Brick by Brick: Unpacking Pafburn and its Effect on Proportionate Liability in NSW

The Court of Appeal’s decision is due to be heard in the High Court, and if upheld, will have profound implications, impacting not only legal practitioners but also developers, builders, and subcontractors who must navigate the new legal terrain.

Design and Building Practitioners Act 2020 (NSW) (“DPB Act”)

Home Building Act 1989 (NSW)

• The owners corporation of a strata development sued the developer, Mandarina Pty Ltd, and the builder, Pafburn Pty Ltd, for defective construction, claiming a breach of the statutory duty of care under section 37 of the DBP Act. Pafburn and Mandarina relied on proportionate liability under the Civil Liability Act naming several subcontractors as concurrent wrongdoers. The owners argued that the duty of care was non-delegable, and the proportionate liability defence was unavailable. The NSW Court of Appeal ruled that the statutory duty under the DBP Act could not be limited by proportionate liability provisions, making Pafburn and Mandarina fully liable for the construction defects.

The Owners – Strata Plan No 87060 v Loulach Developments Pty Ltd (No 2) [2021] NSWSC 1068

• In a dispute over alleged construction defects in a Parramatta residential development, the owners’ corporation sued developer Loulach, citing breach of statutory duty of care under the DPB Act. The court required the owners to submit an amended list statement and a Scott Schedule of defects. The owners submitted these in September 2021, but Loulach opposed their method of pleading. The court ruled against the owners, stating that identifying defects alone does not prove a breach of duty; additional negligence criteria must also be met, including foreseeability and the actions of a reasonable person.

Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor [2014] HCA 36

• The High Court unanimously allowed Brookfield Multiplex Ltd’s appeal against the NSW Court of Appeal decision, which had previously established a common law duty of care owed by Brookfield to a subsequent Owners Corporation for latent defects in a strata-titled serviced apartment building. The High Court determined that, given Brookfield’s detailed contract with the developer, which included provisions for defect management and liability limitation, and the standard sale contracts providing specific rights to subsequent purchasers against the developer, no duty of care existed to prevent pure economic loss from latent defects. The Court also found no independent duty of care owed to the Owners Corporation.

Kazzi v KR Properties Global Pty Ltd t/as AK Properties Group [2024] NSWCA 143

• KR Properties and AS Coaching contracted Oxford Pty Ltd to build a 6-unit apartment building, with Pierre Kazzi as the supervisor. After Oxford missed the completion date, the Owners terminated the contract and Oxford sued for unpaid invoices. The Owners counterclaimed against Oxford and Kazzi for breach of contract and duty under section 37 of the DPB Act. The Owners’ cross-appeal, seeking $918,545.46, challenged the primary judge’s rulings on interest accrual, failure to prove loss, and rejection of the project architect’s evidence. The NSW Court of Appeal sided with the Owners on all issues, finding the primary judge erred in assessing damages and interpreting the architect’s testimony.

Woolcock Street Investments Pty Ltd v CDG Pty Ltd [2004] HCA 16

• In 1987, CDG Pty Ltd was engaged to design the foundations of a commercial complex. After the building’s purchase by Woolcock Street Investments Pty Ltd in 1992, significant structural defects emerged due to alleged negligent design or supervision. Woolcock sought damages for the cost of repairs and loss of rent. The Supreme Court of Queensland referred the case to the Court of Appeal, which found no cause of action in negligence, noting the lesser vulnerability of commercial purchasers. The High Court, referencing the agreed facts and the appellant’s claim, ruled by a 6:1 majority that no duty of care was owed, with the majority finding that the principles in Bryan v Maloney did not support Woolcock’s claim. Kirby J dissented, while Gleeson CJ, Gummow, Hayne, and Heydon JJ provided a joint judgment, distinct from McHugh and Callinan JJ’s individual findings.

