Building Sector Overhaul in NSW

Executive Summary

• The NSW Government has introduced legislative reform to prevent defective works and increase public confidence in the construction sector, particularly for high-rise residential buildings, and create a new customer-focused facing construction industry.¹
• Many of the new provisions are now in force, however some sections will not take effect until 1 July 2021.
• Insurance claims are set to rise in 2021 as design and building practitioners and professional engineers must register for professional indemnity insurance.

Background

The NSW Government has unsurprisingly recognised the need for vast change to the obligations on design and building practitioners, introducing the Design and Building Practitioners Act 2020 (NSW) (DBP Act) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act) (together, the Acts). The Acts were assented to on 10 June 2020, although some sections of the DBP Act do not come into force until 1 July 2021. The RAB Act commences on 2 September 2020.

The Acts form part of the first tranche of reforms the NSW Government expect to make as part of a general overhaul of the NSW building industry, which are expected to be implemented between 2019 to 2025. The primary goal of this legislative reform to the building sector is to increase the accountability of design and construction professionals in complying with national building codes and standards.

Prior to the amendments, there were a number of statutory protections already in place for residential building owners, including statutory warranties under the Home Building Act 1989 (NSW) (HB Act), the strata building bond scheme², and the home building compensation cover for buildings up to three storeys.³

However, the Government recognised that more protections needed to be introduced. The subject reforms came off the back of recent cases leaving this space of law uncertain, and various high profile incidences that were heavily scrutinised by the media. Of note, the evacuation of the Opal Towers in Sydney Olympic Park in 2018, followed by the evacuation of the Mascot Towers in Sydney’s inner-south, due to significant defects, created a climate for urgent reform.

The reforms have also occurred as a response to the Building Confidence⁴ Report authored by Professor Peter Shergold AC and Bronwyn Weir of February 2018 (Building Report). The Building Report included findings of the uncertain accountabilities of different parties, insufficient controls on the accuracy of documentation, and, in respect to design practitioners in particular; there was systemic failure to expressly require documentation to demonstrate compliance with the National Construction Code.⁵

While the Acts implement a vast array of amendments made to the outstanding building and construction laws in place, we focus on some key areas that may affect insurers and Insureds in this new legislative landscape.

Key Amendments

DBP Act

In summary, the DBP Act includes the following key provisions:

• a statutory duty of care owed by construction professionals, imposed retrospectively for the 10 years prior to the assent of the Act;
• compliance declarations by design and building practitioners;
• the requirement for design and building practitioners to be registered; and
• compulsory insurance for registered design and building practitioners.

We briefly discuss each in turn below and flag that greater guidance will likely be provided when the Regulations to the DBP Act are enacted. It is likely the Regulations will include the following provisions, the:

• qualifications, skills and experience required for registration, including the approval of training and the approval of persons to conduct the training or to assess persons undergoing the training;
• continuing professional development requirements for registered practitioners;
• particulars relating to regulated designs and compliance declarations that must be recorded, and the form and manner in which they must be recorded;
• keeping of records and the provision of information to the Secretary by practitioners with respect to preparation of regulated designs, building work, professional engineering work or specialist work and compliance declarations; and
• lodging of copies of designs and compliance declarations electronically or otherwise with the Department or another person approved by the Minister.

RAB Act

The DBP Act is supplemented by the RAB Act, which provides provisions for compliance with, and the enforcement of, building and construction legislation and codes. The RAB Act is focused on residential apartment buildings.

Notification prior to completion of building work

The RAB Act protects the public interest by requiring developers to lodge an expected completion notice at least 6 months, but no more than 12 months in advance of completing works, before applying for an occupation certificate for a residential apartment building.⁶ Should this date change, an amendment notice must be issued within 7 days of the developer becoming aware of such change.⁷

This ensures the Secretary is notified of the completion of residential apartment buildings, or any part thereof.

