Lacrosse Apartments VCAT Decision – Combustible Cladding and Important Liability Issues for Building Consultants

On 28 February 2019 His Honour Judge Woodward delivered his judgement which is the first major decision in Australia regarding the liability of building industry entities involved in the design and construction of a building with combustible cladding.

The subject of the judgement was a fire which took place in November 2014 at the Lacrosse Apartments in Melbourne and extensively damaged the building.

The judgement runs to almost 230 pages and the proceedings had 211 applicants (including 208 individual apartment owners)(the Owners) and 8 respondents (being the builder, the building surveyor and his employer, the architects, the fire engineer, the superintendent under the building contract, the occupier of the unit in which the fire began and the resident who lit the cigarette which caused the fire (Mr Gubitta). Ultimately, the superintendent settled prior to the hearing, and neither the occupier of the unit or Mr Gubitta took part in the proceedings).

The Owners claim was against the builder for breach of statutory warranties under the Domestic Building Contracts Act 1995 (Vic) (DBCA) (such warranties are substantially replicated in other states and territories across Australia including in New South Wales and the ACT). The builder then joined the building consultants – being the architect, fire engineer and building surveyor – as respondents claiming that they were responsible for the specification of the highly combustible cladding and responsible for complying with the building regulations.

The Owners claimed that their loss was caused by the builders’ breaches of warranties under the DBCA because the combustible cladding used on the building was not fire-resistant and did not meet the performance requirements of the Building Code of Australia (BCA). The builder in turn argued the building consultants were liable pursuant to the terms and conditions of the contracts that were novated to them from the developer.

The builder argued that the building consultants should have alerted it to the presence of combustible cladding and prevented the use of the non-compliant combustible cladding.

None of the respondents had a direct contractual relationship with the Owners.

In the matter, the builder did not cavil with Owners’ claim for damages for the DBCA breaches under the principles for damages at common law for breach of contract. Indeed His Honour found that this was unsurprising as the Owners had an “unarguable” entitlement to the damages claimed.

The Tribunal accepted the Owner’s submission that the DBCA warranties were not qualified or limited to an obligation to use reasonable care and skill.

The Tribunal held that the consulting contracts were “pivotal in ascribing liability” in this case. It was held that the contracts were commercial arrangements between parties who were “without exception, sophisticated professionals with considerable experience in the building industry” .In considering whether the builder took reasonable care in selecting the combustible cladding, the Tribunal found that the level of qualifications and nature of responsibilities held by the building consultants led to a reasonable expectation that the fire engineer, the building surveyor and the architect (in that order) should have a “better grasp than building practitioners of fire risks and the application of the BCA to those risks”. Moreover, the builder was relieved of its obligation to exercise reasonable care due to its engagement of those building consultants during the construction of Lacrosse, each being “an important link in the chain of assurance and compliance with the BCA”. The Tribunal in fact placed the builder into a separate category to the building consultants, finding that for large and complex projects, “the builder sought to cover acknowledged shortcoming in its own expertise by engaging highly skilled professionals to direct and supervise its work.”

His Honour found that that the builder was liable to pay damages to the Owners but then found that the damages payable by the builder were to be reimbursed by the respondents as “concurrent wrongdoers” in the following proportions (interestingly no order was made against Mr Gubitta and the builder was not reimbursed the 3% damages that the builder was liable to pay to the Owners which was apportioned to Mr Gubitta):

Fire engineer: 39%

Building surveyor: 33%

Architects: 25%

Mr Gubitta: 3%

The Owners claimed at least $12,765,812.94 in damages and VCAT awarded the Owners damages in the sum of $5,748,233.28.

On 1 Aril 2019 VCAT ordered that just under $7,000,000.00 was to be paid by the builders to bring the building into compliance and for other various heads of loss claimed and interest. As with the primary judgement, the further amount is to be paid by the building consultants in the same proportion as the primary judgement.

As the first decision in Australia that has considered the roles and responsibilities of the builder and other building consultants regarding the use of combustible cladding on a residential building, this decision will impact a wide range of industry participants and their liability and professional indemnity insurer interests.

 

View full decision here.

 

Newly Re-Elected NSW Government Building Standards Announcement

NSW Government – building standards update

The newly re-elected Berejiklian Government has announced its plan in response to the Building Confidence Report commissioned by the Building Ministers’ Forum in August 2017.

The independent expert review by Professor Peter Shergold AC and Bronwyn Weir examined building regulatory systems around Australia and found there are national problems in the construction industry.

