Major Projects & Construction 5 Minute Fix 110: directors' and employees' liability, Domestic Building Contracts Act, proportionate liability regime

By the Major Projects & Construction team 
17 Nov 2022
Time to read: 1.5 minutes

Get your 5 Minute Fix of legal trends in Major Projects and Construction. In this edition: directors and employees of building companies face potential liability under the DBP Act; the Victorian Supreme Court clarifies the scope of regulations made under the Domestic Building Contracts Act 1995 (Vic), and South Australian Court of Appeal considers whether proportionate liability regime applies in arbitral proceedings.

Broadening the scope of "persons" owing a statutory duty of care under the DBP Act

A recent decision concerning the Design and Building Practitioners Act 2020 (NSW) (DBP Act) illustrates the broad reach of the statutory duty of care under section 37 of the DBP Act. In Boulus Constructions Pty Ltd v Warrumbungle Shire Council [2022] NSWSC 1368, the NSW Supreme Court confirmed that the duty of care could extend to directors and employees of building companies (in this case, a project site supervisor).

The Court applied an expansive interpretation of "persons" for the purposes of section 37 of the Act so participants in the residential development sector of the NSW construction industry and their insurers will have a keen interest in the outcome of these proceedings.

Section 37 of the DBP Act imposes a duty on every person who carries out construction work to exercise reasonable care to avoid economic loss caused by defects:

  • in or related to a building for which the work is done; and
  • arising from the construction work.

The Council sought to amend its claim to include a claim under section 37 of the DBP Act against the builder (Boulus), its managing director and its project site supervisor.

Boulus submitted that the managing director of Boulus and the project site supervisor were not "persons" for the purposes of section 37 and that "person" should be construed narrowly as "a person who carries out construction work in their own capacity". It should not extend to a person acting as an agent for another. Boulus cautioned that a broad interpretation of "person" could potentially pick up "hundreds" or even "thousands" of people on construction sites and expose them to claims based on the statutory duty of care.

However, Justice Stevenson declined to read down the reference to "person" as someone acting "in their own capacity". He observed that "the supervision, coordination, project management and having substantive control over building work could be effected by a wide range of actors". In this case, those actors included the managing director and project site supervisor.

The scope of the extended statutory duty of care under the DBP Act continues to evolve as the case law develops. At the time of writing, Justice Stevenson’s first judgment concerning the DBP Act, Goodwin Street Developments Pty Ltd atf Jesmond Unit Trust v DSD Builders Pty Ltd (in liq) [2022] NSWSC 624, is being heard on appeal in the NSW Court of Appeal.

Is student accommodation “domestic building work” in Victoria? Don't forget to look "at" the regulations!

The Victorian Supreme Court has held that building works relating to student accommodation do not constitute "domestic building work" under the Domestic Building Contracts Act 1995 (Vic) and in so finding, has helpfully clarified the scope of regulations made under the Act prescribing building works to which the Act does not apply.

In APM Group (Aust) Pty Ltd v Centurion Australia Investments Pty Ltd [2022] VSC 637, the Court addressed the question whether the Act applied to the student accommodation in issue by first considering whether:

  • the development fell within the scope of section 5 of the Act (which sets out the types of "building work" to which the Act applies); and
  • the development was excluded from the operation of the Act by virtue of section 6 of the Act (which sets out the types of "building work" to which the Act does not apply).

On an analysis of section 5, Justice Stynes found that the Act did apply to the student accommodation. Under section 5(1)(a), the Act applies to the "construction of a home" and here, having regard to the design of the development, the planning permit (which cited "alterations and additions for use as residential buildings") and the terms of the D&C Contract, she was satisfied that the development was "suitable for permanent habitation and that it was intended to be a permanently inhabited residential premises".

Justice Stynes also held that the development was caught by section 5(1)(e), which states that the Act applies to the construction of a building on "land that is zoned for residential purposes under a planning scheme under the Planning and Environment Act 1987 (Vic)".

Justice Stynes then considered whether the accommodation was of a type excluded from the Act by section 6 (which includes any work that the Domestic Building Contracts Regulations 2017 (Vic) state is not subject to the Act). There were two areas of consideration in this respect: whether the work was excluded for being:

  1. "work in relation to a building intended to be used only for business purposes" (section 6(1)(c)); or
  2. on "premises that are used or intended to be used at a school, university or other educational or training institution as accommodation for students or staff" (section 6(2) of the Act and regulation 8(b)).

Justice Stynes agreed with an earlier VCAT decision that held "business purposes" should be afforded its "ordinary meaning" and "refers to non-residential buildings", meaning the student accommodation was not subject to the first exclusion.

The second exclusion was given more detailed consideration by Justice Stynes. The construction of the word "at" in the context of "at a school, university …" was crucial. While the defendant submitted that the word "at" required the accommodation to be "a part of the education institution, or on land owned, leased or occupied by it", the plaintiff (successfully) argued that "at" should enjoy a broader construction and require "only an association or connection between the accommodation in question and the institution".

