Builder’s Personal Liability & Duty of Care for Defects NSW

9 December 2024 in Building and Construction Law | 5 min read | skip to FAQs

This article examines builders personal liability for defects incurred in the construction process. We discuss the extent that practitioners in the construction industry, including designers, suppliers, supervisors and builders are personally liable under the Design and Building Practitioners Act 2020 (NSW).

The Design and Building Practitioners Act (DBP)

The Design and Building Practitioners Act 2020 (NSW) (known as the Act in this article) was introduced for a variety of reasons, including to expand the accountability of persons undertaking residential building work. The Act introduced several key changes, regarding the safety and quality of the building site and works generally, including a registration requirement for design and building practitioners involved in work on class 2 buildings, as set out in Part 5 of the Act. For a more detailed discussion on other aspects of the Design and Building Practitioner Act please see our dedicated article on this topic.

In this article, we focus on the introduction of personal liability for any person who carries out construction work by way of a statutory duty of care with recent relevant cases. This duty is imposed with the intention of minimising any defects in construction work. Construction work is defined in section 36 of the Act and includes residential building work, preparation of designs, manufacture or supply of a building product for building work and supervision and coordination of building work.

Section 37 and ‘Piercing the Corporate Veil’

Section 37 of the Act is in effect “piercing the corporate veil”, a term used to signify the shifting of liability from a company to a director, or in this case to any person who carries out construction work. As early as 1897 the House of Lords in the case Salomon v Salomon & Co [1897] AC 22 found that a company is a separate legal entity and when a company acts it does so in its own right and is liable for its own acts. This principle has remained since with minor exceptions where the courts may “pierce the corporate veil” to attach liability to directors, such circumstances are rare and include circumstances such as insolvent trading, set out in section 588G of the Corporations Act 2001 (Cth).

Duty of Care & Builders Personal Liability for Defects

Section 37 of the Act states that any person who carries out construction work has a duty to exercise reasonable care to avoid economic loss caused by defects related to their construction work. This section not only imposes a duty of care owed by designers, suppliers and builders to owners, but the duty of care also extends to subsequent owners (also known as successors in title). A person to whom this duty is owed is entitled to bring a claim for damages for breach of this statutory duty.

It is important to note that this duty does not exist in industries other than the construction industry.

Recent Case Law regarding Personal Liability 

Recent case law has confirmed that persons can be personally liable for breaches of this duty of care. This means that if a person performing construction work, including as an employee, fails to meet the required standard of care, they themselves, not just their company entity, can be held personally liable for any resulting defects and be subject to legal proceedings for damages.

Kazzi v KR Properties Global Pty Ltd [2024] NSWCA 143, recently decided in the NSW Court of Appeal, has reaffirmed that persons carrying our construction work can be held personally liable for defective works should it be found that the person had a duty of care and breached that duty of care by failing to exercise reasonable care to avoid economic loss caused by defects. Section 37 of the Act may be good news for homeowners, but should be at the front of mind for any person operating within the building and construction industry as the legal and financial risks have now increased significantly. In a further broadening of the scope, the duty of care applies retrospectively to works completed before the Act commenced.

In the most recent case of Mangano v Amescorp Pty Ltd [2024] NSWDC 195 the District Court provided useful guidance on the scope of the duty of care and the elements involved in a breach of such duty. The court considered the question of “what is the content of the statutory duty of care”. Newlinds J stated:

[104] It seems to me clear that the content of that statutory duty, or at least whether it has been breached or not, will vary depending upon the factual circumstances of any particular case.

[109] This is because what constitutes “reasonable care” will vary depending on all of the circumstances a person caught by the act finds themselves in. To frame the duty by reference to the words of s 37 is only the start of the exercise. The question then becomes, to identify what a person did or did not do and then to determine in the particular factual context if that conduct satisfied the statutory duty.

In Mangano, the plaintiff argued that the defendant had a duty to ensure the task was performed carefully, rather than simply relying on a reputable supervisor and contractors. The defendant ultimately conceded that he owed a duty to ensure the task was done properly. As a result, the District Court did not need to address the specifics of the statutory duty of care, the director/nominated supervisor was found personally liable even though he had hired an on-site supervisor.

Insurance

In the event that a building company becomes insolvent, is wound up, deregistered or liquidated the homeowner is entitled to make an insurance claim against the home warranty insurance (also called home building compensation fund) for any claim that would otherwise have been made against the building company. Section 37 and the personal liability for defects now provides homeowners with an additional legal cause of action against any person who carried out construction work to recover the damages caused by any breach of this statutory duty of care. This assumes that the builder/building company took out this insurance for the particular building project. Although a requirement of the builder, has not always been taken out. Furthermore, this is capped at $300,000.

Key Takeaways

Home owners can bring legal proceedings against any person who carries out construction work for breaches of their duty of care. This can include claims for the cost of rectifying defects and any economic loss including for construction work completed prior to the commencement of the Design and Building Practitioners Act. In summary, construction practitioners, including builders do have personal liability for construction defects.

It is strongly recommended that designers, supervisors, suppliers and builders become familiar with this duty of care, its scope and consequences. This legislation may have far reaching effects on traditional asset protection measures, such as the company structure, implications for employees in the construction industry, employment contracts and the supervision methods implemented by companies and persons involved in the construction industry.

How can BSM Sydney Lawyers assist you?

The expert team of Building and Construction lawyers at Brander Smith McKnight Construction Lawyers Sydney have decades of experience in the construction industry and can assist with advice, representation, and any other matters arising from building disputes. BSM Construction Sydney lawyers are able to advise on all aspects of the Design and Building Practitioners Act and answer all questions relating to the duty of care owed by builders, designers, supervisors and suppliers that it provides. The senior construction lawyers at BSM Sydney Lawyers offer a free 20-minute consultation to discuss your individual matter.

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BSM Lawyer Sydney has offices conveniently located in Sydney CBD, Sutherland, Parramatta, Shellharbour and Wollongong.