In response to the Building Confidence Report, the Government will support the majority of recommendations, including requiring that:

  1. building designers, including engineers, declare that building plans specify a building that will comply with the Building Code of Australia,
  2. builders declare that buildings have been built according to their plans. and
  3. requiring building designers and builders to be registered for this purpose.

The NSW Government will appoint a Building Commissioner to act as the consolidated building regulator in NSW, including responsibility for licensing and auditing practitioners.

The plan will also clarify the law to ensure there is an industry-wide duty of care to homeowners and owners corporations so they have the right to compensation where a building practitioner has been negligent.

Read more about the NSW Government’s plan for Building Standard here.

Flammable Cladding Action Group

The Owners Corporation Network (OCN) is calling on all residential owners facing potential financial imposts due to flammable cladding to contact the OCN on eo@ocn.org.au ASAP, to be part of a Flammable Cladding Action Group.

The OCN has seen the benefits of strata owners pooling resources to resolve shared challenges. In addition, OCN is holding a seminar:

 Simplifying Strata – Successfully Managing Building Defects & Major Projects on Saturday 6 October 2018, 9.00am – 11.30am, at the Kirribilli Club

to assist people dealing with building defects, flammable cladding or looking to carry out major projects.  Cost for non-members is just $55 (incl GST), which includes OCN membership to 30 June 2019.

The Minister for Innovation and Better Regulation, The Hon. Matt Kean will open the session, outlining recent regulatory changes which will benefit strata owners.

OCN will introduce you to Better Living in Strata (BLISS!).  OCN is run by strata owners for strata owners with the aim to deliver Better Living in Strata Schemes for the increasing number of people choosing to make strata home.

Global building specialists, Sedgwick (formerly Sergon), will explain how to successfully manage building defects identification and resolution, including combustible cladding, as well as major repairs and upgrade projects.

For more information and to book, visit www.ocn.org.au/events.

University Research Project on Building Defects

Deakin and Griffith Universities are undertaking a research project on building defects. One part of the project involves interviewing stakeholders (including committee members) about their experiences and opinions dealing with building defects.

All participant information will be re-identified to provide anonymity.

If you are interested and available, the researchers can interview you via teleconference at any time between now and mid-December 2018.

If you are a committee member who is interested in participating, please email Christopher Kerin (christopher@kerinbensonlawyers.com.au) who will forward your details onto the relevant academics.

Building Defect Bond Scheme

The website Sourceable has reviewed the new building defect bond scheme which came into force on 1 January 2018 under the Strata Schemes (Management) Act. Christopher Kerin is quoted in relation to some of the issues surrounding the new scheme. To read more, click here.

The Owners Corporation, it’s statutory duty to maintain the common property and liability under section 106(5)

The NSW Civil & Administrative Tribunal’s Appeal Panel today handed down a decision that will significantly affect a number of lot owners and owners corporations. The decision was that of The Owners – Strata Plan No 30521 v Shum [2018] NSWCATAP 15.

In the case below Mr Shum had been successful in obtaining compensation under section 106(5) of the Strata Schemes Management Act 2015 (the “SSMA”) for damage to his lot property and loss of rent when his commercial lot was subject to severe water penetration. Mr Shum also received interest on the amount awarded for his loss of rent. The Owners Corporation appealed the decision challenging both the jurisdiction of the Tribunal to award damages and the decision that s106(5) was retrospective in awarding damages for losses incurred prior to 30 November 2016 (the SSMA’s commencement date).

The Appeal Panel has now set the boundaries for a lot owner’s ability to claim damages under s106(5) of the SSMA. Key points to take away from the decision are:

  • NCAT has jurisdiction to award damages pursuant to section 232 for an owners corporation’s breach of its statutory duty under section 106;
  • NCAT’s jurisdiction to award damages has no monetary limit;
  • Section 106 is a continuing obligation on an owners corporation to maintain and keep its common property in a state of good and serviceable repair;
  • A breach of section 106 can be ongoing and can give rise to multiple causes of action;
  • Under s106(5) a lot owner has a right to recover “reasonably foreseeable loss suffered in consequence of each breach”;
  • Section 106 is not retrospective meaning that NCAT has no power to award damages for any loss suffered prior to 30 November 2016.

For the above reasons, Mr Shum was awarded damages however his damages claim was limited to loss incurred on and after 30 November 2016.

If you have suffered loss due to a failure in the common property or, your owners corporation is subject to a claim for loss, you should obtain legal advice specific to your circumstances as while the decision in Shum prevents claims under s106(5) of the SSMA it may be possible to make a claim in nuisance or, in certain circumstances, in negligence.

