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03 Jul 2020

New NSW legislation imposes obligations on construction industry and establishes new statutory duty owed to owners

By Lina Fischer, Jack Fan and Jessica Lighton

New building legislation enacted in NSW imposes multiple new obligations on design practitioners and builders, re-defining the relationship between practitioners and owners by imposing a new duty of care.

The Design and Building Practitioners Act 2020 (NSW) (DBP Act) and the Residential Apartment Buildings (Compliance and Enforcement Powers) Act 2020 (NSW) (RAB Act) impose significant reforms for the construction industry and, according to NSW Minister for Better Regulation Kevin Anderson, it is hoped they will boost consumer confidence in a residential construction sector battered by high-profile failures such as Opal Tower and Mascot Towers.

The two Acts form part of the NSW Government's response to the Shergold-Weir Report released in April 2018 which considered the effectiveness of compliance and enforcement systems for the Australian building and construction industry and provided multiple recommendations. The timing of the two Acts also means that any residential building work carried out under the Australian Government HomeBuilder housing stimulus package will be subject to these reforms.

Design and Building Practitioners Act

The legislation was enacted on 10 June 2020 and the duty of care provisions came into effect on 10 June 2020. The registration and certification regime is due to come into force on 1 July 2021.

The DBP Act includes numerous significant changes for the construction industry such as the introduction of a new statutory duty of care for the benefit of owners of land, and new methods of regulating building and design work, including registration requirements for designers, builders, engineers and other specialists.

New statutory duty of care

Part 4 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.

"Construction work", in this context, includes building work within the meaning of the Home Building Act 1989 (NSW) (HBA Act) as well as work involved in other classes of buildings prescribed by the regulations (which are not yet available). Additionally, "construction work" also includes: preparing regulated designs and other designs; manufacturing or supplying building products used in the construction work; and, supervising, co-ordinating, project managing or otherwise having substantive control over the carrying out of any of the aforementioned work. "Substantive control" is not defined by the DBP Act and could potentially include a developer or another proponent of a project whose contract with the builder provides them with substantive control over the builder's work.

This new statutory duty is owed to each owner of the land in relation to which the construction work is conducted and includes all subsequent owners. "Owners" includes freehold owners, owners of strata lots, and owners' corporations constituted under strata schemes.

The statutory duty of care applies retrospectively to the extent that the economic loss suffered first became apparent within the 10 years prior to 10 June 2020 or, going forward, on or after 10 June 2020. It is unclear how other limitation periods (such as those under the Limitation Act 1969 (NSW)) interact with the retrospective nature of this new duty of care. Parties considering actions for historical breaches of this new duty should consider this issue carefully before commencing or responding to any action. This new duty will apply in addition to the existing rights and obligations available to owners under the HBA Act, other legislation and common law.

Owners will also need to be aware that the Civil Liability Act 2002 (NSW) applies and, as such, owners bringing an action for breach of this new duty of care may be drawn into pursuing multiple concurrent wrongdoers if the economic loss suffered by the owner was caused by the actions of multiple parties.

The imposition of this new duty of care is a significant change in the law as it reverses the trend of judicial decisions in this area of law, most notably the High Court's decision in Brookfield Multiplex v Owner's Corporation Strata Plan 61288 [2014] HCA 36. All participants in residential development should urgently consider how this new duty of care could affect their risk profile for future projects as well as completed projects. It is important to note that participants are not permitted to "contract out" of the duty of care.

New regulatory system for building and design work

The DBP Act also outlines a new regulatory system to increase compliance with the Building Code of Australia and is intended to commence on 1 July 2021. It is currently unclear whether the system will apply retrospectively. Aspects of the new system include:

  • registration of designers, builders, engineers and other specialist practitioners (including those carrying out maintenance works);
  • declaration of regulated designs by registered designers;
  • declaration of building work by registered builders prior to applying for an occupation certificate;
  • insurance requirements for designers, builders and engineers (the specific requirements are expected to be outlined in the Regulations); and
  • investigation and enforcement powers for authorised officers and the Secretary of the Department of Customer Service, such as issuing stop work orders for up to 12 months (with penalties up to $330,000 for bodies corporate and $110,000 for individuals for non-compliance) and initiating court proceedings.

Changes to the regulatory framework apply to a different definition of "building work" (compared to the statutory duty) which extends to:

  • construction of a building of a class or type prescribed by the regulation;
  • making alterations or additions to a building of that class or type; and
  • repair, renovation and protective treatment of a building of that class or type.

Additionally, the forthcoming regulation may prescribe additional work within this definition or create exclusions. This broad definition means designers, engineers, building practitioners and other specialists that engage in this form of building work are subject to the new registration and compliance requirements.

As such, the DBP Act has implications for practitioners (and businesses that employ practitioners) engaged in building work for major infrastructure and civil engineering projects as well as associated repair work, specific forms of maintenance activities and alterations. For example, where an engineer engaged in professional engineering work has failed to register themselves they are disentitled to payment for their services irrespective of any contract. Therefore, it is crucial all practitioners (and their employers) review these changes and consider adjusting their policies and procedures now to ensure compliance come 1 July 2021.

In addition to the introduction of regulated designs for specified building work and elements, designers and builders are required to issue declarations that their regulated designs or building work comply with, amongst other regulations, the Building Code of Australia. Registered builders and design practitioners must not provide this design declaration unless they are appropriately insured regarding the declaration and work. Designers and builders should be aware of the obstacles this may generate when attempting to take out suitable insurance and, given the current tight professional indemnity insurance market, this requirement could be particularly challenging for parties such as builders, who may not previously have had professional indemnity insurance.

