Are directors and developers liable for defective construction work?
By Kristy Dorney and Matt Dolan
Directors and developers in New South Wales face an increased risk of personal liability for defective construction work. The risk for personal liability sits outside any Corporations Act protections and relates to a statutory duty contained in the Design and Building Practitioners Act (DBPA).
In this article, we discuss the potential risk of personal liability for directors and developers where economic loss results from defective construction works.
- The statutory duty of care in the DBPA could extend to directors and developers (who are independent of the builder) in their personal capacity where they have substantive control over building work, designs for building work, or manufacturing or supplying a product for building work.
- Pending the outcome of the cases discussed in this article, it is unlikely the statutory duty would extend to directors of an independent developer where a third-party builder is appointed to have carriage and control of the build.
- It is imperative directors and developers consider the extent of their current insurance coverage and whether any updates are required to ensure they are sufficiently covered.
Design and Building Practitioners Act
Currently, the DBPA imposes a statutory duty of care on a person who carries out construction work to exercise reasonable care to avoid economic loss caused by defects.
Specifically, the DBPA provides:
- A person who carries out construction work has a duty 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 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.
- A person to whom the duty of care is owed is entitled to damages for the breach of the duty as if the duty were a duty established by the common law.
- The duty of care is owed to an owner whether or not the construction work was carried out –
- under a contract or other arrangement entered into with the owner or another person, or
- otherwise than under a contract or arrangement.
Importantly for developers and directors, the definition of ‘persons’ includes both corporations and individuals and ‘construction work’ includes supervising, coordinating, project managing, or otherwise having substantive control over the carrying out of building work, designs for building work, manufacturing or supplying of a product for building work.
Interpretation of the DBPA
The natural interpretation of the DBPA is that a director (of a builder or developer company) does not actually carry out any construction work and nor does the developer entity as this is undertaken by the builder.
However, over the last 12 months this interpretation has been challenged. Recent court decisions have led to a wider interpretation of the DBPA than originally anticipated with developers (in limited circumstances) and directors of builders also bearing liability.
In The Owners – Strata Plan No 84674 v Pafburn, having the ability to control the building work (even if that control was not exercised) was sufficient to constitute ‘substantive control’.
In this case, the Owners Corporation sued the builder (Pafburn) and the developer (Madarina) for a breach of the statutory duty contained in the DBPA. The court said it was arguable the developer had substantive control so was liable to be sued for breach of the statutory duty.
However, this was due to the sole director of the developer also being the builder’s nominated supervisor and a director of the builder. The sole director of the developer in this case has not been personally sued. These findings were in an interlocutory hearing only and the final liability in the case has not yet been determined.
In another case, Boulos Constructions v Warrumbungle Shire Council (no 2), the court was satisfied the managing director and project site supervisor of a builder in their personal capacity could be ‘persons’ for the purpose of the statutory duty of care.
The legal representatives for those individuals argued if they were considered ‘persons’ under the DBPA, such that they could be personally sued, it could make “hundreds...even thousands of people personally liable” on a job and would have “far reaching and negative impacts on the construction industry”. The court was not swayed by this argument and the final decision on liability of those individuals is still pending.
How can we help?
Subject to the outcome of these cases, the statutory duty is unlikely to extend to the directors of an independent developer where a third-party builder is appointed to have carriage and control of the build.
We recommend directors and developers consider the extent of their current insurance coverage and whether any updates are required.
If you need to know more about the potential risk of personal liability for directors and developers and minimising this risk, then please get in contact with a member of our Investment Funds team.
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