Pafburn v The Owners (2024): High Court Rules Builders Liable for Subcontractor Defects

KEY TAKEAWAYS:

• The Design and Building Practitioners Act 2020 (NSW) imposes a non-delegable duty of care on developers and head contractor builders to ensure reasonable care is taken to avoid defects in construction. This means they cannot simply contract out of this responsibility by hiring subcontractors or other third parties.
• The High Court’s decision in Pafburn Pty Limited v The Owners – Strata Plan No 84674 [2024] HCA 49 reiterates that claims for breach of the NSW statutory duty of care are not ‘apportionable’.
• Developers and Builders are liable for breaching the statutory duty and cannot point to concurrent wrongdoers such as subcontractors or third parties who have undertaken the defective work to minimise their liability and exposure.
• Developers and builders must ensure that all construction work is carried out to a high standard and that proper processes are in place to identify and rectify defects.

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

The Owners – Strata Plan No 84678 initiated legal proceedings against Pafburn Pty Ltd (“Pafburn”) and Madarina Pty Ltd (“Madarina”) over defects in the Building at 197 Walker Street, North Sydney. The owners claimed that both companies breached their statutory duty of care under s 37(1) of the Design and Building Practitioners Act 2020 (NSW) (“the DBPA”). This section requires anyone carrying out construction work to exercise reasonable care to avoid economic loss caused by defects in or related to the building arising from the construction work.

Pafburn and Madarina argued that if the Owners suffered loss or damage as a result of either or both of them having breached the duty under s 37(1) of the DBPA, the claim against them is an “apportionable claim” pursuant to s 34 of the Civil Liability Act 2022 (NSW) (“the CLA”) and identified various other parties as concurrent wrongdoers under Pt 4 of the CLA. Accordingly, they both pleaded that any liability they have to the Owners, in accordance with s 35(1)(a) of the CLA, should be limited to an amount reflecting that proportion of the damage or loss claimed that the court considers just having regard to the extent of the responsibility of each of them for the damage or loss.

The Owners sought to strike out Pafburn and Madarina’s proportionate liability defences on the basis that s 39 of the DBPA makes the under s 37(1) non-delegable. This means that Pafburn and Madarina cannot escape liability for construction defects by blaming subcontractors. It was argued that even if proportionate liability might otherwise apply, the person with the non-delegable duty remains fully liable for the actions of those they engaged.

Initially the primary judges allowed Pafburn and Madarina to plead the Proportionate Liability Defences. However, the Court of Appeal overtuned this decision, ruling that the duty under s 37(2) is non-delegable. Pafburn and Madarina then appealed the decision to the High Court.

The High Court dismissed Pafburn and Madarina’s appeal affirming that:

• Section 39 of the DBPA clarifies that the duty under s 37(1) cannot be discharged by merely delegating tasks. The person with the duty must ensure it is properly performed.

• Builders are fully responsible for the actions of the subcontractors or other third parties they engage and any work delegated will be treated as vicarious liability.

• The proportionate liability scheme under the CLA does not apply to claims made under the DBPA.

What Does the High Courts Decision Mean for Builders and Developers?

1. Increased Responsibility

Builders and Developers cannot simply delegate tasks and expect to avoid liability for economic loss caused by a breach of the DBPA duty of care. They must ensure all work, even if done by subcontractors or other third parties, meets the required standards.

2. Vicarious Liability

Builders are treated as vicariously liable for the actions or negligence of anyone they delegate work to. This means they are responsible for any mistakes or negligence by subcontractors and other third parties. As such, The property owner’s claim is against the developer or builder, and it is up to the developer or builder to prove that another party is liable for the defects.

3. No Liability Shifting

Builders cannot limit their liability by blaming subcontractors and other third parties. They are fully responsible for the entire construction work regardless of who actually performs the tasks. If Builders and developers are pursued and suffer loss as a result of a subcontractor or third parties’ actions, they will need to consider filing cross-claims to recoup any money they have to pay to the owner. This shifts the time, expense, and risk of pursuing these other parties to the developer or builder.

4. Compliance and Oversight

Builders need to have robust oversight and compliance mechanisms in place to ensure that all work meets legal and safety standards. This may involve more thorough vetting and supervision of subcontractors and other third parties.

5. Legal and Financial Obligations

Builders may face higher legal and financial risks. They need to be prepared for potential claims. Builders and Developers should:

• Review contracts: Review contracts with subcontractors and third parties to ensure they have forceful indemnity clauses.
• Strengthen risk management: Implement stronger risk management strategies to prevent defects from occurring in the first place.
• Pursue subcontractors/third parties: Be prepared to engage in litigation (via cross-claims) against subcontractors to recover costs for defective work.
• Increase insurance: Consider the potential for increased liability and ensure adequate insurance coverage is in place. It is recommended that Builders and Developers review their current insurance coverage.

If you are a Builder or Developer and are facing issues or claims relating to loss or damage as a result of works undertaken by subcontractors or third parties, our expert Building and Construction team at Coutts can assist you to navigate such claims and advise you of your options. Reach out to our Team!

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