Combustible Cladding and the Lacrosse tower: Owners Corporation No 1 of PS613436T v LU Simon Builders Pty Ltd & Ors [2019] VCAT 286

Background

In November 2014 a fire broke out on the balcony of an apartment at the Lacrosse tower in Docklands. It spread quickly upwards via the façade which was built using non-compliant aluminium composite panel (ACP) cladding. Fortunately, the building sprinkler system activated, the Metropolitan Fire Brigade responded promptly preventing
any fatalities.

The Lacrosse fire and the subsequent Grenfell tower tragedy in London has resulted in scrutiny of building materialsused in the construction of high-rise apartment towers and high-rise commercial towers.

Decision

On 28 February 2019 Woodward J handed down his decision in case of Owners Corporation No 1 of PS613436T v LU Simon Builders Pty Ltd & Ors [2019] VCAT 286 (LU Simon decision). His Honour dealt with the cause of the Lacrosse tower fire and who was responsible for the resulting loss and damage. This is the first high profile decision in Australia in which a Court or Tribunal has examined the use of ACPs (otherwise referred to as ‘flammable
cladding’) in a high-rise apartment complex. The decision is significant because it examined issues including:

  1. whether an Owners Corporation (or any owner) can succeed in a proceeding against a builder thatinstalled ACPs; and
  2. whether and, if so, which parties involved in the design and construction of the Lacrosse building are
    responsible for the selection, approval and installation of ACPs.
Claims

The Owners Corporations (OC) of the Lacrosse tower and numerous apartment owners claimed against LU Simon (Builder) and alleged:

a. a breach of statutory warranties;
b. negligence; and
c. misleading and deceptive conduct,

relating to the Builder’s installation of flammable ACPs at the Lacrosse building. The OC and the owners variously claimed for several categories of loss and damage including the cost of repair / reinstatement; the cost of installing compliant cladding; loss of rental income; additional insurance premiums and other loss and damage.

The Builder resisted the claims and, in the alternative, sought to apportion any liability to other consultants – in reliance on the terms of their consultancy agreements / terms of engagement. The Builder’s claim was that, as a builder under a design and construct contract it had the services of a consultant team advising as to the design and compliance with legislation (including the Building Code of Australia) and it relied upon members of that team in the selection, design, certification and installation of the ACPs. Accordingly, the builder claimed against:

a. the building surveyor, the Gardner Group (Building Surveyor);
b. the architect, Elenberg Fraser (Architect); and
c. the fire services engineer, Thomas Nicholas (Fire Services Engineer).

Each of the consultants denied the Builder’s claim against them and, amongst other things, sought to defend itself on the basis that it relied upon the other professional consultants and the ‘peer professional opinion’ defence under the Wrongs Act 1958 (Vic). (This provides a defence of reliance upon the opinion of a significant number of experienced practitioners in a field: the consultants sought to rely upon the opinion of a significant number of experienced practitioners to the effect that ACPs were ‘safe’ or at least not combustible).

Key Findings

In the LU Simon decision Woodward J found that:

