In the recent decision of The Owners – Strata Plan No 84674 v Pafburn Pty Ltd  NSWSC 659, the NSW Supreme Court has provided some useful guidance on the interpretation of key terms found in the Design and Building Practitioners Act 2020 (NSW) (‘DBP Act’).
Notably, it suggests that a developer who has the ability to exercise ‘substantive control’ over a builder may be found to have carried out ‘construction work’ within the meaning of the DBP Act, regardless of whether or not they have exercised that control. The effect of this is that a developer may be subjected to the statutory duty of care prescribed by section 37(1) of the DBP Act.
We provide an outline of the decision below.
The plaintiff is the Owners Corporation in respect of a strata development in North Sydney (‘Owners Corporation’). Pafburn Pty Ltd (‘Builder’) was the builder of the development, while Madarina Pty Ltd (‘Developer’) was the developer and owned the land until the strata plan was registered.
The Builder and Developer are related bodies corporate, as follows:
- Mr Antonios Obeid and Mrs Maria Obeid own the shares in the Builder;
- The Builder owns all the shares in the Developer;
- Mr and Mrs Obeid are directors of the Builder; and
- Mr Obeid is the sole director of the Developer.
The Owners Corporation commenced proceedings against the Builder and Developer, alleging that they both acted in breach of the statutory duty of care prescribed by section 37 of the Design and Building Practitioners Act 2021 (NSW) (‘DBP Act’) as:
- the Builder constructed the building defectively; and
- the Developer engaged in ‘construction work’ for the purposes of this section in that it ‘supervised, coordinated, project managed and substantively controlled’ the building work carried out by the Builder.
The Builder and Developer sought, by a notice of Motion, an order that the proceedings be dismissed, or alternatively, an order that the List Statement be struck out.
The Court refused the Builder and Developer’s Notice of Motion, and identified two key issues to be resolved, being:
- whether the Developer engaged in ‘construction work’ for the purposes of section 37 of the DBP Act; and
- whether the Developer was a ‘person’ carrying out construction work for the purposes of section 37(1) of the DBP Act.
Whether the Developer engaged in ‘construction work’
The Court first considered whether the Developer engaged in ‘construction work’ for the purposes of section 37 of the DBP Act.
Section 37 provides that a person who carries out ‘construction work’ has a duty to exercise reasonable care to avoid economic loss caused by defects. Section 36 defines ‘construction work’ to include
- building work; and
- the supervising, coordinating, project managing or otherwise having substantive control over the carrying out of building work.
The Court interpreted the terms ‘supervising, coordinating, project managing’ as actual supervision, co-ordination and project management work being undertaken. However, it also interpreted the phrase ‘otherwise having substantive control’ as not requiring 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’.
The Court observed that any application of this test would be a question of fact to be determined on a case-by-case basis. The fact that a developer owned all the shares in a builder, and had common directors, might lead to an inference of such an ability to control. Where, here, the position is the other way around, namely that the builder owns all the shares in the developer. In these circumstances, the inference may be less easily available.
The Court did not come to a final conclusion on this issue due to a proposed amendment to the pleadings by the Owners Corporation. However, its comments thus far will likely give rise to a series of future disputes regarding whether the relationship between a builder and developer will satisfy this test, and subsequently subject the developer to the statutory duty of care prescribed by section 37(1).
Whether the Developer was a ‘person’ carrying out construction work
The Court also considered whether the Developer was a ‘person’ carrying out construction work for the purposes of section 37.
Section 37(2) provides that the duty of care is owed to each owner of the land in relation to which the construction work is carried out, and to each subsequent owner of the land.
The Developer submitted that on the proper construction of section 37(1), a ‘person’ who carries out construction work does not include a person who was the owner of the land at the time the construction work was carried out. It argued that, if read literally, the effect of section 37(2) is that such an ‘owner’ would owe a statutory duty of care to itself. The Developer submitted that this was a complete answer to the Owners Corporation’s case against the Developer.
The Court, however, observed that Parliament cannot have intended to create a duty owed by an owner of the land to itself. As such, it found that this anomalous result can be readily avoided by interpreting the term ‘each owner’ in section 37(2) as not including an owner that has itself carried out the construction work in question.
The the Court’s discussion of the proper construction of the terms ‘construction work’, ‘substantive control’ and ‘owner’ has provided some clarification regarding who is subjected to a statutory duty of care under the DPB Act. Importantly, this liability has now extended to developers who are seen to hold ‘substantive control’ over building work. As such, developers may wish to consider structuring and planning building projects to avoid such a risk. This may include, for example, ensuring that entities are separately controlled, or dealing with one another at ‘arms-length’.
Keystone Lawyers can assist with advising you on your rights and obligations in relation to residential and commercial building work.