By Stephen Aroney, Partner and Cassandra McAlary, Law Graduate

Owners of residential properties in NSW now have greatly increased avenues to bring legal action against builders, suppliers and manufacturers of building products, project managers, architects, engineers and certifiers (“Building Practitioners”) for defects and economic loss, as a result of the Design and Building Practitioners Act 2020 (NSW) which came into effect on 11 June 2020.

The Act creates a statutory duty of care (to exercise reasonable care to avoid economic loss caused by defects in or related to a building and arising from construction, design and supervision work) owed by Building Practitioners to Owners (and subsequent owners) and, most significantly, applies retrospectively to all building work (including design and certification) previously undertaken if the defect became apparent in the 10 years before 11 June 2020. Further, it is not possible to contract out of (or to delegate) the statutory duty of care.

Prior to the introduction of this Act, Owners had very limited options to recover the rectification cost of defects and design/certification errors. They could only sue Builders (and Developers if there were 4 or more dwellings in the development) for breach of statutory warranties in the Home Building Act 1989 (NSW) up to 6 years for Major Defects and 2 years for Non-Major Defects, but if the builder and developer were insolvent it was virtually impossible in the case of Owners Corporations to succeed in a negligence action against Building Professionals because of the 2014 High Court decision in Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 & Anor [2014] HCA 36 which effectively ended the duty of care in negligence for residential building work. However, the newly created statutory duty of care in the Design and Building Practitioners Act 2020 (NSW) will effectively give Owners up to 10 years to sue Builders, project managers, suppliers, manufacturers, engineers, architects and certifiers for any defects, design failures, product deficiencies, specification errors, improper certification, and so on.

The Act introduces other changes that come into effect from 1 July 2021 such as regulated designs for building elements (including fire, waterproofing, structural and services) and for performance solutions, as well as establishing a registration for design professionals (such as engineers) to be duly registered and adequately insured, and to provide declarations that their designs comply with the building code.

The Act is part of the Government’s sweeping Reforms to address widespread concerns of falling standards in the construction and certification of buildings, particularly high rise apartment blocks such as those publicised in the media being Opal Towers, Mascot Towers, Lacrosse Melbourne and Aya Eliza Auburn.

What does this mean for Building Professionals?

There are severe consequences including government imposed fines and disciplinary action for registered practitioners who do not comply with the new legislation.  We will see the exit of some building professionals from the industry that have been cutting corners and therefore not complying with the new building standards. As well as building professionals who will not be able to obtain the necessary insurance required to be a registered designer or those who will not able to afford the cost of higher insurance premiums that is likely to be imposed on them.

What does this mean for Insurers?

The new legislation is concerning for insurers as the duty of care operates retrospectively for 10 years. This risk has not been priced in policies already issued. Insurers are now at risk of litigation against building professionals they have provided cover or indemnified. We expect there will be a rise in proceedings commenced against these professionals and further, it will complicate current legal proceedings as Plaintiff’s lawyers will likely seek amendments to pleadings and joinder of additional parties. Going forward, underwriters of insurers will have to consider this legislation and how they will price this risk for future policies and implement into renewal policies. Further, insurers will need to consider exclusions for building practitioners who stray outside their area of specialty or undertaking specialist building work without being registered for that work.