NSW reforms to fix building defects – potential for indeterminate liability?

Attention: owners, builders and designers 8 min read

On 11 June 2020, NSW enacted legislation which imposes a number of new obligations on design practitioners, engineers and builders and sees a fundamental shift in the relationship between these practitioners and owners as part of its reforms to the building industry.

Three of the major changes resulting from the Design and Building Practitioners Act 2020 (NSW) (the Act) are:

• the creation of a statutory duty of care on builders and certain designers, building product manufacturers and suppliers, and supervisors, which duty cannot be delegated or contracted out of;
• in conjunction with the recently enacted Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act)¹, the increased scope of enforcement powers given to the Secretary of the Department of Customer Service (the Secretary); and
• the registration and certification process required for design practitioners, principal design practitioners, professional engineers, specialist practitioners and building practitioners.

For all owners, builders and designers, we examine these changes below and outline steps you can take now.

Key takeaways

• Commencement: whilst the duty of care regime under the Act commenced on 11 June 2020, the new registration and certification regime does not apply until 1 July 2021.
• Duty of care: builders and certain designers, manufacturers, suppliers and supervisors will now owe a duty of care to current and future owners to avoid economic loss caused by defects in respect of certain buildings.
• Retrospective application: owners may enforce this statutory duty of care for economic loss in respect of existing buildings where the loss first became apparent within the last 10 years, or for a loss that first became apparent on or after 11 June 2020.
• Regulation of design and building work: the Act introduces a scheme for declarations from certain designers and building practitioners aimed at confirming design and works comply with relevant industry standards.
• Registration of key industry participants: the Act also introduces a scheme for the registration of certain designers, engineers, specialist practitioners and builders, including requirements for such professionals to be adequately insured.
• Enforcement powers: along with proposed reforms under the RAB Act, the Act will allow the Secretary to issue stop-work orders, seek court orders to enforce compliance with the Act and investigate or audit practitioners.
• What to do: builders, designers, suppliers and supervisors should now account for this duty of care when assessing risk, pricing and insurance arrangements. In addition, relevant design, engineering and building practitioners should be aware of the registration requirements and conditions being introduced by the Act.

Background

The Act forms part of the NSW Government's response to the 2018 Shergold-Weir Report,² which considered the effectiveness of compliance and enforcement systems for the building industry nationally.

For our initial insight into the reforms proposed to be introduced, please refer to our previous article.

After being withdrawn in late 2019, the current Act was passed following additional amendments that were largely directed at expanding the legislation's scope and application.

Duty of care to owners

How does it apply?

Part 4 of the Act imposes a statutory duty of care on those who carry out construction work (including preparation of regulated design work, the supply or manufacture of building products, and supervisory or other management roles) to the owner of the land. If this duty of care is breached, the owner will be entitled to damages for the breach as if the duty were a duty established by common law.

The duty requires those who carry 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 construction work. This duty is owed to both current and future owners of the land. If the land is subject to a strata scheme within the meaning of the Strata Schemes Management Act 2015 (NSW), the owner includes the owner of a lot and the owners corporation constituted for the scheme. If the land is subject to a community, precinct or neighbourhood scheme within the meaning of the Community Land Management Act 1989 (NSW), the owner includes the proprietor of a lot as well as the association for the scheme.

An owners corporation or an association is taken to suffer economic loss if it bears the cost of rectifying defects (including damage that defects have caused) that are the subject of a breach of the duty of care imposed under the Act, and include the reasonable costs of providing alternative accommodation where necessary.

The duty of care cannot be contracted out of or delegated to another party.

What classes of building are impacted?

The duty of care applies to construction work, which includes residential building work within the meaning of the Home Building Act 1989 (NSW) and any other building class or type prescribed by the regulations. No regulations have been released to date.

Will the duty of care apply retrospectively?

Yes – owners and subsequent owners of land may claim for a breach of this statutory duty where:

• the loss first became apparent (or the owner ought to have reasonably been aware of the loss) 10 years before the statutory duty commenced; or
• the loss first became apparent (or the owner ought to have reasonably been aware of the loss) on or after the commencement of the statutory duty.³

This applies regardless of whether an action for breach of a common law duty of care has commenced before the commencement of the statutory duty.⁴

New regulatory framework

What are the key changes?

The Act introduces the following key reforms aimed at preventing defects occurring:

• Regulated designs and building work: 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;⁵
• Compliance declaration by design, principal design and building practitioners: requirement for designers, principal designers and builders to declare that their regulated designs or building work respectively comply with, amongst other matters, the Building Code of Australia (BCA).⁶ Registered design practitioners and builders must not provide this declaration unless they are adequately insured with respect to the declaration and work;⁷
• Variations to declared designs: requirement for variations from 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;⁸
• Notice of application for occupation certificate: when making an application for an occupation certificate, written notice must be given to each registered building practitioner who did building work of the intention to apply for an occupation certificate as well as written notice that such application has been made;⁹ and
• Registration requirements for certain industry participants: introduction of a new registration scheme for certain designers, professional engineers, specialist practitioners and builders and a statutory obligation to hold adequate insurance. Minimum insurance requirements are to be prescribed by regulations.

Enforcement

To assist in the enforcement of the above obligations, the Act allows the Secretary to issue stop work orders for up to 12 months,¹⁰ and seek relief from the Land and Environment Court of NSW to remedy or restrain a breach of the Act.¹¹ The Secretary also has the power (with or without a complaint having been made) to investigate practitioners and former practitioners, and may audit a registered practitioner at any time.¹²

Penalties of up to $330,000 for bodies corporate and $110,000 in any other case,¹³ may also be incurred for non-compliance.

In certain circumstances there is also the possibility of imprisonment. For example, if a person makes a design compliance declaration that they know to be false or misleading it may result in imprisonment of up to two years.¹⁴

The Public Accountability Committee of the Legislative Council is to review the Act and consider the functions exercised by the Secretary and whether these are still desirable after 30 March 2022, with a report on the outcome of the review to be tabled by 30 June 2022.

Actions you can take now

• For owners – consider whether the extended duty is available for any claim for defective works.
• For builders and designers:
  • review insurance arrangements;
  • consider whether pricing is adequate for the increased risk profile; and
  • review requirements for registration and be aware of the penalties applicable for non-compliance with a registration certificate.