a development's value, and even alternative accommodation costs where buildings become uninhabitable.

To enable potential litigants to pursue their claims to the fullest extent, the legislation further provides that owners may bring an action under the DBP Act regardless of whether an action for breach of a common law duty of care has been brought prior to the commencement of the new statutory duty.

Most importantly, the duty operates retrospectively, and owners can enforce the duty of care for economic loss where the loss first became apparent within the last 10 years prior to 10 June 2020. It is unclear how this 10 year period can be reconciled with the standard limitation period of six years that applies in New South Wales. However, it is clear that the legislature's clear intent was to extend this limitation period significantly, and that this will have severe implications for builders, developers, designers, project managers and manufacturers, opening them up to liability where no such liability existed at the time of the construction work being performed.

While the new statutory regime brings good news for homeowners and subsequent purchasers alike, developers, construction companies, contractors, builders, and principals would do well to review their risk management for completed, current and future projects.

The duty imposed is an onerous one, particularly in light of the fact that builders are prevented from "contracting out" of this duty of care. There also remains a possibility that other states and territories will follow suit in enacting similar legislation.

Additional contributions from Sarah Chan of Pinsent Masons