Abdel-Kader and ors -v- Royal Borough of Kensington and Chelsea and ors [2022] EWHC 2006 (QB)

• The Grenfell Tower fire in June 2017, caused by an electrical fault in a refrigerator, spread rapidly due to combustible cladding and became the UK’s deadliest structural fire since 1988. Following the fire, the Kensington and Chelsea Council’s leadership resigned, and a review of building regulations was commissioned. The Grenfell Tower inquiry began in September 2017, with reports identifying regulatory non-compliance related to the building’s cladding. Survivors and families filed a civil lawsuit in the US against the cladding manufacturers and refrigerator company, but the case was dismissed in 2020, leading to a civil settlement by April 2023 with 22 organisations involved.

Tanah Merah Vic Pty Ltd & Ors v Owners Corporation No 1 of PS613436T & Ors [2021] VSCA 72

• A fire at the Lacrosse apartment building, caused by a discarded cigarette, spread rapidly due to the use of combustible aluminium composite cladding. The owners of the building suffered over $12 million in losses. The Victorian Civil and Administrative Tribunal (VCAT) found the builder liable for these damages due to breaches of statutory warranties in its Design and Construct contract, specifically regarding the suitability of materials, compliance with the law, and fitness for purpose. The builder’s liability was apportioned among the building surveyor, architect, and fire engineer, who had breached their consultancy agreements by failing to exercise due care and skill. The consultants appealed the decision, but the Victorian Court of Appeal largely upheld VCAT’s findings, maintaining the apportionment of liability: 39% to the fire engineer, 33% to the building surveyor, 25% to the architect, and 3% to the resident who discarded the cigarette. The Court ruled that the builder’s breach of warranties was not apportionable under the Wrongs Act and upheld VCAT’s findings that the architect’s cladding specifications and the building surveyor’s compliance checks were deficient.

Icon Co (NSW) Pty Ltd V Liberty Mutual Insurance Company Branch Trading As Liberty Specialty Markets [2020] FCA 1493

• Icon, a construction company, built the Opal Tower at Sydney Olympic Park. During the 12-month defect liability period that followed the building’s completion in August 2018, major cracks appeared in wall panels and floor slabs, necessitating resident evacuation. A class action by residents against Sydney Olympic Park Authority led to a cross-claim against Icon, resulting in Icon’s liability for $31 million in rectification, accommodation costs, and legal fees. Icon sought indemnity from its insurers, Liberty and QBE, and succeeded against both. Although the defects occurred outside the original policy period, the court rectified the Liberty policy to include the defects liability period based on the intent of the parties. Additionally, Icon’s claim under QBE’s product liability policy was upheld, with the court defining the building as a “product” within the policy’s terms.

• Prior to the Civil Liability Act 2002, joint tortfeasors could be 100% liable for each other’s actions. However, the Act introduced the concept of proportionate liability, wherein liability for damages is apportioned between tortfeasors in proportion to their overall contribution to the damage.
• The DPB Act has reverted liability back to the old 100% model in the context of apportioning liability between tortfeasors in the design and building process.
• Following incidents at La Crosse Towers in November 2014, Grenfell Tower in June 2017, and Opal Towers in December 2018, a new duty of care was introduced under section 37 of the DPB Act.
• Section 37 of the DPB Act establishes a non delegable statutory duty of care for building professionals to prevent economic losses due to defects or poor construction. It outlines the responsibilities of building practitioners in exercising reasonable care in their work.
• The incidents at La Crosse and Grenfell Towers involved combustible cladding in the supply chain leading to significant damage, injuries, and even death. The Opal Towers faced issues with structural integrity, including cracking, which forced residents out of their homes just before Christmas.
• The interaction between the Civil Liability Act provision 5Q and the DPB Act provision, section 37, raised questions about the creation of a non-delegable duty. These duties are not eligible for a proportionate liability defence.
• The pending High Court appeal in Pafburn and possibly Kazzi could impact the liability of directors. Now, it is possible that directors can be held 100% liable, personally, for damage caused by issues with buildings constructed by their company.
• Liability in construction cases could shift into a hybrid model wherein plaintiffs initially seek judgement under the section 37 duty where a party is insured, and where that fails, a judgement apportioning liability between the parties at fault.

• The new duty under the DPB Act impacts everyone involved in supervising, coordinating, or managing construction projects.
• Individuals with a statutory duty of care will be held accountable for the actions of those to whom they delegate construction work to. Developers and builders will be responsible for the misconduct of subcontractors and consultants who violate this duty of care.
• From a professional perspective, passion and dedication are key to success. Keith found success by pursuing his interest in building and architectural liability early in their career. It is important to find your passion, receive proper training, and learn from experienced mentors. Be patient, learn continuously and learn from your mistakes.

