By Slim Majority, the High Court in Pafburn Says No: Developers and Head Contractors Cannot Apportion Liability Under the DBPA!

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In a narrow 4:3 ruling, the High Court of Australia in Pafburn Pty Limited v The Owners – Strata Plan No 84674 [2024] HCA 49 (Pafburn) has dismissed the appeal of a developer and head contractor, ruling that liability for breaches of the statutory duty under section 37 of the Design and Building Practitioners Act 2020 (NSW) (DBPA) cannot be apportioned under proportionate liability legislation. This highly anticipated decision significantly expands liability, holding developers and head contractors accountable for defects arising from the work of consultants or subcontractors.

The Facts

Background

The Owners Corporation of a North Sydney residential complex (the Owners) commenced proceedings against Pafburn Pty Ltd (the Builder) and Madarina (the Developer) for breaching their statutory duty of care under section 37 of the DBPA. The Owners claimed that the Builder and Developer failed to take reasonable care to prevent economic loss caused by construction defects. In response, the Builder and Developer sought to apportion liability for the defects among nine other concurrent wrongdoers involved in the construction, including the waterproofing contractor, the manufacturer and installer of the aluminium composite panels, the architect, the private certifier and even the local council. The Builder and Developer argued that, under Part 4 of the Civil Liability Act 2002 (NSW) (CLA), liability for the defects should be shared. The Owners contended, however, that the statutory duty under the DBPA was non-delegable, meaning the Builder and Developer could not shift responsibility for the defects to other parties that the Builder and Developer had delegated work to during construction.

Application to Strike Out Proportionate Liability Defences

The Owners sought to strike out the Builder and Developer’s proportionate liability defences. They argued that section 39 of the DBPA explicitly states that the statutory duty of care is non-delegable, preventing reliance on the proportionate liability provisions of the CLA. The Owners further contended that, under section 5Q of the CLA, the Builder and Developer should be treated as if they were vicariously liable for the negligence of those performing delegated work, including the alleged concurrent wrongdoers. As a result, the Builder and Developer should not be allowed to apportion liability for the defects to subcontractors or other parties involved in the construction work.

Key issue

The key issue was whether the Builder and Developer’s duty under the DBPA could be apportioned under the CLA, allowing them to share liability with other parties involved in the construction process.

 What did the Court say?

Primary Decision

The Supreme Court of NSW initially found that the Builder and Developer could plead the proportionate liability defences. Rees J rejected the Owners’ argument, determining that a claim for breach of duty under the DBPA was an apportionable claim under Part 4 of the CLA. Her Honour held that vicarious liability under section 5Q of the CLA applied to a defendant’s breach of a non-delegable duty in tort under common law, but not to the statutory duty under section 37 of the DBPA. This meant that the way in which parties led disputes remained largely unchanged.

Court of Appeal

The NSW Court of Appeal overturned the primary decision, ruling that the statutory duty of care under the DBPA is non-delegable. The Court found that section 39 of the DBPA expressly excludes the application of the proportionate liability provisions in Part 4 of the CLA. It also held that sections 5Q and 39(a) of the CLA treat breaches of the non-delegable duty as a form of vicarious liability, meaning the Builder and Developer’s liability cannot be reduced by the liability of others, thereby preventing any apportionment of liability for breaches of the statutory duty under the DBPA.

 High Court

 The Builder and Developer sought to appeal the Court of Appeal’s decision and reinstate Rees J’s orders. However, in a slim 4:3 ruling, the High Court dismissed the appeal, affirming that developers and head contractors cannot apportion liability for defects under the DBPA. The Court held that, under section 5Q of the CLA, they are vicariously liable for defects arising from the construction work, including those caused by subcontractors or consultants. Effectively, the Builder and Developer could not limit their liability by shifting responsibility to other parties involved in the construction process.

What does this mean for you?

Developers and head contractors who delegate construction work may not be able to apportion their liability under the DBPA. Depending on the circumstances, they may be vicariously liable (that is, 100% liable) for any economic loss caused by defects, including those resulting from the negligence of their consultants and subcontractors.

 Implications

 While owners of defective buildings will undoubtedly welcome the High Court’s decision. It will have several practical and potentially onerous implications for developers and builders:

  1. Increased exposure:
  • Developers and head contractors now face greater liability to exposure, leading to higher construction costs.
  1. Rise in cross-claims:
  • Developers and head contractors will need to pursue cross-claims against other parties involved in the construction to seek contribution for defects.
  • This complicates case management of proceedings, as defendants may struggle at the outset to identify other parties’ roles in the project, determine appropriate causes of action and balance the cost risks of joining third parties.
  1. Higher insurance premiums:
  • The removal of proportionate liability defences is expected to lead to higher insurance premiums and increased difficulty in obtaining insurance coverage for construction stakeholders.
  1. Limited scope (for now):
  • The decision currently applies only to developers and head contractors.
  • The High Court primarily focused on whether developers and head contractors can apportion liability, leaving the question unresolved of whether other parties, such as consultants or subcontractors (particularly when they have not delegated any part of construction works), can rely on apportionment defences.
  • Interestingly, the minority raised doubts about whether a certifier or local council, in performing their duties, even qualifies as “a person who carries out construction work” under the DBPA, raising further ambiguity about their potential liability under the Act.

