By: Charu Stevenson and Hamshini Sathiyamoorthy

The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWCA 301

At a glance

• From June 2020, section 37 of the Design and Building Practitioners Act 2020 (NSW) (DBP Act) introduced a new duty of care on those who carried out “construction work”.
• This article considers a key December 2023 judgment of the NSW Court of Appeal (The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWCA 301 (Pafburn)) which determined that the duty of care was not apportionable in the circumstances of that case.
• We also provide a summary of the key cases providing commentary on the application of the DBP Act in this downloadable table.
• Proportionate liability was introduced into the Civil Liability Act 2002 (NSW) in response to the 2001–2002 ‘insurance crisis’ in order to reduce rising liability insurance costs.
• Does the Pafburn decision mean a new insurance crisis for construction professionals?

The factual background

The Owners of Strata Plan No 84674 (Owners) commenced proceedings against Pafburn Pty Ltd (Pafburn) and Madarina Pty Ltd (Madarina) who were the builder and developer respectively of a strata development in Walker Street, North Sydney.

In the proceedings, the Owners alleged that Pafburn and Madarina were both in breach of the statutory duty prescribed by section 37(1) of the DBP Act as:

1. Pafburn had constructed the building defectively, and
2. Madarina engaged in “construction work” for the purposes of section 37 in that it “… supervised, coordinated, project managed” and “substantively controlled … the building work carried out by [Pafburn]”.

Pafburn and Madarina pleaded a proportionate liability defence and nominated a number of Pafburn’s sub-contractors as “concurrent wrongdoers”.

The Owners sought to strike out the proportionate liability defence on the basis that section 5Q of the CLA provided that Pafburn and Mandarina were vicariously liable for the conduct of the sub-contractors such that the proportionate liability regime did not apply.

Primary judgment

In the primary judgment, Rees J rejected the Owners’ submission and dismissed the notice of motion seeking to strike out the proportionate liability defence. Rees J determined that s 5Q(1) of the CLA only applied to common law tort and did not apply to the breaches of duty of care in s 37 of the DBP Act as it was a statutory duty.

The appeal judgment

On 13 December 2023, the Court of Appeal unanimously granted leave to appeal and overturned the primary judgment. Basten AJA, with whom Ward P and Adamson JA agreed, concluded that:

“the liability of the respondents in the present case should be treated as a form of vicarious liability which is not subject to any limitation on their liability by apportionment as between them and concurrent wrongdoers under Pt 4 of the Civil Liability Act”.

Basten AJA noted that since s 37 provides that the new duty of care is to operate “as if the duty…were established in common law”, s 5Q(1) of the CLA did apply.

Implications for professionals and their insurers

The parties in Pafburn seeking to rely on the proportionate liability defence were the developer who sub-contracted the construction to the head contractor and the head contractor who sub-contracted the construction to a number of sub-contractors.

All the named concurrent wrongdoers were sub-contractors of the head contractor apart from the Council. The Council’s alleged act was to have approved non-compliant plans which would have fallen within the duty of care owed by the developer and head contractor.

What is not clear from Pafburn is whether a claim under s 37 against a professional who undertook a limited role in the construction work and who did not sub-contract that role is apportionable. For example, in the primary judgment it was noted that the Owners themselves did not submit that a proportionate liability defence was not available at all in relation to s 37 of the DBP:

The Owners Corporation acknowledged that proportionate liability defences may be available in some circumstances. If the Owners Corporation brought proceedings against the certifier, this it was said that the certifier could apportion their liability against the defendants and sub-contractors, as the certifier was not vicariously liable for them. Ultimately, the Owners Corporation’s counsel submitted there was a subtle and nuanced distinction between situations where those involved in “construction work” could rely on the apportionable claims provisions and those who could not.

Indeed, the Court of Appeal, without directly grappling with this issue appears to have proceeded from the basis that it was only concerned with circumstances involving a principal and its independent contractors, as Basten AJA states:

The general law concept of a non-delegable duty, as reflected in s 39 of the Design and Building Act, merely places the principal’s position with respect to the independent contractors in the same position as that of an employer and employee, it follows that Pt 4 will not prevent recovery in full from the principal who is subject to a non-delegable duty.

In Boulus Constructions Pty Ltd v Warrumbungle Shore Council (No 2) [2022] NSWSC 1368 (Boulus) (detailed further in this table), Stevenson J commented that directors and employees of a builder could rely on a proportionate liability defence in response to a claim under s 37 of the DBP Act.

The Court of Appeal in Pafburn commented briefly on the Boulus judgement saying that “Nevertheless, those statements assume, rather than explain, the manner in which Pt 4 of the Civil Liability Act is engaged. To note that Pt 4 of the Design and Building Act is subject to the Civil Liability Act says nothing unless the latter is engaged in circumstances to which the former applies”.

The Court of Appeal did not go as far as to say that Boulus was incorrect to state that the proportionate liability regime may be engaged in certain circumstances with respect to the DBP Act duty of care.

While Pafburn means that developers and builders may not be able to minimise liability through proportional liability provisions when engaging independent contractors, and they remain wholly liable for any loss that may arise from the sub-contractor’s engagement, the position of professionals remains distinguishable.

This means that professionals can still plead proportionate liability defences to protect their position but, as there remains a risk that the Court of Appeal will broaden its position, professionals may also wish to consider issuing cross-claims in appropriate cases to achieve a greater level of protection.