Do the new duties of care put in place by the Design and Building Practitioners Act 2020 (NSW) open up a new chapter in the ongoing development of consultants’ liability for third parties’ loss? Or is it more a case of coming full circle and returning to where we started? This article sums up 30 years of evolution of liability to third parties. (And although the article talks about consultant liability, the same rules generally apply to liability of contractors too.)
Why does duty of care to third parties matter?
The party who engages a consultant will generally be able to sue the consultant for loss that results from the consultant’s errors. The law has recognised for decades that consultants owe to their clients a concurrent duty of care that exists alongside their contractual obligations. A party who contracts with a consultant can sue for negligence, breach of contract, or both.
But third parties (such as tenants, subsequent purchasers, or parties one or two steps along the contract chain) will not have a direct contract with the consultant. This means third parties who have suffered loss usually need to make a claim in negligence, and to succeed in a negligence claim, the third party must establish that the consultant owed them a duty of care.
Judicial thinking on whether consultants owe a duty of care to protect third parties against economic loss has greatly changed over the last three decades. Between 2004 and 2014, High Court judgments increased the requirements for third parties to establish this duty of care, and lowered the risk of claims against consultants. However, legislation which lowers those requirements now re-opens those risks, and exposes consultants to liability for a greater range of losses.
A Brief History
Back in the 1990s, the leading case was Bryan v Moloney (1995) 182 CLR 609, in which the High Court found that a builder of a domestic property with defective footings owed a duty of care to a subsequent purchaser of that property. At that time, the High Court favoured a simple two-part test which said that a wrong-doer owed a duty of care where (1) the claimant’s loss was “reasonably foreseeable”, and (2) there was a relationship of “proximity” between the wrong-doer and the claimant.
Over the 2000s, the High Court raised the bar by introducing new requirements for a duty of care to exist. The bar is especially high for claims for “pure economic loss”, which means loss that does not flow from physical injury or damage. Loss resulting from design or construction defects is usually classed as pure economic loss.
In Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515, subsequent purchasers of a building sued the original engineers for loss and damage resulting from inadequate design of foundations. The High Court articulated a new requirement for a duty of care to exist: the claimant had to be “vulnerable”, in the sense of lacking means to protect itself against the risk. Since the commercial purchasers of the building could have commissioned their own tests to assess the foundations, or sought contractual protections, the High Court found they were not vulnerable. As a result, the engineer successfully avoided liability as it owed no duty of care. The face of negligence law was fundamentally changed.
This trend reached its peak in the case of Brookfield Multiplex Ltd v Owners Corporation
Strata Plan No 61288 (2014) 254 CLR 185, where the owners corporation of an apartment building that included several floors of serviced apartments sued the original builder for loss arising from various defects. The owners corporation did not have a direct contract with Brookfield Multiplex, so it needed to sue for negligence and that meant establishing that Brookfield Multiplex owed it a duty of care. However, the High Court again found that the owners corporation did not satisfy the new test for “vulnerability”, and so its claim against Brookfield Multiplex failed.
This is obviously a very unsatisfactory state of affairs for owners corporations, especially with the recent escalation in defects claims in multi-residential buildings, as it can leave owners with no recourse for defective building work.
New duties of care under the Design & Building Practitioners Act 2020 (NSW)
In NSW, parliament has stepped in to rectify this problem by means of new duty of care provisions in the new Design and Building Practitioners Act 2020 (NSW) (“the D&BP Act”).
These new provisions essentially take us back to the past (at least for apartment buildings in NSW). They over-ride the High Court decisionsof the last two decades, remove the need to prove “vulnerability”, and reinstate something more like the duty of care that existed in the 1990s under Bryan v Moloney.
Under section 37(1) of the D&BP Act, those who construct, design, supervise or project manage the construction of a building now have a duty to “exercise reasonable care to avoid economic loss caused by defects” arising from the construction work. This duty is owed to the owners corporation and individual lot owners, including subsequent purchasers, and entitles those parties to sue for damages at common law. Section 37(1) merely establishes the first step, of establishing a duty of care, and to succeed, a claimant still needs to prove all the other aspects of a common law negligence claim, such as breach of duty and causation of loss.
This new duty applies from the date of assent of the D&BP Act – 10 June 2020. It also has 10 years’ retrospective operation. However, if a claim relates to loss or damage that became apparent prior to 10 June 2010, the new duty does not apply, and those claimants will be stuck with the higher bar set by Woolcock Street Investments and Brookfield Multiplex.
As a minimum, the D&BP Act reinstates a Bryan v Moloney type duty of care for apartment buildings in NSW. It remains to be seen whether the phrasing of the new law may have inadvertently created a broader or more onerous duty than that.
In other jurisdictions, the High Court’s current test for duty of care will still apply unless modified by legislation. This makes it harder for third parties to successfully sue the original consultants and/or builders.
However, consultants can still be drawn into claims even if they owe no direct duty of care to the claimant. In the Lacrosse Building judgment (28 February 2019, with appeals to be heard in August 2020) the consultants were found liable for the owners’ loss without the need to establish a direct duty of care. The owners corporation sued the design-and-construct builder for breach of certain statutory warranties, and the design-and-construct builder then successfully sought contribution from the consultants for breach of their novated consultancy agreements.
Apart from the direct duty of care, the D&BP Act in NSW also imposes a raft of new obligations which will take effect from 1 July 2021, such as mandatory registration for certain engineers and builders, and mandatory Design Compliance and Building Compliance Declarations. By way of guidance, our recent webinar on the Design and Building Practitioners Act 2020 (NSW) from Lander & Rogers solicitors is available for purchase.