Justice Stynes opined that, had the statutory drafter intended that the premises in question be required to be "within" or "on" land occupied by the educational institution, words to "denote location with greater precision" would have been used. Her view was that a "more harmonious construction" of the regulation was achieved by the broader interpretation of "at", and that while physical proximity might be a relevant factor, it was not necessary for the accommodation to be located within the educational institution. She found that there was a sufficient association between the site on which the student accommodation was located and the educational institution to engage the exclusion under the Act.

Does proportionate liability apply to arbitration? South Australian Court of Appeal says no

In Tesseract International v Pascale Construction [2022] SASCA 107, the South Australian Court of Appeal decision has clarified that proportionate liability provisions do not apply to disputes the subject of arbitration.

The Court held that the proportionate liability regimes under Part 3 of the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) (Law Reform Act) and Part VIA of the Competition and Consumer Act 2010 (Cth) (CCA) did not apply to an arbitration under the Commercial Arbitration Act arising from alleged defective work on a Bunnings Warehouse project.

The decision that the proportionate liability regime did not apply by force of the relevant legislation itself was consistent with earlier case law in other states: Aquagenics Pty Ltd v Break O'Day Council (2010) 20 Tas R 239 and Curtin University of Technology v Woods Bagot Pty Ltd [2012] WASC 449. However, the Court of Appeal also addressed an issue that earlier decisions had left unanswered, specifically, whether the implied term in arbitration agreements extends the operation of the proportionate liability regime to commercial arbitrations. The applicant (Tesseract) argued that the implied term in the parties' arbitration agreement that the arbitrator should decide the dispute according to the existing law of the contract meant that the proportionate liability regime applied.

The Court found that the arbitration agreement contained an implied term granting the arbitrator authority to give the parties the same relief they could have obtained in Court. 

However, the Court observed that this implied conferral of power was qualified. Accordingly, it considered the statutory proportionate liability provisions were not "amenable to arbitration". In reaching this conclusion, it considered legislative features under both the Law Reform Act and the CCA, which indicated an intention on the part of the relevant legislatures that these regimes did not apply in the context of arbitration proceedings. Significantly, proportionate liability regimes involve and affect third parties, and contemplate that the plaintiff can join any third-party wrongdoer(s) to their proceedings. Yet, the inability in arbitral proceedings to join or bind third parties (absent their consent) was a key factor in the Court's conclusion that the proportionate liability provisions of the Law Reform Act and the CCA did not extend to the arbitral proceedings.

Proportionate liability legislation exists in all States and Territories. But differences exist between the legislative schemes. The parties’ intentions regarding the application of proportionate liability legislation should be considered in developing the terms of an arbitration agreement.

NSW District Court considers defective construction and termination

The NSW District Court recently considered the validity of the termination of a subcontract following a failure to comply with a direction to repair a defect in Invictus Development Group Pty Ltd v Versatile Fitout Pty Ltd [2022] NSWDC 477.

The head contractor, Versatile Fitout Pty Ltd was engaged for Sydney Airport construction works. Versatile engaged a subcontractor, Invictus Development Group Pty Ltd to undertake formwork and concrete works relating to the construction of stairs. Versatile purported to terminate the contract based on the defective construction of the stairs, which it claimed were bowing. To justify its termination, Versatile relied on a direction to rectify the stairs. Invictus sued Versatile claiming that the termination was unlawful and therefore constituted a repudiation.

Versatile's direction to rectify, sent to Invictus via email, was clear in expressing that rectification was required to the stairs. Invictus submitted to the court that the direction was invalid because, although it identified the problem (bowing of the stairs) no methodology was specified as to what the subcontractor should do about it. The NSW District Court dismissed this argument, noting that it is unnecessary for the Head Contractor to be specific in relation to how the rectification ought to be carried out in a direction, noting, "An inherent feature, or perhaps underlying assumption, of the subcontract is the subcontractor’s special skills and knowledge base in identifying a problem and devising solutions."

The direction made by Versatile was found to be valid. On that basis, the Court also held that the direction was not complied with by Invictus.

The question then turned to whether Versatile validly terminated the contract based on the Invictus’ non-compliance with the direction. Judge Abadee had to consider whether the term under which the direction was given was an essential term (where a breach of any kind would generate a contractual right to terminate) or an intermediate term (where it may not be the case that any breach of the term will entitle the other party to terminate, but some breaches of the term may do so). Ultimately, the Court held that the failure to comply with a direction was an intermediate term of the subcontract as it was not found to be serious enough to generate a right for Versatile to terminate. Nor did Invictus' failure to comply with the direction constitute repudiation.

Therefore, in the absence of an express right to terminate, and its failure to establish repudiation by Invictus, the Court ultimately held that Versatile's termination was unlawful and amounted to a repudiation of the subcontract (for which Invictus was entitled to damages).

Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.