High Court ruling on Pafburn tests the foundations of construction industry

In a much anticipated decision for the construction industry, the High Court has confirmed that the duty of developers and head contractors is not apportionable under the Design and Building Practitioners Act. So where does this leave developers in the midst of a housing crisis?

Pafburn Pty Limited v The Owners – Strata Plan No 84674 [2024] HCA 49

The long-awaited decision of Pafburn Pty Limited v The Owners – Strata Plan No 84674 [2024] HCA 49 was handed down by the High Court on 11 December 2024.

The case concerns whether claims for breaches of the statutory duty contained in s 37(1) of the Design and Building Practitioners Act 2020 (NSW) (DBPA) are apportionable claims when pursuing a builder or developer.

Facts

• The Owners of Strata Plan No 84674 (Owners) commenced proceedings against Pafburn Pty Ltd (Builder) and Madarina Pty Ltd (Developer) in the Supreme Court of NSW for breaches of the statutory duty contained in s 37(1) of the DBPA, to exercise reasonable care to avoid economic loss caused by defects (Statutory Duty).
• In defence of the allegations made by the Owners, the Builder and the Developer pleaded that the claim brought by the Owners was ‘apportionable’ and subject to Part 4 of the Civil Liability Act 2005 (NSW) (CLA).
• The Owners brought a motion to strike out the Proportionate Liability Defences on the basis that section 39 of the DBPA prescribes that the Statutory Duty is non-delegable.

Primary decision

The Developer and the Builder argued that, despite the wording of s 39 of the DPBA, the Statutory Duty, arose from statute and not in tort. The Developer and the Builder argued that s 5Q only applied to duties which arose in tort.

At first instance, her Honour Rees J held that the Builder and Developer were entitled to apportion their liability as:

1. s 37 of the DBPA created a statutory duty, which is not a duty of care that arises in tort; and
2. s 39 prescribes that the Statutory Duty is non-delegable, which is separate to the non-delegable duty in tort described in s 5Q of the CLA.

NSW Court of Appeal decision

The Court of Appeal overturned the decision of the Supreme Court of NSW and held that:

1. there was no basis for the Supreme Court’s confined construction of the words “liability in tort” and “breach of a non-delegable duty”;
2. the wording of s 5Q of the CLA cannot sensibly be construed as excluding tortious liability which is dependent on statute; and
3. whether as a matter of general law principles, or by operation of s 5Q, the liability of the respondents in the present case should be treated as a form of vicarious liability and so the proportionate liability defence was not available to either the Developer or the Builder.
4. The effect of the Court of Appeal decision is that a person owing the Statutory Duty would be required to bring cross-claims against concurrent wrongdoers for contribution.

High Court appeal

The Builder and the Developer appealed to the High Court of Australia to set aside the Court of Appeal decision and reinstate the orders of her Honour Rees J.

The Builder and the Developer appealed on the following grounds:

1. s 5Q does not apply to claims for breach of duty of the Statutory Duty;
2. it is not implicit in the ordinary interpretation of s 39 of the DBPA that proportionate liability cannot be relied on as a defence in respect of claims made for breaches of the Statutory Duty; and
3. if s 5Q is enlivened by a cause of action under Pt 4 of the DBPA, the Court of Appeal erred in concluding that no apportionment is to occur even when there exists, amongst the concurrent wrongdoers in respect of a defect, persons to whom the defendant did not delegate or otherwise entrust work or a task.

The Owners maintained that the Statutory Duty is non-delegable, and the Builder/Developer is wholly liable for the damages sought. In respect of the CLA, the Owners argued:

1. s 5Q has the effect that a breach of a non-delegable duty will be treated as if it is vicarious; and
2. s 39 means that vicarious liability will apply irrespective of what is set out in the proportionate liability legislation.

In respect of the Builder/Developer’s submission that the Statutory Duty extends to persons who physically carry out the works, the Owners argued:

1. the Builder/Developer’s construction of s 37 of the DBPA is inconsistent with Part 4;
2. s 37 of the DBPA applies to anyone with ‘substantive control’ and there is no requirement that the head contractor physically carry out the work; and
3. the absence of the word ‘ensure’ in s 39 of the DBPA does not mean that s 5Q of the CLA does not apply.

High Court decision

A majority of the High Court (4 Justices agreeing, with 3 Justices dissenting) dismissed Pafburn’s appeal and held that:

1. the Statutory Duty cannot be delegated (i.e., the Builder and the Developer cannot apportion any part of their liability to persons whom they have delegated the construction work); and
2. persons in the roles of a head contractor and developer are to be held vicariously liable for the breaches of the Statutory Duty committed by a person in connection with the carrying out the construction work for which they have been engaged.

What next

Section 37 of the DBPA creates the duty; it does not provide the consequence for breach of that duty. The consequence is dealt with at common law, the ‘civil wrong’ being the breach of the Statutory Duty, is remedied by an action in the tort of negligence. The High Court found that the Statutory Duty is non-delegable, where a developer or builder has been engaged to construct the whole of the works.

Interestingly, and despite the majority’s firm view, a question has been left open as to whether claims for breaches of the Statutory Duty in respect of part a building work is apportionable i.e. where a developer has engaged multiple head contractors to carry out construction work in respect of a single project – that question remains unanswered.

Ultimately the High Court’s decision prompts a consideration that, before the issue of the interaction of the DBPA with the CLA is approached in the context of dealing with a claim under s 37(1) of the DBPA, a party must approach that issue with the likelihood that the defendant(s) will be dealt with as if they are vicariously liable for breaches committed by subcontractors and consultants.

So, relevantly, the question becomes “how does the CLA deal with claims which cannot be delegated and for which vicarious liability attaches?” and the answer is, invariably, that the proportionate liability scheme will not apply.

Key takeaways

A head contractor or developer cannot apportion liability to its subcontractors or consultant by exercising reasonable care to engage skilled and competent persons to carry out the construction work (including design and certification of the construction work).

A head contractor or developer will be held to be vicariously liable to an owner for breaches of the Statutory Duty caused by those which they have engaged to carry out all or part of the construction work.

Accordingly, developers and head contractor should bear this decision in mind from the very beginning of the project phases. The level of risk assumed by a contractor who is engaged to deliver an entire scope of work should be considered carefully and, where appropriate, the contractor should make realistic concessions in its tenders and gauge the Developer’s appetite to bundle or package the project scope into smaller phases, with a view to awarding them to contractors with experience expertise relevant to that scope.

Whilst on its face, the decision may be seen as a win for Owners, the result of the decision will invariably be:

• to increase construction costs – as builders and developers will not be able to plead proportionate liability of subcontractors or consultants as their defence to a claim;
• insurance premiums for those builders and developers will rise in the face of non-delegable obligations for 10 years post completion; and
• uncertainty for consultants, including designers, who will be able to continue to plead proportionate liability (for example, where services fell outside of their scope).