The Design and Building Practitioners Act 2020 (NSW) (DBP Act) has been in effect since July, but is it clear what – if any – are the key changes dealing with a builder’s or a designer’s liability to subsequent owners of a property?

This article explains firstly the key common law principles previously held by the courts and secondly, how the DBP Act differs.

The previous common law position

Three important cases have previously dealt with the question of a builder’s or a designer’s (including architects and engineers) liability to subsequent owners of a property. The key principles to apply as a result of these important cases are:

1. The question of whether or not a builder or designer owes a duty to subsequent owners to take reasonable care to avoid economic loss – as might occur from latent defects – turns on how vulnerable a subsequent owner is to such economic loss. That is, what mechanisms are available to the subsequent owner to protect itself from such economic loss
2. A subsequent owner is unlikely to be vulnerable if it can (in its contract with the former owner) address the question of responsibility for economic loss regardless of whether or not it does so
3. A builder or designer is unlikely to be liable to a subsequent owner if its contractual relationship with the original owner is such that the original owner does not rely on the builder or designer to avoid economic loss from latent conditions or defective design and the builder or designer does not assume that responsibility.

Case study: Bryan v Maloney

In this case the High Court of Australia determined that a professional builder who builds a domestic residence owes a duty of care to subsequent owners of the land.

That duty obliges the builder to use reasonable care to avoid economic losses for those subsequent owners. Such economic losses might arise, for instance, if the value of the house diminishes when latent defects become evident.

Case study: Woolcock Street Investments v CDG

In this case the High Court determined that a consultant engineer, who had been engaged to design the footings on a commercial property, did not owe a duty to a subsequent purchaser. That is, the engineer was not obliged to use reasonable care to avoid economic losses by any subsequent purchaser.

In part, this was because:

• The engineer had asked the original owner to pay for geotechnical investigations but the owner refused, and the Court concluded therefore that this distinguished the facts in Bryan v Maloney from the facts in this case. That is, there was no reliance by the original owner on the engineer, nor was there any assumption of responsibility by the engineer. In other words, the original owner was not vulnerable to any deficiencies in the engineer’s services.
• The contract by which the property was sold to the subsequent owner included nothing by way of warranty that the property was free from defects. Nor did the original owner assign to the subsequent owner any rights the original owner may have had against, for instance, the engineer in respect of defects.

The High Court said the contract between the original owner and the engineer was relevant to determining the duty that a builder or engineer might owe to a subsequent owner. It cannot be the case that a builder or engineer would owe a duty of care to a subsequent owner if performance of that duty would oblige the builder or engineer to do more work than the contract with the original owner required the builder or engineer to do.

Case study: Brookfield Multiplex v Owners Corporation SP 61288

In this case the High Court held that a builder did not owe a duty to take reasonable care to avoid economic loss to the subsequent owner of the common property in a strata development, being the owners’ corporation (OC).

As was the case with Woolcock Street:

• It cannot be said that there was either reliance by the OC on the builder, or any assumption of responsibility by the builder in respect of the OC
• The builder could not be taken to have assumed any responsibility for economic loss consequent on latent defects beyond its obligations under its design & construct contract with the original owner, being the developer.

The fact that the subsequent owners entered into contracts with the developer, and those contracts:

• Specifically dealt with the quality of the work that had been promised
• Allowed the owners to vest in the OC the rights the owners had to have defects in the common property rectified
• Shows that the owners were not vulnerable to any lack of care by the builder in the performance by the builder of its obligations under its contract with the developer.

As well, since the OC is vested with the common property at no cost, then, as long as the value of that property is greater than the cost of rectifying any defects, it is difficult to see what economic loss the OC suffers as a result of any latent defects.

The Design and Building Practitioners Act

The DBP Act establishes a statutory duty of care to avoid pure economic loss that is caused by defective design, or defective construction works, or both. This fundamentally changes the common law positions previously held by the courts, which are discussed above.

Under the DBP Act, an owner who suffers economic loss because of one or more latent defects will have a cause of action in negligence against the relevant builder or designer. Critically, where the DBP departs from the common law position is that there is no need to prove vulnerability, though it will still be necessary to prove a failure to exercise reasonable care.

The DBP is clearly intended to give such owners an avenue for relief – in the form of an action in negligence – if the contractual structures typically in place would mean that no such action or remedy is available. In effect, the DBP Act reverses the trend by the courts to give primacy to contract over tort.

This statutory duty is in addition to the duties, statutory warranties and other rights an owner has under the Home Building Act 1989, any other legislation, and the common law. It also has a ten‑year retrospective operation, meaning that it applies to work carried out in the ten years before 10 June 2020.

The statutory duty conferred by the DBP cannot be delegated, and it applies despite anything in any contract that might annul, vary, or exclude the duty. Though this has yet to be tested, the prohibition against exclusion of the duty is broad enough to capture limitation of liability provisions, which is to say that it may not be possible to impose a contractual limit on liability.

Every subsequent owner of the land (which includes strata lots) will have the benefit of the duty, as will an owners corporation in respect of the common property. If latent defects in common property result in strata tenants or owners needing alternative accommodation while repairs are carried out, the reasonable cost of that accommodation is also recoverable.

The new duty will apply to architects, engineers and builders, who must all now be registered if they intend to carry out any applicable building work, and provide certain declarations as to compliance with the Building Code of Australia. It will also apply to subcontractors and suppliers of building products, and it seems likely to apply to owner‑builders and to a builder’s nominated supervisor. However, the duty does not apply to certifiers.