Today on Hearsay, we’re talking about a recent New South Wales Court of Appeal decision The Owners – Strata Plan No 84674 v Pafburn Pty Ltd [2023] NSWCA 301, which we’ll be calling Pafburn today, which marks a significant shift in the legal landscape concerning proportionate liability in New South Wales construction and design cases, fundamentally altering over two decades of legal practice in the area.

Now, this isn’t the end of the story. The Court of Appeals’ decision is due to be heard in the High Court following a grant of special leave, but if it’s upheld, it’ll have profound implications for construction lawyers and their clients impacting not only legal practitioners, but also developers, builders, and subcontractors who have to navigate this uneasy new legal terrain.

Now, to provide insight into these changes and their practical impact, we have on the show Keith Redenbach, Principal Solicitor at Redenbach Legal. With extensive experience in construction law and proportionate liability cases, Keith is here today to help us unpack the nuances of the Pathburn decision and its broader implications for the legal community.
Keith, welcome to Hearsay the Legal Podcast.

TIP: Okay, so Keith just mentioned the Multiplex case or Brookfield Multiplex. The issue in this case was whether the owner’s corporation could recover damages for economic loss resulting from latent defects in the common property of a commercial apartment complex that was built by the defendant, Brookfield Multiplex Ltd.

The court ruled that the owner’s corporation wasn’t vulnerable to these losses due to the contractual provisions between the developer and subsequent purchases, which addressed the construction and repair of defects. Justices Haybe and Keifel looking at this situation said there was no need to define vulnerability, the contracts themselves granted the purchasers the right to have any defects fixed. They further emphasise that the inclusion of explicit quality standards in these contracts demonstrated the party’s ability to safeguard against any negligence on the part of the builder in fulfilling their contractual obligations.

In other words, it was up to the parties to contractually deal with any risks of latent defects, the court and the law shouldn’t interfere in what the parties had agreed. The High Court referred to the earlier case of Wilcox Street Investments and CDG, where Justices Crennan, Bell, and Keane supported the idea that vulnerability could be used as a justification for allowing recovery in exceptional cases involving pure economic loss.

Again, Justices Hayne and Kiefel emphasised the importance of the question of vulnerability in determining the outcome in Brookfield Multiplex. In Brookfield Multiplex, the court suggested that owners corporations and by extension, the purchasers of individual investment apartments in the building, are deemed capable of protecting themselves by negotiating in the contract and the law didn’t need to intervene otherwise.

The High Court concluded that the owners corporation was not vulnerable due to the provisions outlined in the contracts between the developer and the subsequent purchasers regarding the construction and the repair of building defects, and the court denied recovery to the plaintiffs.

And ultimately in June, 2020 … so you can go back and remember COVID and it was, I guess, a dark time for humanity, let alone the law … those new provisions, the new duty of care provisions were introduced in this new legislation we’re talking about today, the Design Building Practitioners Act in New South Wales, obviously to take away notionally the effect of the joint and several problem that the Proportionate Liability Scheme fixed, but basically ends up reverting back now to a concept of 100% liability for a party that even is maybe say 40% responsible. So it does take us back a bit, full circle.

TIP: So Keith just mentioned the tragic Grenfell Tower fire in June 2017. That fire at Grenfell Tower in North Kensington in London was caused by an electrical fault in a refrigerator on the fourth floor and it rapidly spread due to the combustible cladding used in the construction of the building. It became the UK’s deadliest structural fire since the 1988 Piper Alpha disaster and an extensive investigation followed focusing on building management, fire safety and regulatory failures.