Further, when applying for an occupation certificate, the new regulatory system requires written notice of the intention to apply to be provided to each registered building practitioner who did work on a building as well as written notice that the relevant application has been made. These notices must be given with timeframes to be specified under the forthcoming regulation. A maximum penalty of $22,000 (200 penalty units) applies if a party fails to comply with this notice requirement.

Regulations yet to be enacted

The prescribed Regulations, which will set out further detail and specific functions of the DBP Act, are expected to be introduced later this year. The Regulations may prescribe further categories of "owner" and applicable types of buildings subject to the duty of care.

Residential Apartment Buildings Act

The legislation was enacted by on 10 June 2020 (after the Bill had been passed by NSW Parliament only two days following its introduction) and is due to come into force on 1 September 2020.

The main features of the RAB Act include:

  • intervention by the Secretary of the Department of Customer Service requiring the correction of "serious defects" in residential apartment buildings (typically class 2 under the Building Code of Australia);
  • issuing of building work rectification orders to developers where the Secretary has a reasonable belief that building work was or is being conducted in a manner that could result in a serious defect with heavy penalties for those who fail to comply with an order; and
  • extensive investigation and enforcement powers for authorised officers, including authority to enter occupied premises and undertake (potentially destructive) testing of the building work.

A "serious defect" is defined as including a failure to comply with performance requirements under the Building Code of Australia, use of building products prohibited under the Building Products (Safety) Act 2017 (NSW), and any defects likely to prevent habitation or use of the building for its intended purpose. To ensure any such defects are rectified before residents take possession of their apartment, the Secretary can issue a prohibition order to delay the issue of an occupation certificate and/or registration of a strata plan.

Further, "developer" is given a broad definition, including land owners where building work is conducted, principal contractors (this is likely to include the builder as the person responsible for the overall co-ordination and control of the carrying out of the building work, as defined under the Environmental Planning and Assessment Act 1979 (NSW)), strata scheme developers, people who contract or facilitate the building work to be conducted, and any other people to be prescribed by the forthcoming regulation.

Under the RAB Act, the Secretary may exercise its powers up to 10 years after the issue of the occupation certificate for residential building work. This retrospective application is significant and may open the door to further practitioner liability in addition to that provided by the statutory duty of care created by DBP Act. If a rectification order is issued to multiple parties including the landowner, developer and builder, the legislation requires all parties to ensure compliance. Parties should ensure this is adequately addressed in their contracts to avoid costly disputes to determine who will comply and who will pay the Secretary's costs that can be imposed.

HomeBuilder housing stimulus package

The Australian Government's HomeBuilder housing stimulus package intends to accelerate residential property development and boost the economy in the wake of the downturn caused by the COVID-19 lockdown.

This package is likely to see an increase in the volume of residential construction work (both small and large-scale) being carried out in NSW. Builders, design practitioners, engineers and developers undertaking such works would do well to keep the DBP Act and RAB Act in mind as any residential building work carried out under this package will be subject to the obligations and duties to owners (including to subsequent owners) established by the new Acts. In the event defects in any such work are identified, the new compliance and enforcement powers could also prove expensive for any practitioners who are caught failing to comply with construction standards.

What should you do now?

The DCP and RAB Acts create a range of new obligations for all involved in the building industry.

Developers should:

  • take note of the notice requirements under the DBP Act of upcoming occupation certificate applications and the applicable strict timeframes;
  • update building contracts and consulting contracts to address the new Acts including indemnities in respect of any building work rectification orders and compliance with the DBP Act;
  • be aware that the statutory duty of care could extend to them and take steps to protect themselves contractually;
  • ensure that the DBP Act requirements will be met for any new buildings as the principal certifier is otherwise not permitted to grant an occupation certificate;
  • review existing projects for potential serious defects and, if any are identified, consider taking steps to rectify them now in order to minimise defects being investigated by the Secretary;
  • review any proposed or existing works to ascertain whether proposed application dates for occupation certificates fall within the 6 month transition period and, if so, ensure required notices under the RAB Act notification scheme are prepared in advance of the strict 14 day timeframe (otherwise they may not be able to obtain an occupation certificate).

Designers should:

  • review and prepare to comply with the registration requirements and take note of penalties for non-compliance with a registration certificate;
  • review their professional indemnity insurance arrangements;
  • prepare to provide compliance declarations for any designs they prepare; and
  • prepare to lodge all designs and design compliance declarations with the Department of Customer Service.

Builders should:

  • review and prepare to comply with the registration requirements and take note of penalties for non-compliance with a registration certificate;
  • review their professional indemnity insurance arrangements;
  • ensure that work is carried out strictly in compliance with the certified designs and seek re-certification of any variations before implementing them;
  • prepare to comply with the requirements to ensure that all designs are prepared by registered designers;
  • prepare to lodge all relevant documents with the Department of Customer Service within 90 days after issue of an occupation certificate.

Engineers – whether in the residential building sector or otherwise – should prepare to comply with the new registration and insurance requirements.

Owners should consider whether the new statutory duty of care under the DBP Act is available for any defective works claims.

For further information on how this new legislation may impact your business or construction projects in NSW, please contact a member of our team.

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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.