Cause of the fire
  1. The fire was caused by smoking on the 8th floor of the building on a balcony, after that the fire spread to other tenant’s items on the balcony and the air-conditioning unit and then rapidly spread up the façade due to the use of ACPs on the exterior of the building. The use of ACPs on the Lacrosse building’s balconies made them come into close contact with potential ignition sources including cigarettes, BBQs, air-conditioning units and other items.
  2. The ACPs installed at the Lacrosse tower were non-compliant with legislation including with the Building Code of Australia (BCA), they did not satisfy the ‘Deemed to Satisfy’ provisions of the BCA. The calorific (or energy) value of the ACPs installed at the Lacrosse tower were equivalent to that of petrol, diesel or
    propane. Therefore, the ACPs were combustible within the meaning of the BCA and were responsible for the fast spread of the fire and damage caused by it.
Not all ACPs are the same
  1. The use of ACPs in buildings (even those with a 100% polyethylene core, which is highly flammable) does not automatically result in those materials being non-compliant with the BCA. There may well be instances in which the use ACPs will be compliant with the performance-based regime under the BCA. The issue of compliance or non-compliance of building materials used in a circumstance is a complex question which requires consideration by building experts, such as fire services engineers and others.
Builders’ libaility
  1. The Builder was liable to the OC for a breach of the statutory warranties owed by builders to owners for domestic works. The relevant breaches included compliance with the law and fitness for purpose warranties implied by the Domestic Building Contracts Act 1995 (Vic) (DBCA)1. The selection and use of the ACPs in the Lacrosse tower were not ‘good or suitable for the purpose of being used in the external walls of a high rise residential building such as Lacrosse.’ Accordingly, the OC and owners were entitled to damages including (but not limited to):
    1. diminution in value of the property;
    2. rectification of the defective work to give the OC and owners a building in accordance with the warranties and contractual terms (i.e. a compliant building); and
    3. all other loss arising naturally or flowing from the breach of the implied warranties that are reasonably within the contemplation of parties at the relevant time.
  2. The statutory warranties owed by the Builder to the OC and the owners under the DBCA are not qualified or limited by an obligation to use reasonable care and skill (i.e. not dependent upon a finding of negligence). They also flow from owner to owner as dwellings are bought sold. However the statutory warranties cease for claims attempted to be brought more than 10 years after the issue of the relevant certificate of occupancy.
Builder not negligent
  1. The Builder’s decision to construct the Lacrosse using non-compliant ACP was ‘clearly an error’. (The parallel with builders historically installing asbestos containing materials in buildings was referenced – this practice was thought to be safe and compliant at the time of installation). However, the Builder did not act negligently in installing the ACPs into the building as, amongst other things, the Builder relied upon its professional consultants such as the Architect, Building Surveyor and Fire Services Engineer.
  2. The Builder was liable for damages to the OC and owners in the sum of approximately $5.74 million for a breach of the relevant implied warranties in the DBCA. (Additional claims for loss and damage incurred by the OC and by individual lot owners will be determined at a later date).
Liability of Consultants
  1. The consultants were responsible for the selection and use of the ACPs in the Lacrosse tower. Accordingly, each of the Building Surveyor (33%), Architect (25%) and Fire Services Engineer (39%) were liable to the Builder for breach of their respective consultancy agreements, in negligence (for specifying the ACPs and/or failing to warn as to their use) and for misleading and deceptive conduct contrary to the Australian Consumer Law. Each was liable to reimburse the Builder for their respective proportion of 97% of the amount paid out by the Builder to the OC and owners. (The Builder, therefore, bore the risk of the consultants not having insurance or having insufficient insurance coverage and/or assets to reimburse it).
Defence of ‘peer professional opinion’
  1. The defence of ‘peer professional opinion’ under the Wrongs Act 1958 (Vic) was not established by the Building Surveyor, Architect and Fire Services Engineer as there was sufficient information and material available in the period from 2007 to 2010 (when the tower was designed) that ACPs with a polyethylene core were not compliant and were flammable. (Notwithstanding marketing at the time promoting the ACPs used as innovative, safe and cost-effective). For that reason, the tribunal found that it was not the case that a majority of professionals in the field of designing buildings and fire services engineering believed that ACPs were compliant. Woodward J also expressed views which included that designconsultants should:
    1. take positive steps to clarify any uncertainty about the compliance of particular materials;
    2. not simply rely blindly upon the views of others, certificates of compliance or other materials proffered by parties; and
    3. raise concerns and warn relevant parties about any safety or compliance risks arising from the design and/or selection of materials.
Observations

The LU Simon case provides significant guidance on the issue of flammable cladding and how professionals involved with projects may be liable for the selection and installation of materials including ACPs.

From the Owners Corporation’s and owner’s perspectives

From the perspective of OCs, OC managers and owners the LU Simon decision raises the following issues (amongst others):

