Developer landowners may be subject to statutory duty of care to avoid economic loss from building work

The recent NSW Supreme Court decision of The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2022] NSWSC 659 considered the proper interpretations of a “person” carrying out “construction work” under the Design and Building Practitioners Act 2020 (NSW) (the Act) and found that a person who has the ability to exercise substantive control over construction work (whether or not such control is exercised) may be subject to the statutory duty of care to avoid economic loss from the work.

Madarina Pty Ltd, a developer landowner (Developer), contracted with Pafburn Pty Ltd (Builder) to build a strata development in North Sydney. The Builder owned all the shares in the Developer. Following the occupation certificate being issued, the strata plan was registered, the Owners Corporation was created and the Developer ceased being the landowner.

The Owners Corporation subsequently commenced proceedings against the Builder and Developer under the Act for allegedly defective construction work. It alleged the Builder and Developer each breached the statutory duty of care to avoid economic loss caused by defects in section 37 of the Act, on the basis that the Builder constructed the building defectively and the Developer engaged in “construction work” as defined under the Act.

Section 37 relevantly provides that a person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects in a building arising from construction work, owed to each current and subsequent landowner. “Construction work” is defined in section 36 of the Act to include “supervising, coordinating, project managing or otherwise having substantive control over the carrying out of any work referred to in [other parts of the definition, including building work]”. The question for the Court was whether, to establish a person had “substantive control”, it is necessary to show that they actually exercised such “substantive control” or if it is sufficient to show that the person was in a position to exercise “substantive control”.

The parties agreed the Court should decide as a preliminary matter the proper meaning of “construction work” for the purposes of the duty. Further, whether a Developer landowner can be a “person” who carries out construction work as this would mean a Developer landowner may owe itself the statutory duty of care.

The Court found that the definition of “construction work” will be enlivened if it is established that a person was in a position where they had the ability and power to exercise “substantive control over the carrying out of” construction work, regardless of whether such control was in fact exercised, which is a question of fact in each case. Further, that a “person” who carries out construction work may include the owner of the land, if it can be established on the facts that they had such control. The anomaly of a landowner potentially owing itself a duty can be resolved by reading the expression “each owner of the land” in section 37 as not including an owner that has itself carried out the construction work in question.

In reaching these conclusions, Stevenson J observed that the words “otherwise having substantive control” call for consideration of all relevant circumstances and do not require a person to do anything to cause control to be exercised; only that the person has the ability and power to control how the work is carried out.  Stevenson J stated that such control may more easily be inferred where a developer owns all the shares in the builder and has common directors and less likely where (as was the case here) a builder owns all the shares in the developer.

The full decision can be found here.