Background

The Design and Building Practitioners Act 2020 (NSW) (Act) introduces a myriad of statutory measures in the building and construction sector including a new statutory duty of care, registration requirements, and regulated design requirements, amongst other things. The new statutory duty of care is particularly interesting because it follows recent prominent high-rise apartment building defects and is intended to overcome difficulties which apartment owners previously faced in claiming pure economic loss from high rise apartment builders.

Statutory warranties under the Home Building Act 1989 (NSW) (HBA), home building compensation cover for buildings up to three storeys and the strata scheme building defects scheme may provide subsequent property owners with some protections and redress for building defects. However, these have been said to be inadequate in assisting subsequent property owners of high-rise buildings (including apartment owners and owners corporations) with successfully claiming costs of defect rectification.

This uncertainty about the extent of protections available to these owners came to light following the economic loss suffered by many owners of apartments in high rise buildings, including the Opal Tower and Mascot Towers, as a result of building defects. Further, decisions by courts to dismiss claims brought by subsequent owners for defect rectification costs, have arguably added to this uncertainty.[i]

Duty of care at common law

Prior to the Act, subsequent owners of high-rise apartments found it difficult to establish the existence of a duty of care in a claim for pure economic loss. In Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61228 [2014] HCA 36 (Brookfield), the High Court of Australia held that in a claim for pure economic loss, a building practitioner only owed a duty of care to a subsequent purchaser who relies on the practitioner or who is vulnerable due to the inability to take reasonable steps to protect itself from economic loss.[ii] Such a judgment significantly limited the possible scope of claimants.

Accordingly, in Brookfield, the High Court of Australia unanimously dismissed the claim by the owners corporation (which was a subsequent owner of the building) for the costs of defect rectification because the owners corporation had the ability to take reasonable steps to protect itself from the pure economic loss suffered by way of contract. This meant that the owners corporation was not vulnerable and therefore the builder did not owe a duty of care to the owners corporation at common law.[iii]

New statutory duty of care under the Act

On 11 June 2020, NSW parliament passed the Act as part of its reform to the building and construction industry. The Act forms part of the NSW government’s response to the Shergold-Weir Report,[iv] which considered the effectiveness of compliance and enforcement systems for the building industry nationally. The second reading speech suggests that the Act seeks to improve the remedies available to property owners including subsequent owners of apartments in high rise buildings and owners corporations for claims of pure economic loss.

Accordingly, the Act changes the landscape since the High Court’s judgment of Brookfield by statutorily enshrining that a new duty of care is owed by persons involved in construction work towards certain categories of owners. Section 41 of the Act suggests that the new duty of care does not abrogate from any existing duties or warranties, including the limited duty available under Brookfield. That is to say that the new duty of care is in addition to any existing rights.

Pursuant to section 37 of the Act, from 11 June 2020, a person who carries out construction work owes a statutory duty of care to both current and future owners of the land. Specifically, those persons carrying out construction work are to exercise reasonable care to avoid economic loss caused by defects in or related to a building for which the work is done or arising from the construction work.[v]

The duty of care is owed to an owner regardless of whether the construction work was carried out under a contract or other arrangement with the owner or another person. Parties cannot contract to annul, vary or exclude the duty of care nor can the duty be delegated to another party.[vi]

For the purposes of the Act, an owner means any of the following:

• every person who jointly or severally or at law or in equity is entitled to the land for an estate of freehold;
• for a lot within a strata scheme, the owner of a law within the meaning of the Strata Schemes Management Act 2015;
• for a development lot or neighbourhood lot within a community scheme, the proprietor in relation to the lot within the meaning of the Community Land Management Act 1989 (NSW);
• every person who jointly or severally or at law or in equity is entitled to receive, or receives, or if the land were let to a tenant would receive, the rents and profits of the land, whether as beneficial owner, trustee, mortgagee in possession or otherwise;
• other persons prescribed by the regulations for the purposes of this definition.

For the purposes of the Act, construction work means any of the following:

• building work (which includes residential building work within the meaning of the HBA);
• the preparation of regulated designs and other designs for building work;
• the manufacture or supply of a building product used for building work; or
• supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work referred to in the three (3) sub-points immediately above.

The Act also provides that the regulations may prescribe additional work that is construction work for the purposes of the duty of care. Whilst the regulations have not yet been finalised, the Minister stated in his second reading speech that the duty of care “will apply to construction work in a building that is a class 1, 2, 3 and 10 under the Building Code of Australia.”[vii] Those classes of building include: houses; multi-unit residential buildings; and other buildings such as boarding houses, hostels, backpackers’ accommodation, residential parts of hotels, motels or schools.[viii]

Economic loss suffered by owners corporations

In contrast to the High Court judgment of Brookfield, the Act allows owners corporations or associations to claim damages in negligence when suffering pure economic loss regardless of whether the owners corporation or association owned the land at the time of the construction work.