Bradbury Legal is a specialist building and construction law firm. If you or anyone you know requires advice or assistance, reach out to us on (02) 9030 7400, or email us at [email protected] to see how we can assist you.

Righting the Wrong in Wrongful Termination

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A common reason why an owner may seek to terminate a building contract is that they believe the builder has taken too long to complete the works. They would then claim that the builder has failed to proceed with due diligence under the contract.

For this argument, an owner must be able to show that the builder did not proceed with the works with due diligence within the time stipulated in the contract – which is a breach of the contract and the statutory warranties (as set out in section 18B of the Home Building Act 1989 (HBA)).

This concept of claiming a ‘due diligence breach’ was established in Re Stewardson Stubbs & Collett Pty Ltd v Bankstown Municipal Council [1965] NSWR 1671, which stated that the requirement of due diligence is breached when there is a failing to act with a level of promptness that is expected of a reasonable person undertaking a building project with regard to the contract. However, several cases have since challenged the ease with which owners are able to terminate building contracts by way of alleging a breach of due diligence.

Let’s start with a review of the statutory warranties

Implied into every residential building contract, the HBA states that the works under a building contract will be completed within the time stipulated in the contract or, if there is no time stipulated, within a reasonable time. For example, it must take into account instances that are out of the builder’s control such as third party delays. The HBA also determines that the owners must allow reasonable access to the site for builders who may be seeking to rectify any defects.

Turner Corporation Ltd (Receiver and Manager Appointed) v Austotel Pty Ltd (1994) BCL 378

In this case, Turner appealed the decision in favour of Austotel for the recovery of costs of engaging third parties to rectify defects in Turner’s work without notice and without allowing Turner to rectify the defects. The Court found that the owner did not follow the procedural steps and notice provisions in the contract relating to the defects. Here it is important to acknowledge sections 18BA(3)(a) and (b) of the HBA whereby the owners, through their own conduct, prevented Turner from rectifying the defects and were ultimately unsuccessful as a result.

Hometeam Constructions Pty Ltd v McCauley [2005] NSWCA 303

In this case, it was decided that practical completion of the building work would be in May 2000, and in July of the same year a notice of default was served on the builder for failing to proceed with the building works with due diligence, and by the date for practical completion. In August 2000, the owners terminated the contract, claiming that the builders had failed to remedy the situation. The Court held that there had been no breach of contract, and the builder’s delay and lack of programme for completion, was not enough to amount to a substantial breach of due diligence.

Patel v Redmyre Group Limited [2021] NSWCATAP 132

In this case, the builder worked on the restoration of a residential apartment terrace which was to be completed within 32 weeks. However, the building was not complete by the time specified in the contract and the owners issued a notice of termination with immediate effect. At the time the notice was issued to the builder, the work was 26 weeks behind schedule. The builder sought to rectify the defects, but the owner did not allow access to the site. NCAT held that the builder did not fail to proceed with due diligence and no damages for delay or incomplete works were awarded as the owners failed to mitigate the loss and provide reasonable access to rectify the defects.

THINGS TO CONSIDER

In summary, whether you are a builder or an owner, there are some useful points derived from these cases that may be helpful in understanding if there has been a failure on the part of the builder to proceed with the works with due diligence:

  1. What is the reasonable and relevant time period for a diligent builder to complete the works?
  2. Whether the works are incomplete and, if so, whether there are any circumstances preventing the builder from performance of the works, as well as the pace of performance. This may include any disputes in relation to payment, lack of instructions, a change in scope, request(s) for variations, all of which would cause delay;
  3. Whether there is a lack of activity on the project for a significant period of time that cannot be satisfactorily explained;
  4. Whether the owner mitigated his/her/its loss by allowing reasonable access to the site for the builder to rectify its defects; and
  5. Whether the builder issued extension of time claims and updated programmes if required by the contract.

Terminating a contract based on the failure to proceed with due diligence is a risky one and this is why it must be approached carefully. Otherwise, the owners claiming a breach of due diligence could be found to have repudiated the contract and be liable for damages.

Legal advice should always be sought before terminating a contract.

If you have questions or would like to discuss this article, please contact us.

A new year and debts still on the books? Here’s what contractors in NSW can do to get paid

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In the construction industry, contractors often face the challenge of getting paid on time and, as we all know, cash flow is king. Under the Building and Construction Industry Security of Payment Act 1999 (NSW)(SOPA), there are several options available to contractors as “claimants” to enforce their rights to payment.