Following the fire, the Kensington and Chelsea Council’s leadership all resigned and a review of building regulations was commissioned. The Grenfell Tower inquiry began in September 2017 with the first report from that inquiry in 2019 identifying regulatory non compliance of the building’s exterior combustible cladding. A second phase of the inquiry started in 2020, and the final report of that inquiry is due in September of this year, 2024. The survivors and families of the victims of the Grenfell Tower fire filed a civil lawsuit in the U.S. state of Philadelphia against Arconic and Celotex, the manufacturing companies of the cladding and insulation used in the building. The complaint alleged that the cladding and insulation were defective and combustible due to a lack of fire retardant used in the manufacturing process. Interestingly enough, Whirlpool, the manufacturer of the refrigerator that was believed to have started the fire on the fourth floor of the building, was also named as a defendant in that action. In August, the case was moved to the United States District Court for the Eastern District of Pennsylvania, and then that court dismissed the case in September 2020, stating that it was not the most convenient forum for the claim, ‘forum non conveniens’, allowing claims to be filed in the English courts by the plaintiffs. By April 2023, 22 organisations, including cladding company Iconic, the refrigerator manufacturer Whirlpool, and several government bodies had reached a civil settlement with the 900 individuals who were impacted by the fire. 

Now Keith also mentioned the Lacrosse building incident. This one occurred in Melbourne in 2014. The fire affected 15 levels of apartments, affecting about 500 people who required immediate evacuation from the building, but there were no fatalities or serious injuries. The fire and the subsequent investigation into it raised questions about the building’s compliance with the Building Code of Australia, the number of occupants in the tower, and the external wall cladding. Subsequent investigations revealed that the external walls between the balconies and bedrooms of the apartments in the building were combustible, which were  contrary to the requirements of the Building Code of Australia.

In May 2021, the Victorian Court of Appeal reallocated liability in the landmark cladding litigation from the Lacrosse Tower fire, which involved aluminium composite panels, or what you might have heard of as ACP. Now, initially, the Victorian Civil and Administrative Tribunal, which heard the action, had apportioned 12 million in damages between the building surveyor, who was held 33% liable, the architect, 25% liable, the fire engineer, 39% liable, and the individual who caused the fire, 3% liable. The appeal, which was brought by the three consultants, the surveyor, the architect, and the fire engineer, argued that it was the builder who was negligent, that the court upheld VCAT’s decision that the builder hadn’t failed to take reasonable care. The court found that the builder relied on consultants for technical details and wasn’t responsible for the ACP risks. The Court of Appeal reallocated responsibility again. The fire engineer, 42% up from 39, the building surveyor, 30% down from 33, and the architect and the resident’s shares unchanged. 

Finally, we spoke about the Opal Tower incident. This one occurred on Christmas Eve, 2018. That evening, residents of the building reported loud banging noises, exposed panels and cracks, predominantly on levels 4 and 10 of the tower. A fissure on the 10th floor had caused a loud bang, prompting a bomb scare and the evacuation of 300 people from Opal Tower. Police and firefighters forced open doors to aid the evacuation and extended the evacuation zone to accompanying neighbouring buildings, roads and a railway station within a one kilometre radius of the building.

Investigations followed, as they do. In 2019, a government report into the Opal Tower incident attributed the cracks to design and construction flaws, noting deficiencies in horizontal support beams, which were deemed both non compliant with the BCA and under designed, but the overall structure of the tower was considered sound. The structural engineers for the Opal Tower project, WSP, settled claims brought against it by both Icon Co. NSW, its head contractor, and a class action, while its parent company covered the legal costs. After those settlements, WSP sought indemnity under Icon’s third party liability policy for the payments made and the legal costs incurred. Remember, Icon was the head contractor, WSP the subcontractor. But Icon’s insurers declined coverage. The primary insurer accepted coverage for the settlement payments, but not the legal costs that WSP’s parent had paid, citing WSP’s choice to claim under its own professional indemnity insurance policy. The excess insurers argued that WSP didn’t qualify under the liabilities policy definition of subcontractor.

 The Federal Court of Australia determined two primary issues in that case. First, whether WSP was covered as a subcontractor. The liability insurance policy covered entities  ICON, which WSP argued included them as a design subcontractor. And the court agreed, rejecting the argument that coverage under the policy was limited to construction subcontractors only, and the double insurance issue, the issue of liability insurance policy coverage and professional indemnity insurance policy coverage. With WSP covered under both the liability policy and its own professional indemnity insurance, the court addressed potential double insurance concerns, and it held until WSP had actually received payment from a professional indemnity insurer, then the liability insurers couldn’t rely on double insurance issues to deny coverage.

