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POTENTIAL LIABILITY OF DEVELOPERS UNDER DBP ACT

Kreisson

21 October 2022

CASE NOTE – The Owners Of Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659

On 24 May 2022, the Supreme Court in its decision in The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659 (Pafburn) has handed down its second decision in relation to the Design and Building Practitioners Act 2020 (NSW) (DBP Act).

Although the decision related to a procedural ruling, the decision clarifies the scope of the statutory duty of care created by Part 4 of the DBP Act and provides the meaning of:

1.“construction work” in section 36(1) of the DBP Act; and

2.“person” who carries out construction work under section 37 of the DBP Act.

KEY FACTS

Key facts included that:

• The Owners Corporation commenced proceedings for breach of the statutory duty against the developer, Madarina Pty Ltd (Madarina), and the builder, Pafburn Pty Limited (Pafburn P/L).
• Mr Obeid and Mrs Obeid were shareholders and directors of Pafburn P/L. Pafburn P/L owned all the shares in Madarina. Mr Obeid is the sole director of Madarina.
• The Owners Corporation claimed that Madarina engaged in construction work for the purposes of section 36 and owed a statutory duty of care to the Owners Corporation of the DBP Act.
• The claim was made by the Owners Corporation exclusively because of “limitation problems apprehended as arising from a corresponding claim under the Home Building Act 1989.”

ISSUES CONSIDERED

Section 36 of the DBP Act

Construction work as defined in section 36 of DBP Act means any of the following:

“(a) building work,

(b) the preparation of regulated designs and other designs for building work,

(c) the manufacture or supply of a building product used for building work,

(d) supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work referred to in paragraph (a), (b) or (c).”

The Court considered the meaning of the terms “substantive control over the carrying out of” found in section 36.

This was relevant to the claim by the Owners Corporation which argued that Madarina carried out construction work under section 36(d) and in circumstances where the supervising, coordinating and project managing during the construction of the scheme was carried out by Pafburn P/L and/or its employees and subcontractors.

What did the Court say?

The Court held that in order to be in “substantive control over the carrying out of” building work it is sufficient to establish that the person was in a position where it was able to control how the work was carried out, which is to be established on the facts.

The Court went on to say the following:

1. In the case where a developer owns all the shares in a builder, and had common directors, an inference may be drawn that there was an ability to control the carrying out of building work,
2. however, where the position is the other way around, namely that the builder owns all the shares in the developer, as was the case in Pafburn, drawing that inference is more difficult.

Meaning of “person” in section 37 of the DBP Act

The Defendants argued that, on the proper interpretation of section 37(1), of the DBP Act, a “person” who carries out construction work does not include a person who was the owner of the land at the time the construction work was carried out, which was Madarina in this case.

Relevantly, Section 37 says:

(1) A person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects—

(a) In or related to a building for which the work is done, and

(b) arising from the construction

(2) The duty of care is owed to each owner of the land in relation to which the construction work is carried out and to each subsequent owner of the land.

(3) 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.

(4) The duty of care is owed to an owner whether or not the construction work was carried out—

(a) under a contract or other arrangement entered into with the owner or another person, or

(b) otherwise, than under a contract or arrangement.”

The Defendants said that if a person who carries out construction work as referred to in section 37(1) includes the owner of the land in relation to which the construction work is carried out, then, read literally, the effect of section 37(2) is that such an owner would owe a duty to itself to avoid a loss referred to in section 37(1).

What did the Court say?

The Court did not agree with the Defendants’ interpretation of the meaning of person in section 37 of the DBP Act as it was said to be against the intention of parliament. The Court confirmed that a “person” can include an owner of land who carries out construction work on that land (i.e. a developer who has carried out construction work within its meaning found in section 36 of the DBP Act).

KEY TAKEAWAYS 

Although the decision related to a procedural matter and is subject to a final hearing, the decision does indicate that:

1. The commercial and legal relationship between a developer and a builder may result in a developer being liable for a breach of statutory care under the DBP Act where it can be established that the developer had substantial control over the carrying out of building work.
2. to have substantial control over the carrying out of building work it is only required to establish that the person was in a position where it was able to control how the work was carried out.
3. to prove on the facts that a developer had substantial control over the carrying out of building work by a builder owned by the developer is easier than when the relationship between developer and builder is in the reverse (i.e. where the builder owns all the shares in the developer).
4. in such a case, a developer owes a statutory duty of care to exercise reasonable care to avoid economic loss caused by defects in relation to construction work prescribed by section 36 of the DBP Act.

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