Pursuant to section 38 of the Act, if an owners corporation or association bears the cost of rectifying which are the subject of a breach of duty of care imposed under the Act (including damage caused by defects), it will be taken to have suffered economic loss for the purposes of the Act. The economic loss includes the reasonable costs of providing alternative accommodation where necessary.

Proving negligence

Pursuant to section 37(3) of the Act, a person to whom the duty of care is owed is entitled to damages for the breach of the duty as if the duty were a duty established by the common law. This means that while a duty of care is statutorily deemed to be owed to current and future property owners, claimants relying upon the new duty of care will be required to meet the tests for establishing negligence under common law and the Civil Liability Act 2002 (NSW).

In addition to establishing the statutory duty of care, a claimant must:

• prove that a breach of the duty of care has occurred; and
• establish that the damage (or economic loss) suffered by the owner was caused by the breach.

New registration requirements

From 1 July 2021, building practitioners, design practitioners, professional engineers and specialist practitioners will be required to be registered. A condition of registration includes maintaining adequate insurance to cover the work of the practitioner.[ix] Failure to comply with this requirement may result in a maximum penalty of $33,000.00 for body corporates and $11,000.00 for individuals.[x]

Regulated designs requirements

From 1 July 2021, registered design practitioners are also required to provide design compliance declarations for certain design work.[xi] Additionally, registered building practitioners must provide compliance declarations for building work carried out in relation to regulated designs.[xii] Failure to comply with these requirements may result in a maximum penalty of $165,000.00 for body corporates and $55,000.00 for individuals.[xiii]

Building practitioners will also be prohibited from carrying out any building work for which a regulated design is to be used unless a compliance declaration has been issued. The compliance declaration declares that the design complies with the Building Code of Australia.[xiv] The maximum penalty applicable for failure to comply with this requirement is $330,000.00 for body corporates and $110,000.00 for individuals.[xv]

Other consequences for failing to comply with the new requirements

In addition to the penalties outlined above, failure to comply with the required obligations under the Act may result in disciplinary action being taken against a practitioner by the Secretary, including:

• fines of up to $110,000.00 for an individual and $220,000.00 for a body corporate;[xvi]
• conditions being imposed on registration, including a requirement for specified education or training;[xvii]
• suspension or cancellation of registration;[xviii] and
• temporary or permanent disqualification of the practitioner.[xix]

Key takeaway points

• In contrast to the High Court judgment of Brookfield, the Act imposes a statutory duty of care on any person who carries out construction work to exercise reasonable care to avoid economic loss caused by defects, even when that party does not rely on the practitioner or is not vulnerable.
• Builders, designers, professional engineers and others involved in the design and construction of all kinds of buildings should be aware of their new obligations.
• Failure to comply with these obligations is likely to result in the imposition of fines, conditions on registration, suspension or cancellation of their registration or temporary or permanent disqualification of the practitioner.

Conclusion

Whilst subsequent owners of apartments in high rise dwellings may have previously experienced difficulties in prosecuting an action in negligence against builders for pure economic loss, the Act removes the hurdle of establishing that a duty of care is owed. Removing such an obstacle potentially makes it easier for apartment owners to prosecute such claims for pure economic loss under the Act.

What should you do?

Contact us if you would like further advice on the duty of care that may be owed under the Act.

Builders and designers should take steps now to comply with the registration, compliance and insurance requirements and be aware of the penalties that may be imposed for non-compliance with the Act from 1 July 2021.

[i] See eg, Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61228 [2014] HCA 36; New South Wales, Parliamentary Debates, Legislative Assembly, 23 October 2019 (Kevin Anderson, Minister for Better Regulation and Innovation).

[ii] See Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61228 [2014] HCA 36 at paras 12, 56-58.

[iii] Ibid.

[iv] Peter Shergold AC and Bronwyn Weir, Building Confidence – Improving the Effectiveness of Compliance and Enforcement Systems for the Building and Construction Industry Across Australia (February 2018).

[v] Design and Building Practitioners Act 2020 (NSW) s 37(2).

[vi] Design and Building Practitioners Act 2020 (NSW) ss 37(4), 39, 40.

[vii] New South Wales, Parliamentary Debates, Legislative Assembly, 23 October 2019 (Kevin Anderson, Minister for Better Regulation and Innovation).

[viii] Ibid.

[ix] Design and Building Practitioners Act 2020 (NSW) s 24.

[x] Ibid.

[xi] Ibid s 9, 12.

[xii] Ibid s 17

[xiii] Ibid.

[xiv] Ibid s 22.

[xv] Ibid.

[xvi] Ibid s 66(c).

[xvii] Ibid s 66(d).

[xviii] Ibid s 66(e).

[xix] Ibid ss 66(f).