If this is not complied with, the Secretary may make an order prohibiting the issue of an occupation certificate and the registration of a strata plan for a strata schedule (a Prohibition Order).

Who is a developer?

Given the broad definition of developer, insurers should be mindful of the potential for Insureds to fall within this category. A developer is broadly defined in the RAB Act as:⁸

• a person who is directly or indirectly contracted, arranged, or facilitated for building works;
• an owner of the land on which building work is erected or constructed;
• a principal contractor under the Environmental Planning and Assessment Act 1979 (NSW);
• a developer within the meaning of the Strata Schemes Management Act 2015 (NSW); or
• any other person under the Regulations of the RAB Act.

Remedial and rectification powers

The RAB Act introduces remedial and rectification powers for the Secretary in the residential building sector, including:

• Written undertakings which may be accepted by a Secretary from a developer regarding the carrying out of building work;
• Stop work orders which may be issued to developers if works may cause significant harm or loss to the public, present or future owners of a building; and
• Building work rectification orders which allows the Secretary to direct a developer to refrain from or vary building works to remedy a serious defect or a potential serious defect.

Relevantly, a serious defect is defined as:

• a defect in a building element that is attributable to a failure to comply with the performance requirements of the BCA, the relevant Australian Standards or the relevant approved plans; or
• a defect in a building product or building element that:
  • is attributable to defective design, defective or faulty workmanship or defective materials; and
  • causes or is likely to cause:
    • the inability to inhabit or use the building (or part of the building) for its intended purpose; or
    • the destruction of the building or any part of the building; or
    • a threat of collapse of the building or any part of the building; or
  • a defect of a kind that is prescribed by the regulations as a serious defect; or
  • the use of a building product (within the meaning of the Building Products (Safety) Act 2017) in contravention of that Act.

The failure to adhere to these orders may result in a financial penalty to the developer.

Liability

Offences under the RAB Act are applicable to directors of, or those concerned with the management of, a body corporate if they have knowingly authorised or permitted the contravention. ⁹ Hence, liability may arise under professional indemnity and D&O policies for a claim brought against a director or management of a responsible body corporate.

Retrospective effect

The RAB Act is to have a retrospective effect, applying to residential building works that are yet to be completed, or have been completed within the past 10 years (s 5 of the RAB Act). Hence, claims may arise out of a failure to comply with the Secretary’s orders once the RAB Act commences on 1 September 2020. Given the wide definitions of “developer”, it is clear that a wide variety of contractors may be liable to the remedial powers under the RAB Act.

Implications

Obviously the new changes are likely to have wide ramifications for building professionals and insurers alike. The reason for the overhaul is that increased liability will ultimately lead to a greater spread of liability across all tiers of the construction industry. Whether the government achieves that aim remains to be seen.

For building professionals, bearing in mind given the sheer number of high-rise buildings in Sydney over the last decade, the risks of a greater number of claims being made against them has almost certainly increased, particularly now potentially from subsequent owners. Notifications will likely extend beyond civil claims to investigations and disciplinary action (which includes fines) for registered practitioners who do not comply with the new legislation. Practitioners will therefore need to ensure that sufficient cover is available for such regulatory matters.

Given the new duty of care for design professionals, professional indemnity insurers will likely see increased notifications. In pricing risks, insurers will have to consider how they will price this risk for future policies and for renewal. Insurers may well seek to insist on the inclusion of retroactive dates / continuity dates to try and potentially reduce the prospective of claims dating back 10 years, as well as relevant exclusions such as where a professional undertakes specialist building work without being registered to do so.

A consequence of increased claims is that premium will start to increase further – noting the pricing for certifiers is already under pressure significant pressure. That may well result in practitioners being priced out of the insurance market which, in turn, may then cause issues with projects commencing / being completed.

For liability insurers, given manufacturers and suppliers of building products fall within the definition of “construction work”, we expect that there will be a lot more claims under general liability policies.