Building Cladding Crisis and Orders

In the light of the current crisis around building cladding, the NSW Government is sending Notices of Intention to Issue an Order to buildings it suspects of having flammable wall cladding.

Please see the typical letter being sent to owners corporations by the NSW Government enclosing the Notices of Intention to Issue an Order.

The NSW State Government (in addition to local councils) has the power to issue such notices although typically it is local councils who issue Notices of Intention to Issue an Order.

Once a Notice of Intention to Issue an Order has been provided to an owners corporation, a Fire Safety Order can issue requiring an owners corporation to complete work at its own cost to rectify any non-compliances with the Building Code of Australia.

Notices of Intention to Issue an Order and Fire Safety Orders are issued as part of the ongoing responsibility of the NSW State Government and local councils to enforce the fire safety provisions of the Environmental Planning and Assessment legislation.

Appeal Rights

It is important for owners corporations to appeal an Order if one is received and the owners corporation does not wish to complete all the work required by the Order (because some or all of the work required by the Order may not be necessary). This is because not appealing greatly weakens the bargaining power of the owners corporation in any negotiations regarding compliance with the subject matter of the Order. That is, there is ultimately little an owners corporation can do to resist total compliance with an Order if no appeal is lodged and the NSW Government digs its heals in over compliance.

There are two types of appeal that can be made against an Order:

  • a “class 1” merits appeal; and
  • a “class 4” legal process appeal.

The relevant legislation governing this area of fire and life safety is the Environmental Planning and Assessment Act 1979 (the Act) (see especially Divisions 2A and 4 of Part 6 of the Act). Both appeals are made under the Act.

Class 1 Merits Appeal

In this appeal, the Land and Environment Court effectively looks at the Order and determines if the Order should be revoked, modified or given subject to no modifications.

Such an appeal must be made within 28 days after service of the Order.

It should be noted that this is a much stronger appeal as it can address a wider range of issues than a limited class 4 Legal Process Appeal.

Class 4 Legal Process Appeal

In this appeal, the Land and Environment Court looks at whether the legal process required has been followed prior to the issue of the Order.

It is a procedural appeal and there is no specified time period for taking such an appeal, although sooner is better than later. An example of a procedural appeal would be where an Order was given but no Notice of Intention to Issue an Order was given beforehand (assuming it is not an emergency fire safety order).

It is important to note that a procedural appeal, if successful, does not necessarily stop the NSW Government from re-issuing an order following the required legal process.

It should also be noted that under section 121ZN of the Act, making an appeal will not automatically stay an order (although a stay could be applied for once an appeal was commenced).

Consequences of Non-Compliance

There are a number of potential consequences of not complying with an Order including:

  • pecuniary penalties;
  • the work may be carried out by the NSW Government and then the cost of this recovered from the owners corporation;
  • compliance costs;
  • enforcement proceedings;
  • summary criminal proceedings;
  • personal liability of executive committee members (although executive committee members are insured for negligent acts or omissions); and
  • possible inability to obtain an Annual Fire Safety Statement (with attendant penalties).

In addition, owners corporations should notify their insurer if a Notice of Intention to Issue an Order or an Order is received. Further, while an owners corporation may have an insurance policy, the liability of the owners corporation and executive committee members is unlimited (whereas any insurance coverage is limited).

Next Steps

Please see the Order Flow Chart (NSW) which sets out the process to be followed when an owners corporation receives a Notice of Intention to Issue an Order. It is important to act quickly as rights are lost if timely action is not taken.

In particular, there are two things which are recommended to be done:

  1. representations on the proposed order should be made by the required date to avoid an Order being issued; and
  2. an EGM be called to pass a resolution to commence court proceedings in the event an Order is issued by the NSW Government as there is usually not sufficient time to call an EGM to seek approval to commence appeal proceedings and then commence the appeal proceedings within the 28 day appeal period (if an order issues).

Please contact Christopher Kerin on (02) 8706 7060 if you have any questions.

Australian Building Codes Board has published additional information on Non-Conforming Building Products

The Australian Building Codes Board has added a new page to its website entitled “Non-Conforming Building Products”.

This webpage is presumably a response to various concerns raised about the risks of using substandard products or materials (‘non-conforming’), or using products and materials incorrectly (‘non-complying’).

The new webpage has general information on non-conforming building products (NCBP) including answering questions such as:

  • what are non-conforming building products?
  • what are the requirements for compliance and conformance for building products?
  • what are the responsibilities of the various stakeholders?
  • how to ensure that the right building products are being used?
  • what to do in the event of non-conformance?
  • how to lodge a query or report a suspected non-complying building product.

To visit the page, click here.