Shift­ing the dial on build­ing defects lia­bil­i­ty – a greater risk for com­pa­ny direc­tors and devel­op­ers under recent leg­isla­tive reform

Under the Home Build­ing Act 1989, claimants in defec­tive build­ing cas­es against cor­po­rate builders and/​or cor­po­rate devel­op­ers may hit a road­block in the case of ulti­mate insol­ven­cy of those par­ties even if the claims are suc­cess­ful and rec­ti­fi­ca­tion or dam­ages orders are made in respect of the defects. 

Has this now changed? Are the con­trol­ling minds of those com­pa­nies, tra­di­tion­al­ly not touched by such lit­i­ga­tion, now at risk? 

We are all aware that the Build­ing Com­mis­sion­er of New South Wales is util­is­ing his ever increas­ing pow­ers under con­tin­u­ing con­struc­tion reform in NSW to stamp out ​‘risky’ builders and devel­op­ers with the intent of tag­ging those par­ties with a label to pre­vent them ever build­ing again or at least be in the dif­fi­cult posi­tion of being unable to obtain insur­ance for the per­for­mance of build­ing works. 

Three NSW Supreme Court deci­sions hand­ed down dur­ing 2022 by His Hon­our Jus­tice Steven­son sug­gest those ​“con­trol­ling minds”, may not be as safe a pre­vi­ous­ly thought. Whilst we may be see­ing some appeal deci­sions out of these cas­es, the path ahead is clear, direc­tor’s for­mer­ly pro­tect­ed, may not be pro­tect­ed any more.

This new direc­tion is all down to one thing. The Design and Build­ing Prac­ti­tion­ers Act 2020 (DBP Act) has brought in changes for defect claims to intro­duce a new statu­to­ry duty of care. This duty of care is now held by a ​‘per­son’ who car­ries out con­struc­tion work. A ​‘per­son’ must now exer­cise rea­son­able care to avoid eco­nom­ic loss caused by defects aris­ing from con­struc­tion work. 

How the law defines ​‘con­struc­tion work’ and ​‘per­son’ is emerg­ing which (although the deci­sions being dis­cussed may be chal­lenged on appeal), is not real­ly sur­pris­ing giv­en the Par­lia­men­tary ​‘intent’ of the DBP Act which has been clear since the out­set — to build bet­ter build­ings and to increase con­sumer confidence. 

Con­struc­tion work includes (as expect­ed) build­ing work. But, ​‘con­struc­tion work’, also includes ​“super­vis­ing, coor­di­nat­ing, project man­ag­ing or oth­er­wise hav­ing sub­stan­tial con­trol over the car­ry­ing out” of the build­ing work. 

The emerg­ing path is illus­trat­ed by the Supreme Court judg­ments in three recent cas­es. Those cas­es are Paf­burn No. 1 [2022] NSWSC 659, Paf­burn No. 2 [2022] NSWSC 1002 (Paf­burn cas­es) and Bou­los Con­struc­tions Pty Ltd v War­rum­bun­gle Shire Coun­cil (No 2) [2022] NSWSC 1368 (Bou­los).

The Paf­burn cas­es con­cerned the same build­ing. The claimant had alleged its build­ing was defec­tive­ly con­struct­ed and sued the builder and devel­op­er under the DBP Act. Both of these defen­dants were cor­po­ra­tions. The builder replied that it had car­ried out con­struc­tion work, but the devel­op­er denied it had car­ried out the work and asked the court to strike out the claim against it, say­ing the case could not pos­si­bly succeed. 

The devel­op­er argued it could not be liable because it did not car­ry out the work and fur­ther­more did not super­vise, project man­age or have con­trol over the car­ry­ing out of the work. 

In the Paf­burn cas­es, the builder and devel­op­er had a par­tic­u­lar struc­ture one often sees. First­ly, they were both cor­po­ra­tions. Sec­ond­ly, the builder had a build­ing licence. The sole direc­tor of the devel­op­er (Mr Obeid) was also one of the two direc­tors of the builder. And Mr Obeid was also per­son­al­ly the nom­i­nat­ed super­vi­sor on the build­ing licence. 

