The duty of care under the DBP Act can extend to owner developers who have ‘substantial control’ over the carrying out of building work

In The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659, the plaintiff (Owners Corporation) commenced proceedings against Pafburn Pty Limited (First Defendant) (Builder) and Madarina Pty Limited (Second Defendant) (Developer) in relation to alleged defective construction work in respect of a strata development in North Sydney.

The Developer was the owner of the land until 6 December 2010 when the strata plan was registered.

The Owners Corporation commenced the proceedings on 1 December 2020, just five days within the 10 year ‘long stop’ limitation period prescribed by s 6.20 of the Environmental Planning and Assessment Act 1976 (NSW). The pleading was based solely on breaches of the duty of care under s 37 of the Design and Building Practitioners Act 2020 (NSW) (DBP Act). This was (presumably) because of the expiry of the limitation period to claim under warranties provided by the Home Building Act 1989 (NSW).

The Builder and Developer brought a motion to dismiss the proceedings or alternatively an order that the List Statement be struck out. The Owner also brought a motion seeking leave to amend its pleading.

The issue of leave to amend the pleading was not determined given that further particulars of the contract between the Developer and the Builder were to be provided to the Owners Corporation. Nevertheless, the Court did provide some useful guidance on the interpretation of ‘construction work’ under subparagraph (d) of the s 36 definition which is as follows:

’36 Definitions

…

construction work means any of the following—

(a) building work,

…

(d) supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work referred to in paragraph (a) … ‘

The issue to be resolved was whether, in establishing that the Developer had ‘substantive control over the carrying out of’ the building work, it was necessary to show:

• that the person actually exercised such ‘substantive control’; or
• whether the person had the ability to exercise such control, whether or not such control was in fact exercised.

Justice Stevenson held that the words ‘supervising, coordinating, project managing’ were to be construed as meaning that actual supervision, co-ordination and project management work were to be undertaken. However the words ‘otherwise having substantive control’ did not require a person to actually do anything to cause that control to be exercised. All that is required is that the person ‘had the ability and the power to control how the work was carried out’ (at [25]).

Whether this test is satisfied will be a question of fact in each case. His Honour observed at [26] that if a developer owned all the shares in a builder, and had common directors, this might lead to an inference of such an ability to control. However if the builder owns all the shares in the developer, ‘that inference may be less easily available’. This issue was not finally determined given the foreshadowed amendments to the pleading however, in the author’s opinion, will be fertile ground for disputes as to whether the developer / builder relationship (or any other relationship) has the necessary indicia to bring the developer within the ‘construction work’ definition under section 36(d) and thus subject the developer to a statutory duty of care under section 37 of the DBP Act.

A further issue was explored, namely whether the word ‘person’ includes the owner (the Developer at the time) of the land in relation to which the construction work was carried out. It was argued for the Developer that at the time of the alleged breach of duty, the Developer was the owner of the land and could not owe a duty to itself under section 37(2) of the DBP Act. In support of this argument, counsel for the Developer referred to the following passage from the Second Reading Speech for the Bill:

“The duty [now contained in section 37] deliberately does not extend to owners who are developers or large commercial entities, as the Government considers these entities to be sufficiently sophisticated and able to contractually and financially protect their commercial interests.”

However the exclusion of ‘developers’ or ‘large commercial entities’ appears nowhere in the text of the DBP Act. Stevenson J resolved this construction issue by reading the expression ‘each owner’ in section 37(2) as not including an owner that has itself carried out the construction work in question. This interpretation would seem to promote the purpose of the DBP Act (and avoid an absurdity in owing a duty to oneself) however is perhaps unnecessary on a practical level given the additional duty of the Developer (owner) to a subsequent owner of land in any event.

It will be interesting to see the extent to which future duty of care claims under the DBP Act will seek to bring in developers or other persons (in addition to builders or designers) under the section 36(d) definition of ‘substantive control’ and whether those same developers or other persons cross-claim against the builder or designer who actually carried out the building work.

Developers may wish to consider structuring their building projects in a way to avoid any risk that the Developer may be seen to have ‘substantive control’ over the building work, for example by having separately controlled entities dealing with each other at arms’ length.

The case can be found here: The Owners – Strata Plan No 84674 v Pafburn Pty Ltd – NSW Caselaw.

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Authored by:

Matthew Taylor, Partner
Del Chin, Senior Associate