Builders beware: NSW Court of Appeal shatters proportionate liability shield for breach of non delegable statutory duty of care

Proportionate liability cannot be used in defence against a claim for breach of a non-delegable statutory duty of care. The NSW Court of Appeal held the builder and developer of a residential building vicariously liable to subsequent owners for defects caused as a result of the negligence of various independent subcontractors.

In issue

• Whether a defendant is able to rely on the proportionate liability provisions contained in Pt 4 of the Civil Liability Act 2002 (NSW) (CLA) when it has been sued for an alleged breach of the non-delegable statutory duty of care imposed under the Design and Building Practitioners Act 2020 (NSW) (DBP Act) to exercise reasonable care to avoid economic loss caused by defects.

The background and Interlocutory Judgment

The Applicant was the Owners Corporation of a strata development in North Sydney (Owners Corporation). The Respondents were the builder of that development, Pafburn Pty Limited and the developer, Madarina Pty Limited (collectively the Respondents).

The Owners Corporation alleged that the development contained defects and commenced proceedings against the Respondents in the Supreme Court of New South Wales for breach of the statutory duty of care owed under the DBP Act. In response, the Respondents pleaded a proportionate liability defence, naming nine others as concurrent wrongdoers. The Owners Corporation applied to summarily dismiss or strike out the proportionate liability defence due to the combined operation of ss 37, 39 and 41 of the DBP Act and ss 5Q and 39(a) of the CLA. Relevantly:

1. Section 37 of the DBP Act establishes that a builder or developer owes a duty to exercise reasonable care to avoid economic loss caused by defects to owners and subsequent owners of the relevant property under construction and that such owners are entitled to damages for breach of such duty 'as if the duty were a duty established by the common law'.
2. Section 39 of the DBP Act provides that the statutory duty of care under s 37 is non-delegable, meaning that a party allegedly owing this duty cannot discharge it by delegating it elsewhere.
3. Section 41 of the DBP Act confirms that the sections of the DBP Act imposing the statutory duty are subject to the CLA and do not limit but, rather, are in addition to any duties or obligations imposed by legislation or common law.
4. Section 5Q of the CLA equates 'liability in tort' of a person for breach of a non-delegable duty with vicarious liability. That section applies to an 'action in tort'.
5. Section 39(a) of the CLA provides that nothing in Pt 4 of the CLA 'prevents a person from being held vicariously liable for a portion of any apportionable claim for which another person is liable'.

During an interlocutory hearing, the Owners Corporation argued that the above sections precluded a defendant’s reliance on the proportionate liability regime for breaches of the duty under s 37 of the DBP Act, otherwise the ‘non-delegable’ statutory duty would become ‘delegable’. This argument was ultimately unsuccessful, as Rees J held that s 5Q of the CLA was confined to the common law and did not encompass statutory liabilities such as the duty under s 37 of the DBP Act. On this basis, the Supreme Court of NSW dismissed the Owners Corporation’s application (Interlocutory Judgment).

The Owners Corporation sought leave to appeal the Interlocutory Judgment.

The issues on appeal

The main issues on appeal were whether:

1. the non‑delegable duty created by s 37(1) of the DBP Act was a 'tort' for the purposes of s 5Q of the CLA; and
2. the proportionate liability provisions in Pt 4 of the CLA applied.

The decision on appeal

The Court of Appeal (Adamson JA and Basten AJA, Ward P agreeing) granted the Owners Corporation leave to appeal the Interlocutory Judgment and ultimately decided the appeal in its favour, ordering that the relevant paragraphs of the Respondents’ pleadings in the primary proceedings regarding proportionate liability be struck out.

In relation to the first issue of whether the non-delegable statutory duty was a 'tort', the Court of Appeal found that references in s 5Q of the CLA to 'liability in tort' and 'an action in tort' were not intended to exclude some circumstances in which non‑delegable duties were imposed. Rather, the aim of the section was to address the full scope of non-delegable duties and the use of these references merely reflected an understanding that the concept of whether a duty was delegable only arose with respect to actions in tort. The terms 'liability in tort' and 'breach of a non-delegable duty' in s 5Q should not be read down as being confined to common law, because doing so would undermine the statutory purpose of the provision.

The Court observed that the duty of care established by s 37 of the DBP Act contained a 'deeming phrase' at s 37(3), which included the phrase 'as if the duty…were established in common law'. To give effect to the purpose of this phrase in describing an existing duty that is extended by statute, a claim for breach of such duty must be treated as one brought under common law for all purposes, including in addressing application of Pt 4 the CLA. Having considered case law regarding the definition of a tort and breach of statutory duty, the Court reasoned that the inevitable conclusion of principles arising from relevant jurisprudence was that a cause of action for a breach of a duty imposed by a statute, in turn, invoked liability in tort.

In relation to the second issue of whether the proportionate liability provisions applied to the proceedings, the Court held that the designation of the duty as non-delegable by s 39 of the DBP Act was sufficient to exclude Pt 4 of the CLA. Their Honours observed that the CLA equated the liability for breach of a non-delegable duty with vicarious liability, and that the proportionate liability statute in Pt 4 did not apply to vicarious liability. Accordingly, the duty imposed under s 37 should be considered as a form of vicarious liability for any breaches by concurrent wrongdoers and could not be avoided based on the rule that a principal is not liable for breach of duty by its independent contractor. On this basis, the Court held that the Respondents were vicariously liable for the whole of any loss and that the duty owed was not subject to any limitation by way of apportionment.

Implications for you

The case warrants careful consideration. As a result of Pafburn, those persons who have delegated some or all of their duty to a potential plaintiff to others (for example, to one or more subcontractors) cannot rely on the proportionate liability regime to reduce their liability by naming those subcontractor(s) as concurrent wrongdoers. That liability could of course be reduced through cross-claims or later recovery proceedings. The decision does not appear to impact those persons who rely on the proportionate liability regime that have not otherwise delegated their duty.

As such, the decision has the potential to significantly impact builders and developers (and even contractors on larger scale projects) who have subcontracted some or all of their obligations. In the event that a subcontractor is impecunious, that pain will not be felt by the plaintiff. Consultants sitting at the bottom of a contractual chain should have little to worry about.

However, practically, the decision will likely see greater complexity in case management of proceedings given the need for cross-claim(s). Plaintiffs too may need to pause and carefully consider who to name in proceedings alleging a breach of the DBP Act.

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

For additional background, see our earlier case note on the Interlocutory Judgment, as well as other related articles on the DBP Act below.