NSW looks to hold builders and designers liable to current – and future – property owners for defective works

In brief 7 min read

Legislation focusing on imposing new obligations on design consultants and builders was recently introduced to the NSW Parliament. Importantly, the Design and Building Practitioners Bill creates a statutory duty of care owed by builders, and others, for economic loss for defects in construction services they've performed in connection with residential-type buildings, and allows current and future owners of the land to claim damages. While owners will welcome this new statutory duty of care, cementing a cause of action against a builder or designer still may not deliver the desired financial benefits in an industry where solvency risk is an ongoing concern. It will also be interesting to see how builders and designers' liability insurers respond to (and price for) this development.

Key takeaways

• The Design and Building Practitioners Bill 2019 (NSW) (the Bill) was introduced to NSW Parliament in November.
• It focuses on imposing new obligations on certain design consultants and builders, aimed at ensuring construction work is well documented and compliant with relevant standards. Importantly, the Bill also creates a statutory duty of care owed by builders (and certain designers, manufacturers and suppliers) for economic loss for defects in, or relating to, construction services they have carried out in connection with residential-type buildings. It allows current and future owners of the land to claim damages for breach of the duty, which works a reversal to the development of the common law, as the High Court explained in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288¹.
• If implemented, owners (including subsequent owners and strata title owner corporations and associations under the Community Land Management Act 1989 (NSW)) will have the basis for a cause of action in tort against negligent builders, certain regulated designers and certain building product manufacturers and suppliers, for economic loss arising out of defects in, or related to, construction work.
• The types of buildings to which the statutory duty of care will apply is currently the subject of parliamentary debate. As a minimum, it appears that it will apply to residential-type buildings².
• Builders and designers cannot contract out of this duty to exercise reasonable care.
• The duty will apply retrospectively – Parliament is currently debating the extent of the retrospective effect.
• This duty will still be subject to the usual statutory limitation periods and proportionate liability regime.

Background to the Bill

The Bill forms part of the NSW Government's response to the 2018 Shergold-Weir Report³, which considered the effectiveness of compliance and enforcement systems for the building industry nationally. It reflects the first tranche of government reforms to overhaul the NSW building sector.

The Bill was passed, with amendments, by the NSW Legislative Assembly but has stalled in the Legislative Council, pending debate on further amendments that are largely directed at expanding the Bill's scope and application.

A key reform in the Bill is extending the common law duty of care that builders (and certain designers and building product manufacturers/suppliers) owe to avoid causing economic loss arising from defective works.

Duty of care to owners

Current common law position

There has recently been a narrowing at common law of the circumstances in which a builder or designer will owe an owner (or subsequent owner) a duty of care to avoid economic loss for defective works⁴. Except in rare cases requiring an element of vulnerability, damages for economic loss that is not consequential upon personal injury or property damage are not recoverable in negligence, even if the loss is foreseeable.

New statutory duty of care

Part 3 of the Bill imposes a statutory duty of care on those who carry out construction work (including regulated design work, and the supply and manufacture of building products) to the owner of the land. Under the Bill, a person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects in, or related to, a building for which the work is done. This duty is owed not only to each current owner of the land, but also to every subsequent owner of the land. Further, the duty is owed whether or not the construction work was carried out under a contract, or other arrangement entered into with the owner or a previous owner. If the duty is breached, the owner is entitled to damages. 

In addition to owners, an owners corporation under the Strata Schemes Management Act 2015 (NSW) or an association under the Community Land Management Act 1989 (NSW) is also taken to suffer economic loss if it bears the cost of rectifying defects (including damage defects have caused) that are the subject of a breach of the duty of care imposed under this Part. Owners corporations and associations are owed this duty of care regardless of whether they were the owner of the land when the construction work was carried out.

Building classes impacted

The Bill, as currently drafted, applies the duty of care to buildings falling within Building Code of Australia (BCA) building classes 1a, 1b, 2, 3 and 10 and any other building class or type prescribed by regulation. These building classes relate to residential-type buildings⁵.

However, the scope remains uncertain, as:

• the Opposition has proposed amendments expanding the duty of care to all BCA building classes (including commercial buildings); and
• the Greens Party has proposed amendments that the duty apply to a building containing four or more dwellings and any other buildings prescribed by regulation.

Can this duty be avoided?

A person who owes the duty of care cannot delegate their duty to another party. Parties will not be allowed to contract out of the duty. 

Relationship with other duties of care and law

The Bill's provisions are not exhaustive in setting out, or limiting, the duty of care owed – rather, they act in addition to the duties, statutory warranties or other obligations set out elsewhere in legislation (including the Home Building Act 1989 (NSW)) or the common law. Other key points to note:

• Part 3 of the Bill is subject to the Civil Liability Act 2002 (NSW), meaning an action for breach is apportionable;
• the limitation periods under the Limitation Act 1969 (NSW) and section 6.20 of the Environmental Planning and Assessment Act 1979 (NSW) still apply; and
• Part 3 does not limit damages or other compensation that may be available to a person under another Act or at common law because of a breach of a duty by a person who carries out construction work.

Retrospective action

The Bill currently provides that the statutory duty of care applies to construction work carried out before commencement of Part 3, except if:

• the owner commenced an action for breach of a common law duty of care before the commencement of the statutory duty;
• the loss first became apparent (or the owner ought to have reasonably been aware of the loss) more than six years before the statutory duty commenced; or
• the building work was completed more than 10 years before the statutory duty commenced.

This is subject to further debate, as amendments have been proposed that would effectively limit the exceptions only to the second dot point above.

Additional reforms

In addition to creating the statutory duty of care, key reforms the Bill proposes include:

• Regulated designs: the introduction of the concept of 'regulated designs', which includes designs for a building element (including fire safety systems, waterproofing and load bearing components) or a performance solution for building work or a building element;
• Compliance declaration by designers: requirement for designers to declare that their regulated designs comply with the BCA;
• Compliance declaration by builders: requirement for builders to build in accordance with declared designs, and declare that they have complied with the BCA;
• Variations to declared designs: requirement for variations to a regulated design for a building element or a performance solution to be documented, and relevant declarations obtained from the designer(s) and builder in relation to the varied design; and
• Registration of compliance declaration makers: requirement for designers, principal designers and builders who make compliance declarations to register under a new registration scheme.

Significant civil penalties may be imposed for non-compliance with the proposed regulatory regime.

Much of the detail and scope of these reforms are to be described in supporting regulations, which are yet to be published. This includes details of the classes of building to which these regulatory reforms apply. However, the Government has indicated that the reforms will target high-rise residential buildings, including mixed use buildings (residential and commercial). Other classes of building may be included in the new regime over time.

Further reform issues that are the subject of parliamentary debate and may yet be added to the Bill include:

• Registration of professional engineers – a regime for the registration and investigation of professional engineers; and
• NSW Building and Construction Commission – creation of an independent statutory body with broad powers to oversee and regulate the building industry.

Actions you can take now

• For owners – consider whether the extended duty is available for any claim for defective works
• For builders – review insurance arrangements and consider whether pricing is adequate for the increased risk profile.