  1. Recovering the debt through Court action

If a respondent (the party up the contractual chain) fails to respond to a valid payment claim with a payment schedule, the respondent becomes liable to pay the claimed amount as a debt due and payable under section 14(4) of SOPA.[1]

Section 15(2) of SOPA also allows claimants to issue a notice of intention to suspend work under the contract and either elect to commence proceedings to recover the claimed amount or proceed to adjudication under SOPA.

If the claimant chooses to pursue the debt through legal proceedings, the respondent is prohibited from raising any cross-claim against the claimant[2] or defence related to matters arising under the construction contract.[3]

However, litigation can be time-consuming and costly, involving court fees, legal representation and other associated costs. While a successful claim may allow for the recovery of some of these costs, court proceedings are typically more complex, slower (often taking months or even years) and are generally more expensive than alternative enforcement options. Legal action is usually only commenced, at this point, if there is a strategic reason to do so.

  1. Proceeding to Adjudication

Adjudication typically offers a faster, more cost-effective alternative to court proceedings. If the respondent fails to provide a payment schedule within the required time,[4] claimants can apply for adjudication under section 17(1)(b) of SOPA.

The claimant must first serve a written notice of intention to apply for adjudication (Adjudication Notice or a section 17(2) notice) on the respondent within 20 business days after the payment due date.[5] If the respondent does not respond with a payment schedule within 5 business days,[6] the claimant can lodge an Adjudication Application within 10 business days to an authorised nominating authority.[7]

Section 21(3) requires the adjudicator to decide the application as quickly as possible, and in any case, within 10 business days from the lodgement of an adjudication response by the respondent or when the adjudication response was due (unless the parties agree to further time).

The adjudication process typically takes a couple of months and results in a binding interim decision if the claimant is successful.

The adjudicator’s determination is enforceable, and if the respondent fails to pay any adjudicated amount, the claimant can request an Adjudication Certificate,[8] which can be filed as a judgment debt in court.[9]

This process ensures a quicker resolution compared to litigation, helping to prevent payment delays and improve cash flow in an industry plagued by payment issues and the constant risk of insolvencies.

  1. Issuing a Payment Withholding Request

In cases where an adjudication application has been lodged, claimants can issue a payment withholding request to the principal (usually the developer) to withhold payment from the head contractor (the respondent in this case).[10] This enables the claimant to receive payment directly from the principal, provided the conditions of SOPA are met.[11] This option can be executed relatively quickly, often within the same timeframe as the adjudication process, and therefore does not typically delay the recovery process.

Recommended Strategy: Adjudication

While each enforcement option has its merits, adjudication is typically the most efficient and cost-effective choice for preserving the lifeblood of the construction industry – cash flow. It provides a swift, binding interim decision that can be enforced. If the respondent fails to comply with the adjudicator’s determination and pay the adjudicated amount, the claimant can then take enforcement action to recover the debt.

It is important to note that determinations under SOPA are interim and do not constitute a final determination of the parties’ rights. However, in practice, most parties tend to accept the determination, as there are limited grounds for setting them aside, and often, it is not commercially viable to proceed to Court (depending on the amount claimed and the parties’ appetite for litigation).

In summary, claimants in NSW have options under SOPA to secure payment. By choosing the right enforcement option based on the circumstances, claimants can take decisive steps to secure the payments owed when payment disputes cannot be resolved.

Bradbury Legal is a specialist building and construction law firm. If you or anyone you know requires advice or assistance, reach out to us on (02) 9030 7400, or email us at [email protected] to see how we can assist you.

 

[1] Assuming a valid payment claim was served in compliance with s 13(2) of the Building and Construction Industry Security of Payment Act 1999 (NSW)(SOPA), and within the time stipulated by s 13(4) of the SOPA, that is, according to the time stated in the contract, or 12 months after the relevant construction work was carried out or related goods or services were last supplied, whichever is later.

[2] See s 15(4)(b)(i) of SOPA.

[3] See s 15(4)(b)(ii) of SOPA.

[4] See s 13(4) of SOPA.

[5] See s 17(2)(a) of SOPA.

[6] See s 17(2)(b) of SOPA.

[7] See s 17(3)(e) of SOPA.

[8] See s 24(1)(a) of SOPA.

[9] See s 25(1) of SOPA.

[10] See s 26A(1) of SOPA.

[11] See s 26A of SOPA

Think twice! The NSW Supreme Court’s take on Generative AI in practice

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Following its introduction in 2022, ChatGPT paved the way for other generative artificial intelligence (Gen AI) platforms, making them a force to be reckoned with, capable of streamlining any task with the help of data extrapolation and language learning processes.