  1. The warranties owed by all builders to OCs and owners under the DBCA provide a powerful tool to claim against builders responsible for non-compliant building works and/or defective works such as the installation of ACPs.
  2. The liability of a builder for breach of implied warranties under the DBCA is not dependent upon a builder being proven to have acted negligently. There is also some scope to argue that the implied warranties under the DBCA are not qualified or limited by, for example, the builder being appointed under a ‘construct only’ building contract and not being responsible for the design of works.
  3. Not all ACP cladding is the same – whether or not it is compliant will be a matter for expert engineering opinion. All OCs, OC managers and owners should investigate whether cladding installed on their building is compliant or not. It is not appropriate to assume that any cladding installed in an apartment complex is compliant, without evidence to support this assumption.
  4. If any cladding is found to be non-compliant OCs and owners should seek legal advice to commence a claim against the builder early and before the 10 year limitation period which runs from the issuing of the certificate of occupancy (or building completion) for commencing building actions.
  5. OCs and OC Managers should be particularly careful to consider any cladding which is located near balconies and habitable areas given their proximity to sources of ignition (BBQs, smoking and electrical equipment such as air-conditioning units and hot water units).
From the Builder’s perspective:
  1. Builders should note carefully the broad scope and application of the implied warranties in the DBCA. These warranties are owed for all domestic works and are not qualified by notions of negligence or perhaps even by a builder not be responsible for the design of the works. Builders cannot contract out of the implied warranties.
  2. In the event of a builder being found to have breached the implied warranties in the DBCA the builder will be liable to pay the owner(s). The potential right of a builder to recover against others (and be compensated / reimbursed for liability to owner(s)) will depend upon a range of factors including the terms of the engagement of consultants, advice provided by consultants and, if a consultant is found to be liable, their capacity to pay (and scope and amount of any relevant insurance coverage held by the consultant).
  3. In this case the Builder was found not to have been negligent essentially because it relied upon a team of professional and highly trained consultants (who were obliged to provide the builder with expert advice).
  4. The finding of no negligence on the part of the Builder was no doubt supported by the consultancy agreements between the Builder and each of the Architect, Building Surveyor and Fire Services Engineer which contained comprehensive terms and conditions and scopes of services. In this instance it appears
    that the contracts between the builder and consultant team members were robust enough to assist the builder. This will not always the case.
  5. The Builder should carefully consider the insurance elements of consultancy agreements and ensure that all consultants take out and maintain appropriate insurance policies for an appropriate run off period (typically 10 years from the date of the certificate of occupancy / completion) and that contain adequate levels of insurance coverage. This may mitigate against the risk of a consultant not having taken out appropriate insurance and/or not maintaining such insurance during the run-off period following the completion of the works / delivery of services (in which case any right of reimbursement may be academic).
  6. Builders should review the terms of their standard Consultancy Agreements and the scopes for the engagement of consultants to ensure that they adequately framed as to the roles and responsibilities of parties. This review should focus upon, amongst other things, which consultant is appointed as Head Design Consultant for the purpose of review and signing-off on all aspects of the design prepared by other consultants. The function of Head Design Consultant carries with it additional obligations and potential risk to, amongst other things, review, comment upon, question and challenge the advice and design provided by other consultants on the team and to verify the compliance with the law (including with the Building Code of Australia) of building materials in the context of their intended use on the project.
  7. If a consultancy agreement(s) is to be novated to it, the builder should carefully review its terms to ensure that they are robust and adequate. They need to provide the builder with recourse in the event of a consultant being negligent. If not, the builder runs the risk of being liable to owner(s) under the implied warranties and being unable to recover from members of the consultant team.
From the Consultant’s perspective:
  1. The LU Simon decision is very significant for consultants engaged in the design and construction of domestic works.
  2. The role of the building surveyor has been clarified by the Tribunal. There was some previous (mis)understanding to the effect that building surveyors could adopt a ‘tick the box’ approach to compliance. This view has been dispelled: building surveyors cannot simply rely on certificates from others. They must inquire and ask questions and challenge the views of others when determining the compliance or non-compliance of design and material selection. If a building surveyor is unsure about an issue they must seek specialist advice from, for example, a fire services engineer rather than simply ‘tick the box’ and approve the design or materials. Their service contracts need to contain terms covering the reimbursement of the cost of such external services.
  3. The Tribunal did not accept that it was an industry practice to use ACPs and that, on this basis, professionals could avoid liability. The widespread use of ACPs in the industry was done without a proper scientific or rational basis to conclude that they were safe.
  4. Other building practitioners and consultants such as fire services engineers, architects and engineers must exercise reasonable care skill and diligence when assessing risk and undertaking design and providing advice for construction projects. It is not enough to simply rely the advice of others and/or on statements made by a manufacturer as to a particular product’s level of compliance.
  5. Consultant should review their insurance terms and levels of cover. It may follow that insurance costs
    will rise with a consequent impact on fees.

Queries

If you have any questions about this article please get in touch with an author or a member of our Building & Construction team

Disclaimer

This article is general commentary on a topical issue and does not constitute legal advice. If you are concerned about any topics covered in this article, we recommend that you seek legal advice.

The Authors

Peter Macnish

SPECIAL COUNSEL, MELBOURNE

Richard Hutchings

SENIOR ASSOCIATE, MELBOURNE