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In recent months the High Court of Australia has handed down two judgments relevant for underwriters in assessing risk exposure of contractors and building professionals and the availability of proportionate liability defences.
Despite the tort reforms implemented following the Ipp Report in the early 2000s and introduction of proportionate liability, statutory reform in NSW, the decision in Pafburn Pty Ltd v The Owners – Strata Plan No 84674[1], has resulted in a reversion to joint and several liability for residential construction in respect of non-delegable building work. In contrast, whilst there is significant reform proposed for Victorian building liability, and warranty protections which are not apportionable, there is no suggestion that the Victorian parliament intends to further wind back the proportionate liability reforms.
Like the USA, Canada and the UK, housing affordability in Australia has been a significant social problem since Covid 19 and significant interest rate hikes, which governments have been struggling to address. However, governments at all levels in Australia are looking to significantly invest in social housing to address housing affordability. These policies are likely to see significant residential construction work in the coming five to ten years, with a commensurate rise in the demand of insurance coverage by builders and building consultants. At the same time as new ownership levels have fallen, the NSW legislature has confronted the Opal Towers defects which resulted in enacting statutory reform to regulate the building and construction industry including the liability of builders, developers and certifiers of high-rise strata buildings.
On 11 December 2024, the High Court handed downs its 4:3 judgment with the majority finding that the duty of care imposed on by s37 of the Design and Building Practitioners Act (NSW) is non-delegable and apportionment liability is not available. So, professionals and developers with non-delegable construction duties who delegate responsibilities to others, remain jointly and severally liable for any defects arising from the delegated work. For underwriters insuring developers involved in high rise residential tower construction risks in NSW, the liabilities of Head Contractors and Developers can no longer be defrayed to consultants. That is not to say that contribution claims cannot be brought against consultants, they can, but the risk of insolvency or underinsurance of engineers, architects, surveyors and inspectors, now sits with the developer and not the homeowner or owners’ corporation. Defence Counsel need to be mindful of ensuring that cross claims are correctly formulated for breach of contract and duty of care claims filed against downstream defendants. Notably the minority judges, disagreeing that the non-delegable duties were apportionable, expressly recognised that the findings of the majority judgements would significantly increase risks, costs and insurance premiums arising from the removal of joint and several liability.
Unlike NSW, although significant reform of the building industry is being advanced, particularly in relation to the certification of buildings by inspectors and building surveyors to reduce the potential for building defects, the Victorian parliament has not signalled a departure from the proportionate liability regime, which for building professionals has been in place since 1983.
In Victoria, the Court of Appeal in the Lacrosse case held that certain statutory warranties under the Domestic Building Contracts Act 1995 (DBCA) were not apportionable[2]. Thus, plaintiffs in Victoria can circumvent the apportionment provisions in domestic building disputes by bringing claims relying solely upon those implied warranties imposed by the DBCA which are not apportionable and not bringing a claim for breach of duty. As the Victorian Court of Appeal said in the Lacrosse case, such claims could not “logically or semantically” be said to arise from a failure to take reasonable care and therefore were not apportionable. Of course, that requires a very careful assessment of the claims to be made, and there will be matters where the apportionable claims may have more merit than the statutory warranty claims.
A recent practical example of the interplay between apportionable and joint and several liability claims is the decision of Kirton J in Owners Corporation 1 PS7212535N v Team Building Pty Ltd & Ors[3]. In that matter the Owners Corporate originally brought claims against the builder relying on implied warranties including the implied warranties imposed by s8(a) and s8(d) of the DBCA to carry out work in a proper and workmanlike manner and with reasonable care and skill and a negligence claim at common law and claims against the supplier of a car stacker. When met with an apportionment defence, by the builder, and following the liquidation of Second Defendant which had manufactured, supplied and installed the alleged defective car stacker, the plaintiff amended the claim to withdraw the apportionable claims under the Act and at common law and confine its allegations against the builder to those implied DBCA warranties which were not apportionable, namely that the work was to be carried out in accordance with the plans and specifications. The plaintiff then moved to strike out the apportionment defences raised by the Builder on the basis that they had no realistic prospect of success. Kirton J recognised that the application was designed to remove the risk of non-recovery from other defendants and move that a risk to the builder. However, Her Honour was not prepared on an interlocutory basis to strike out the claims citing an “absence of binding authority” on the court and accepting that whilst the pleadings are a starting point in determining whether a claim is apportionable, ultimately it was an open question on whether the question of apportionment was to be determined after hearing all of the evidence at trial. The decision highlights that this issue is not yet clear and claimants would therefore be wise to keep open the various causes of action which may be available to them.
Another recent decision of the High Court in Tesseract International Pty Ltd v Pascale Construction Pty Ltd[4] is a building case in which the court considered whether the apportionment provisions under Part IVA of the Competition & Consumer Act and apportionment under the Law Reform (Contributory Negligence and Apportionment of Liability) Act 2001 (SA) apply in the context of a commercial arbitration proceeding. The engineer, Tesseract, was sued by Pascale by way of arbitration, relying on claims for breach of contract, negligence and statutory claims for misleading and deceptive conduct. Tesseract pleaded apportionment defences. A preliminary question was ordered by the arbitrator to be determined by the Supreme Court of South Australia. The SA Court of Appeal held that the apportionment defences were not available because the proportionate liability regimes contemplate the plaintiff will have the opportunity to join all wrongdoer in the one set of proceedings and without consent of the defendant, the plaintiff was unable to join all concurrent wrongdoers. The arbitration was a private dispute process where the concurrent wrongdoers were not parties. The High Court held, by majority, that the proportionate liability provisions do apply to commercial arbitrations and the inability to join all concurrent wrongdoers does not mean that proportionate liability laws are not applicable. This was not a good outcome for the plaintiff but provided the defendant with the ability to plead apportionment and avoid the joinder of other concurrent wrongdoers.[5]
Lessons
It is clear from the above cases and our own recent experience in building disputes, that parties are adopted a targeted approach in the way construction claims are pleaded to obtain the best outcome against contractors and developers and to avoid the impact of apportionment regimes or obtain strategic benefits. This includes applications by claimants for preliminary discovery of insurance policies, in the case of insolvent building practitioners, with the ultimate purpose of enabling plaintiffs to formulate claims within cover provided by policies and avoid relevant exclusions, to maximise recovery of the third-party claim.[6]
For construction professionals defending third party claims and for first party property recovery claims, the market remains dynamic and challenging.
[1] [2024] HCA 49
[2] Sections 8(b), (c) and (e) of the DBCA. In Tanah Merah VIC Pty Ltd v Owner’s Corporation No 1 of PS613436 [2021] VSCA 72 (the Lacrosse case) the Court of Appeal emphasised that s24AF(1)(a) Wrongs Act requires a claim arising from a failure to take reasonable care and does not extend to a claim “involving circumstances arising out of a failure to take reasonable care”.
[3] [2024] VCC 1633
[4] [2024] VSC 5
[5] Note in Victoria, the Wrongs Act provisions require the concurrent wrongdoer to be a joined party for the apportionment provision to be applied.
[6] Wadren Pty Ltd & Anor v Probuild Constructions (Aust) Pty Ltd [2023] VSC 348
Construction and engineering
Insurance and reinsurance
Australia