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Focus: Construction – June 2008

When does a sub-contractor owe a duty of care?

In brief: When will a sub-contractor in a building project owe the proprietor or subsequent owners a duty of care? Is the liability of other concurrent wrongdoers under Victoria's proportionate liability regime affected if another concurrent wrongdoer reaches a settlement with the plaintiff? Partner Nick Rudge (view CV) and Senior Associate Anna Thwaites report on a recent judgment in the Victorian Supreme Court.

How does it affect you?

  • Sub-contractors' liability. Building industry participants should take care to ensure that their contractual arrangements provide adequate protection against the negligence of sub-contractors. Absent special reliance or vulnerability on the part of the principal, the courts will be reluctant to impose a duty of care on a sub-contractor, particularly where the principal has the ability to protect itself through its contractual arrangements.
  • Proportionate liability. Litigants should be careful when settling apportionable claims with concurrent wrongdoers: settlement with one concurrent wrongdoer at under-value or over-value does not affect the liability of other concurrent wrongdoers.

Gunston v Lawley: Liability of sub-contractors to subsequent owners

In an appeal from the Victorian Civil and Administrative Tribunal (VCAT), Justice Byrne in Gunston v Lawley [2008] VSC 97 has ruled on the tortious liability of sub-contractors to principals and subsequent owners in the domestic building context. His Honour has also considered the liability of concurrent wrongdoers where the plaintiff reaches settlement with one concurrent wrongdoer.

This case is of particular interest because it highlights the courts' reluctance to impose a duty of care on sub-contractors to principals. Although the case arose in the domestic building context, similar principles will apply in the commercial context.

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Facts

A developer engaged an associated company, the defendant builder, to construct two dwellings on the developer's property. The builder retained the co-defendant architectural draftsman to provide drawings and the co-defendant building surveyor to assess plans and conduct inspections. The developer sold the completed dwellings to two purchasers, who subsequently on-sold the dwellings to the plaintiff owners.

After discovering extensive cracking, distortion and other defects in the building, the plaintiffs brought proceedings in VCAT against, relevantly, the builder, the architectural draftsman and the building surveyor. Senior Member Young found the builder, the architectural draftsman and the building surveyor to be liable in negligence to the plaintiffs.

Although the plaintiffs had reached a settlement with the building surveyor and the builder's statutory insurer had paid the plaintiffs up to the statutory insurance limit, Senior Member Young nevertheless apportioned liability between the builder, the architectural draftsman and the building surveyor under Part IVAA of the Wrongs Act 1958 (Vic). The architectural draftsman appealed against VCAT's finding of liability.

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Liability of sub-contractors to principals and subsequent owners

Justice Byrne in the Supreme Court of Victoria upheld the architectural draftsman's appeal.

Applying the two-stage test in Woolcock Street Investments Pty Ltd v CDG Pty Ltd,1 Justice Byrne held that the architectural draftsman did not owe the developer a duty of care. As a result, no duty of care was owed to the plaintiffs as subsequent purchasers.

Justice Byrne acknowledged that although there is no general principle of law that a sub-contractor cannot owe a duty of care to a principal, a duty of care will only arise if the relationship between the principal and the sub-contractor is such that there is reliance or vulnerability on the part of the principal.

As he had done in Aquatec-Maxcon Pty Ltd v Barwon Regional Water Authority (No 2),2 Justice Byrne emphasised the importance of vulnerability in establishing a duty of care. Justice Byrne held in Gunston v Lawley:

The feature which is of great importance in the cases, at least since 1999 in determining the existence of a duty of care in the architectural draftsman to the proprietor is vulnerability, that is, the ability of the plaintiff to protect itself from the loss in the event of negligence. In the normal case, where duty is said to be owed by a sub-contractor to a proprietor, this requirement may be difficult for the proprietor to satisfy. There will usually be a contract between the proprietor and the head contractor which will contain covenants protecting the proprietor from defective work. Even if it does not, it will be difficult in the typical case for the proprietor to persuade the court that it did not have the ability to protect itself in this way.3

His Honour observed that reliance or vulnerability may be established through a combination of factors such as where:

  • the sub-contractor is nominated by the principal;
  • the parties are in a close, almost contractual relationship;
  • the sub-contractor's work results from direct dealings between the principal and the sub-contractor; or
  • the sub-contractor's work is of a particular skilled or technical nature.

However, Justice Byrne found that vulnerability is difficult to establish in the domestic building context where the principal:

  • is a developer;
  • has some experience or expertise in construction matters;
  • is involved in the construction activity; or
  • engages a qualified, registered, experienced head contractor.

In the present case, the fact that the developer and the builder were related companies, controlled by a common director, and that the architectural draftsman received instructions from the director and enjoyed a close relationship with the developer, was not sufficient to attract a duty of care. Justice Byrne held that the developer lacked the requisite vulnerability for a duty of care to arise.

The developer was involved in aspects of the construction work, knew that further architectural drawings would be required and could have sought, but did not seek, further advice from the architectural draftsman on these matters. In addition, the developer had the ability to protect itself from the consequences of the architectural draftsman's negligence through the contractual arrangements between the developer and the builder. As a consequence, no duty of care was owed by the architectural draftsman to subsequent purchasers of the dwellings.

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Apportionment

The plaintiffs reached a settlement with the building surveyor before the VCAT proceedings concluded. Senior Member Young nevertheless apportioned liability to the building surveyor in accordance with the apportionment regime in Part IVAA of the Wrongs Act, but did so in an amount that was significantly lower than the settlement amount.

Justice Byrne declined to adjust the liability of the other concurrent wrongdoers. His Honour held that settlement by a plaintiff with one concurrent wrongdoer in an amount that is greater than that concurrent wrongdoer's liability to the plaintiff does not affect the liability of other concurrent wrongdoers. However, in these circumstances the plaintiff would not be permitted to recover from the concurrent wrongdoers more than 100 per cent of the plaintiff's loss.

On the question of costs, Justice Byrne held that the proportionate liability regime does not require costs to be allocated in the same proportions as the liability of the concurrent wrongdoers.

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Consequences for building industry participants

Participants in building projects should be careful to ensure that the matrix of contracts gives them adequate protection in the event of default by another party. Justice Byrne's decision highlights the increasing reluctance of Victorian courts to impose a duty of care on parties where there is no contractual relationship, particularly where those parties are capable of protecting themselves against the default of sub-contractors through their contractual arrangements. Although Gunston v Lawley was concerned with the domestic building context, it nevertheless provides guidance on how courts will consider these issues in the broader commercial context.

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Footnotes
  1. (2004) 216 CLR 515.
  2. [2006] VSC 117, [275].
  3. Gunston v Lawley [2008] VSC 97, [28] (footnotes omitted).

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