Jus­tice Steven­son heard the Paf­burn cas­es. He decid­ed two impor­tant points. First­ly, he said that the words, ​“super­vise, project man­age or have con­trol” of work does not mean to actu­al­ly exer­cise con­trol, but instead means able to con­trol that work. Sec­ond­ly, he said that it was arguable that Mr Obeid being both sole direc­tor of the devel­op­er and the builder’s nom­i­nat­ed super­vi­sor were two impor­tant pieces of infor­ma­tion. And giv­en this infor­ma­tion, it was arguable that Mr Obeid had the abil­i­ty to con­trol the car­ry­ing out of work and that he did in fact con­trol the car­ry­ing out of that work. 

And as a result, because Mr Obeid had that abil­i­ty, Jus­tice Steven­son said he would not strike out the defects claim against the devel­op­er and also said the case should go on.

In the deci­sion of Bou­los, Jus­tice Steven­son grant­ed leave to the plain­tiff in a build­ing defects case, to amend its plead­ings to include the man­ag­ing direc­tor and project site super­vi­sor of the defen­dant builder, as defen­dants in a per­son­al capac­i­ty as ​‘per­sons’ for the pur­pos­es of sec­tion 37 of the DBP Act. 

A defence of ​‘ille­gal­i­ty’ argued by the Builder’s legal rep­re­sen­ta­tive, was reject­ed stat­ing that that argu­ment was only rel­e­vant where it was being con­sid­ered as to whether ​‘a duty should be held to arise at all’ [17 – 18] not where that ques­tion did not arise because sec­tion 37 already states that there is such a duty.

The next ques­tion to be con­sid­ered in Bou­los was whether the direc­tor and/​or the project site super­vi­sor (Mr Boulus or Mr McCarthy) were ​‘per­sons’ for the pur­pos­es of s37 of the DBP Act. His Hon­our made ref­er­ence to his ear­li­er deci­sions in the Paf­burn cas­es and failed to accept the Builder’s Coun­sel’s legal argu­ments, on the ques­tion of whether Mr Bou­los or Mr McCarthy exer­cised ​‘con­trol over the car­ry­ing out of the build­ing work’, that, ​‘such a broad inter­pre­ta­tion could make hun­dreds, or on a very large job even thou­sands, of peo­ple per­son­al­ly liable in respect of the con­struc­tion work over which they have con­trol or super­vi­sion, which would have far reach­ing and neg­a­tive impacts on the con­struc­tion indus­try’ [30].

His Hon­our did not accept this argu­ment and went on to dis­cuss the def­i­n­i­tion of ​‘per­son’ as opposed to ​‘prac­ti­tion­er’ under the DBP Act in some detail. His Hon­our held at [61] ​“I am unable to see by what process of statu­to­ry inter­pre­ta­tion that word could be read down to mean a per­son act­ing ​‘in their own capac­i­ty. That would, in effect, involve read­ing ​‘per­son’ in s37(1) as mean­ing ​‘prac­ti­tion­er”.

Whilst it is clear it will be a ques­tion of fact in each par­tic­u­lar case, there fol­lows an inter­est­ing ques­tion, if the nom­i­nat­ed super­vi­sor con­trolled the build­ing work, does this mean that not only might the devel­op­er be liable, but also the nom­i­nat­ed super­vi­sor per­son­al­ly? If this were the case, claimants may not be bound by the pre­vi­ous dif­fi­cul­ties in suing cor­po­ra­tions, but may also pur­sue indi­vid­u­als for their loss­es, despite the cor­po­rate structures.

Time will tell if these recent cas­es will have that effect. As evi­denced by the above, these cas­es are con­tin­u­al­ly emerg­ing and we are anx­ious­ly await­ing fur­ther deci­sions to be in a posi­tion to clear­ly apply the new law to each build­ing defects case. 

With the com­bi­na­tion of fur­ther leg­isla­tive reform pend­ing, includ­ing the Build­ing Bill 2022 and fur­ther amend­ing leg­is­la­tion, the world of ​“NSW con­struc­tion” con­tin­ues to evolve and devel­op with the ulti­mate aim of the return of con­sumer con­fi­dence in the industry. 

Helen Kow­al, Partner

Nicholas Hufton, Spe­cial Counsel

Swaab Projects Team