Developers, Builders Ruled Responsible for Defect Liability

A High Court decision has deeply changed defect liability in New South Wales. As a result of the decision, developers and head contractors will carry 100 per cent of the liability for the full 10-year defect period. It is a “a significant increase in exposure [for developers and head contractors]”, according to Hamilton Locke partner Veno Panicker. It is now six years since more than 300 people were evacuated from the Opal Tower ( pictured top ), a crisis that highlighted the scope of building defect issues in NSW. But despite bringing in the introducton of a Building Commissioner as well as the Design and Building Practitioners Act of 2020, the issue of defect liability has raged on. The High Court this year decided on a pivotal case concerning the apportioning of responsibility for building defects. That decision is now percolating through the industry. The case clarified issues of liability now faced by head contractors and developers. But for the wider industry, it has also put the spotlight on the potential of programs such as the ICIRT ratings to provide a “carrot rather than a stick” approach, according to Panicker, who has 25 years of experience advising on major projects. “iCIRT should be the focus in terms of getting quality outcomes rather than draconian defect regimes,” Panicker says. The (lengthy) case Builder Pafburn and developer Madarina were sued in 2020 by the owners corporation of a North Sydney residential building constructed between 2008 and 2010. Proceedings detailing alleged breaches of the Design and Building Practitioners Act commenced with five days left of the 10-year limitation period introduced by the Act. The statutory duty in question in this case, as determined by the Act, specifies that a person who carries out construction work has “a duty to exercise reasonable care to avoid economic loss caused by defects”. ▲ Hamilton Locke partner Veno Panicker. But Pafburn and Madarina argued that the claim should be apportionable to subcontractors, and this was initially agreed to by the Supreme Court of NSW. However, the decision was overturned by the Court of Appeal in a battle of semantics as the court considered the understanding of what defined “non-delegable” duty, and whether the proportionate liability defence was available to the developer or the builder. Madarina and Pafburn then appealed to the High Court, asking it to set aside the Court of Appeal decision. In December of 2024, the High Court dismissed the appeal, decreeing that statutory duty cannot be delegated, and so the builder and developer could not apportion any part of the liability to subcontractors, ultimately determining that the buck stops with them. ▲ The case was heard in the High Court after an appeal process. The developer and builder took the risk over an untested definition, Panicker says. “Ordinarily with a claim for breach of duty or care, it would be apportionable,” Panicker says. “You could plead that other parties were liable. But in the Pafburn case, the High Court said that no, developers and head contractors carry the can for the entirety of that responsibility. “The builder and head contractor deliberately pled that it was apportionable because [the definition in the Act] had not been tested. “It ultimately went to the High Court, where it was highlighted there would be significant expansion of liability and increased costs for insurance, but they were the minority.” The end of apportionable liability? The case will have a major impact on builders and developers going forward, Panicker says. “It marks a significant increase in exposure,” he says. “It means that for a developer or head contractor, they have 100 per cent liability and you need professional indemnity insurance for 10 years. Most have only six or seven years after completion.” Sharing the liability has historically been accepted as a given, so this change will have flow-on effects for the industry. Head contractors and developers can still cross-claim against subcontractors, but this would be “solely a matter of recovery”. “And if a supplier has gone bust in the meantime, there’s nothing to sue,” Panicker says. ▲ The evacuation of Opal Tower in Sydney’s Olympic Park sparked an avalanche of policy changes around defects. This will not only affect NSW. “It’s going to become more of a problem as similar legislation is enacted in other states,” Panicker says. “While NSW was on the front foot to this knee-jerk reaction to the building crisis, Victoria is looking at it now and it will come.” The Building Legislation Amendment Bill 2025 introduces a requirement for developers to lodge a bond with the Victorian Building Authority for 3 per cent of the total build cost. The renamed Building &amp; Plumbing Commission will take over domestic building insurance and dispute resolution, with the ability to issue rectification orders against builders and developers during the build and for up to 10 years. Inside the iCIRT The Independent Construction Industry Rating Tool (iCIRT) introduced in 2021 has been championed by the NSW Government and industry as a better way to approach building defects and ensure higher quality building work. “Fundamentally, builders respond better to carrot than stick,” Panicker says. “[The DBP Act] legislation is draconian, it’s some of the most onerous in the world. “Ten years is a long time, to the point it’s almost unheard of. “All it does is force head contractors to take on a risk they don’t price, and it’s competitive so they will just go to smaller subcontractors who are less experienced but cheaper, and we will have more defects. And then they won’t have the ability to meet those claims later on. “For the industry it’s just more pressure on margins and that doesn’t lead to quality,” Panicker says. ▲ Deicorp, developer of the such projects as Parramatta’s Cosmopolitan (pictured), was one of the first to achieve an iCIRT rating. Often these rules target the smaller end of the market, he says. “While the Building Commissioner may have a different view, imposing supernormal, non-delegable periods does not help. They target the bottom end, but how does that improve quality? “It’s very difficult to measure quality as a general proposition across the industry, so while we get rid of bad actors and put them in insolvency, in terms of tangible quality outcomes, the iCIRT scheme is much better.” It puts the focus on accreditation and upskilling, Panicker says. “Instead of kicking the industry when it’s down, it praises those that get those qualifications, and highlights those good actors, rather than viewing the whole industry as bad actors which this legislation does,” he says. “They are also being taken up by second and third tier contractors as well as the big end of town, which gives those players a point of difference and shows they’re working with the government, as opposed to the government being the police officer for the industry.”

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