Gen AI is considered a subset of artificial intelligence that operates by producing written responses (including images) when prompted. To produce these responses Gen AI relies upon the datasets it is fed, but these datasets can often be traced back to websites or other unverified sources of information.

In response to this, the NSW Supreme Court in conjunction with the NSW Land and Environment Court have developed a set of considerations, ensuring lawyers and other key players within the legal industry think twice before outsourcing key responsibilities to any open or closed source Gen AI models.

What do you need to know?

Commencing on 3 February 2025, Practice Note SC Gen 23 – Use of Generative Artificial Intelligence (Practice Note) contains a set of guidelines outlining where Gen AI is considered acceptable for litigants to use[1], as well as corresponding amendments contained within Uniform Civil Procedure (Amendment No 104) Rule 2025 (NSW) (Amended Rules).

The Practice Note does not apply to search engines, transcription or translation software, generic editing software like Microsoft Editor or legal research platforms supported by AI.[2]

Following a set of amendments published on 28 January 2025, the Supreme Court has outlined that Gen AI has limitations that both practitioners and unrepresented litigants should be aware of, including:

  • the production of inaccurate or incorrect responses including false citations or fabricated sections of legislative instruments;
  • the potential for spreading misinformation as the datasets fed to AI may contain irrelevant, out of date or ‘selective’ information; and [3]
  • information provided by Gen AI programs may not be relevant to the NSW legal jurisdiction.

Moreover, a host of ethical concerns arise when considering that many Gen AI platforms lack any inbuilt safeguards to maintain professional privilege over correspondence or other documents that may be uploaded in an attempt to make certain repetitive or administrative tasks more efficient.

Tips for Practitioners

Generally, Gen AI must not be used in generating the content of any ‘affidavits, witness statements, character references’ or other material that is intended to reflect the deponent or witness’ evidence and/or opinion without leave of the court.[4]

It is essential that practitioners include disclosures for deponents specifying that “generative artificial intelligence was not used to generate the content of the [affidavit/witness statement]” within the body of the affidavit/witness statement.[5]

Further, legal practitioners cannot enter information that is subject to non-publication orders, suppression orders, or Harman undertakings (documents obtained in proceedings can only be used for a litigious purpose) or produced by subpoena to Gen AI platforms.[6]

As an exception, provided specific criteria are met[7], practitioners can use Gen AI for the preparation of chronologies, to assist with the review of documents and to prepare written submissions.[8] In relation to written submissions, the writer must manually verify in the body of the document that the citations and academic authorities and references exist, are accurate and have relevance to the proceedings on foot.[9]

Considering the range of strict prohibitions, practitioners should consciously:

  • include the necessary disclosure in all witness statements/affidavits;
  • ensure they are familiar with the contents of the Practice Note so leave is sought for the use of Gen AI, where appropriate;
  • direct the attention of any expert witness being relied upon to abide by the guidelines set out in the Practice Note (see below), and noting Schedule 7 of the UCPR has been amended as part of the Amended Rules;
  • maintain confidentiality over all privileged documents, by storing them on secure document management systems and not uploading them to Gen AI platforms; and
  • where the use of Gen AI is permitted by the Practice Note, review all work produced to ensure accuracy.

Advice for Experts

The Practice Note also highlights the obligations of expert witnesses engaged to produce reports that state their opinion/s and reasoning as evidence.

As part of these obligations expert witnesses should now note that:

  • using Gen AI to produce an expert report is now prohibited without prior permission from the court[10];
  • where permission or leave has been granted by the courts, experts must now disclose and identify the parts of any report that have been produced with the assistance of Gen AI; and
  • reports prepared between 21 November 2024 and 3 February 2025 must identify which parts of the report (if any) have been produced with the assistance of Gen AI.

If at any point in the drafting process Gen AI has been used, the prompts provided to the AI tool and a record of how the outputs were used within the draft or final report must be annexed to the final report. [11]

What’s next?

The Practice Note will be subject to continued review as the capabilities of Gen AI expand beyond simple drafting assistance. Therefore, it is essential that practitioners, expert witnesses, and others periodically review the Practice Note for any updates to maintain best practice when using Gen AI.

Practice Note SC Gen 23 can be read here, but if you or anyone else you know is concerned about how these new guidelines may impact you, please contact Bradbury Legal on (02) 9030 7400 or at [email protected] to see how we

[1] Practice Note SC Gen 23 – Use of Generative Artificial Intelligence.

[2] Ibid [6].

[3] Ibid [7].

[4] Ibid [10] and [15].

[5] UCPR rules 31.4(3B) and 35.3B(2).

[6] Ibid [9A]. Also Harman v Secretary of State for the Home Department [1983] 1 AC 280.

[7] Practice Note SC Gen 23 – Use of Generative Artificial Intelligence at [9A].

[8] Ibid [9B and 16].

[9] Ibid [16].

[10] Ibid [20].

[11] Ibid [22(b)].