TGIF 7 February 2025 – High Court provides clarity on construction liability

In this week’s TGIF, we look at the recent High Court of Australia decision in Pafburn Pty Limited v The Owners - Strata Plan No 84674 [2024] HCA 49 and its implications for distressed construction matters.

Key takeaways

• Where a financier has greater oversight or control over activities being undertaken on the project site (e.g. where it has appointed a receiver/AMIP or is otherwise controlling the activities), the financier may consider taking proactive steps to monitor the quality of the works to minimise the risk of defects.
  
  
• Where controllers have delegated the actual construction work to be undertaken by a builder or a subcontractor, the property owners may still allege that defects were either caused by the controllers or that they occurred during the period of controllers’ appointment.
  
  
• Practically, this risk for a financier is highlighted in situations when the builder or subcontractor who performed the defective work becomes insolvent or is otherwise lacking the financial means to respond to or defend the claim. In such cases, the controllers (who will need to be indemnified by the financier as appointor) could be held to be 100% liable for breach of the NSW duty of care. Any crossclaim available to the controllers against the builder or subcontractor would therefore be worthless.

The relevant statutory regime

The Design and Building Practitioner Act 2020 (NSW) (DBP Act) is one of several statutes introduced aimed at boosting consumer confidence in the residential construction sector and in response to concerns about deficiencies in the quality of construction work across New South Wales, amplified by the high-profile failures of Opal Tower and Mascot Towers.

Since those failures, the statutory duty of care provided in section 37 of the DBP Act has already featured in multiple first instance and appellate decisions on defective construction work, typically alongside claims under the Home Building Act 1989 (NSW) (HBA). The Pafburn litigation is the first to have gone to the High Court on the statutory duty of care.

What happened?

The Owners Corporation in respect of a residential strata building in Walker Street, North Sydney sued Pafburn Pty Ltd as builder (Pafburn), and Madarina Pty Ltd as the developer and former owner of the land (Madarina) for alleged defects.

Pafburn admitted it owed the statutory duty of care, whereas Madarina denied it owed the duty. Both denied breach of the duty and relied on a proportionate liability defence, naming nine alleged concurrent wrongdoers including the architect, building product manufacturers and installers, certifiers, subcontractors and the Council for having approved the plans.

In May 2022, Stevenson J permitted the Owners Corporation to make certain pleading changes, in a leading decision defining the range of persons who owe the duty - including former owners of land (e.g. Madarina) and any person with “the ability and the power to exercise” substantive control over the carrying out of construction work (even if they do not actually exercise that power).

The Owners Corporation also sought to strike out the proportionate liability defence, based on statutory provisions stating the duty was non-delegable. In February 2023, the primary judge (Rees J) refused to strike out the defence.

In December 2023, the Owners Corporation successfully appealed, with the Court of Appeal finding unanimously that the proportionate liability defence should be struck out.

High Court confirms claims not apportionable

Pafburn and Madarina then obtained special leave to appeal to the High Court. The High Court found that claims for breach of the NSW statutory duty of care are not ‘apportionable’. This confirmed the Court of Appeal’s position that those liable for breaching the statutory duty cannot point to concurrent wrongdoers such as developers and building consultants (including designers and certifiers or subcontractors) who have undertaken the defective work to minimise their exposure.

The High Court was split 4:3 in the decision but both the majority and the minority referred to the NSW statutory duty of care having been legislated in the midst of public concern about building defects, with the majority emphasising that consumers had a “crisis of confidence” in the safety and quality of NSW residential apartment buildings and the minority referring to the need for “individual and collective” responsibility.

Comment

The High Court’s decision, confirming the rejection of apportionability, was not unexpected but the full extent of its effect for distressed builders, developers and their financiers remains to be seen.

For example, generally in a distressed scenario where a financier has greater oversight or control over activities being undertaken on the project site (e.g. where it has appointed a receiver/AMIP or is otherwise controlling the activities), the financier may consider taking proactive steps to monitor the quality of the works to minimise the risk of defects.

This is because there is a risk that the property owners (including both current and future owners, as well as potentially insurers with subrogated claims) may sue those with substantive control of the construction work for loss and costs associated with defects in that work. Whilst the duty will be owed by a wide range of persons, the risk of breaching the duty and becoming subject to a claim is minimised if defects are avoided.

Even in circumstances where the controllers have delegated the actual construction work to be undertaken by a builder or a subcontractor, the property owners may still allege that the defects were either caused by the controllers or that they occurred during the period of controllers’ appointment because they were a person who had the “ability to exercise” control over the carrying out of construction work, even if that ability was not exercised. In that context, it should also be kept in mind that “construction work” is defined expansively in the DBP Act to include “supervising, coordinating, project managing or otherwise having substantive control over the carrying out of” building work (not limited to HBA-regulated residential building work), as well as design and other activities.

Practically, this risk for a financier is highlighted in situations when the builder or subcontractor who performed the defective work becomes insolvent or is otherwise lacking the financial means to respond to or defend the claim. In such cases, the controllers (who will need to be indemnified by the financier as appointor) could be held to be 100% liable for breach of the NSW duty of care. Any crossclaim available to the controllers against the builder or subcontractor would therefore be worthless.

As an alternative to the appointment of controllers, it may achieve a better outcome for all stakeholders if the project can be completed and brought to market or leased without the appointment of controllers and financier involvement in the construction phase. In that regard it may be relevant for directors of a distressed builder or developer to consider the availability of a statutory safe harbour as described in the recent podcast: The Turnaround Podcast: Spotlight on Safe Harbour featuring Corrs partner Michael Catchpoole.