TIP:  Now, Keith just mentioned something that you might be familiar with and something you might be less familiar with; a Scott Schedule and a Loulach Schedule. Now, a Scott Schedule is the one you might be familiar with. It’s a document used in construction and property disputes to clearly outline the issues in contention between the parties.

It’s typically structured as a table and it lists the claimant’s allegations or claims in one column and the respondent’s responses or defences in another column. To prove a breach of the statutory duty of care under the Design and Building Practitioners Act, it’s insufficient to simply demonstrate that a defect exists.

The claimant has to specify how the defendant was negligent in a manner that caused the defect. For instance, a claimant could create a Scott Schedule listing the relevant defects, detailing the risks that the builder was expected to manage, and outlining the precautions the builder should have taken to prevent those defects from occurring.

Now, Keith also mentioned a Loulach schedule. In the case of Loulach, a body corporate initiated legal action against the developer and builder Loulach, citing alleged defects in a residential strata development in Parramatta. The full citation for the case is in the show notes for this episode. The owners also claimed a breach of the statutory duty of care established by section 37 of the Design and Building Practitioners Act.

The court instructed the owners to submit a draft of the amended list statement and include a Scott schedule identifying the defects. In September 2021, the owners submitted the Scott Schedule and circulated a proposed amended list statement that didn’t reference the Scott Schedule. Instead, the draft amended list statement referred to defective work based on various consultants reports who had examined the building. Loulach opposed the owners request to plead the statutory duty of care under the Design and Building Practitioners Act in the manner that they proposed.

Alternatively, the owners argued that merely identifying the defects in the draft amended pleadings was sufficient. They contended that a defect breaching the HBA or the Home Building Act established that the defect resulted from a breach of statutory duty of care.

The court denied the owner’s request to amend the list statement in the proposed form and the court clarified that the existence of a defect alone doesn’t establish a breach of the duty of care under the Design and Building Practitioners Act. The plaintiff has to satisfy other negligence criteria under common law and the Civil Liability Act, including whether the risk was foreseeable, significant, and what a reasonable person would have done in similar circumstances.

What’s really going on if we took a giant step back, is the legislative cause of action is in effect replacing the common law provisions that we all went to law school with, including questions of not only duty, but causation, questions of actual remoteness and so on, they are now replaced by a very, on one view, onerous regime on anyone who sets foot or is near or supervises a building site in New South Wales. Now, it’s quite unusual for a state law to be examined by the High Court. I mean, these are both state laws, the civil liability legislation, as is the Design Building Practitioners legislation. And the fact that the High Court has given leave for half burn to be argued before it probably suggests that they, and with respect would, no doubt, appreciate the significance of it.
As I’ve said in my article, you referred to earlier, it’s on one view, the death of proportionate liability in a practical sense. Because as I said, you wouldn’t bother going with the other claims on the, on the alternative, if you could get a section 37 up with a 100% liability, where there is in effect, no remoteness causation requirement on one view, and I’m sure there’ll be some refinement after the Pafburn high court decision about those topics, because it does really throw everything on its head.
Not to mention, as I’ve mentioned, the Kazzi implications, which are that the directors and those involved in the administration of the company can be now dragged into this liability fight. Notwithstanding, there’s no contract with them. Notwithstanding, there’s no proportionate system that might apply to them and notwithstanding the corporate veil itself.

Now, if you’re an Australian legal practitioner, as you probably know, you can claim one continuing professional development point for listening to this episode. Whether an activity entitles you to claim a CPD unit is self assessed, as you know, but we suggest this episode entitles you to claim a substantive law point.

More information on claiming and tracking your points on hearsay can be found in the description on our website. Hearsay the Legal Podcast is brought to you by Lext Australia, a legal innovation company that makes the law easier to access and easier to practise, including your CPD.

Finally, I’d like to ask you a favour, listeners. If you like Hearsay for Legal Podcast, please leave us a Google review. It helps others to find us and that keeps us in business.

Thanks for listening and we’ll see you on the next episode of Hearsay.