Construction Industry Update: No Longer Clad With Uncertainty?

Background

The appellant was the Owners Corporation of a 28-storey building located at Parramatta, New South Wales (Building). The Building was a mixed-use building, comprised of both residential and commercial lots and was constructed using aluminium composite panels (ACPs). The Building was designed and constructed by Toplace Pty Ltd (Toplace) who was the second respondent in the proceedings pursuant to an agreement with the owner/developer, JKN Para 1 Pty Ltd (JKN). JKN was the first respondent in the proceedings.

Supreme Court Proceedings

In the underlying proceedings, the Owners Corporation claimed damages against the respondents for breach of statutory warranties arising from defects in the Building. The most significant breach was the use of ACPs on the exterior of the Building. The Owners Corporation contended that the cladding did not comply with the requirements of the Building Code of Australia (BCA) in relation to fire resistance of buildings and sought damages for the removal and replacement of the ACPs. The respondents’ position was that at the time of installation, the cladding complied with the BCA. At first instance, the Supreme Court of NSW found that the ACPs did not comply with the deemed-to-satisfy (DTS) provisions. However, the primary judge also found that JKN had not breached the warranty in s 18B(1)(c) of the Home Building Act 1989 (NSW) (Act) and declined to award the reinstatement damages on the basis that the Owners Corporation had not established that an alternative solution could not then or now be performed.

The issues for determination on appeal and what the Court of Appeal held

The first issue for determination was whether the respondents breached the statutory warranties in section 18B(1)(c) of the Act.^[2] The Owners Corporation submitted that the conclusion by the Supreme Court of New South Wales, that there was no breach of s18B(1)(c) of the Act was a “clear error” because the Building did not satisfy the performance requirements of the BCA. This was on the basis that it did not comply with the DTS provisions and since there was no alternative solution prepared prior to the issuance of the construction certificate, the work did not comply with the relevant provisions of the Environmental Planning and Assessment Act 1979 (NSW). The Court of Appeal accepted the Owners Corporation’s submission on this issue.

The second issue for determination turned to the issue of loss and damages and whether the respondents were liable to pay damages. On this issue, the Court of Appeal determined that:

• the burden of proof for establishing loss was on the Owners Corporation;
• the respondents had the onus of displacing the prima facie rule for assessing damages as to the cost of re-instatement;^[3]
• the judge at first instance erred in finding that the Owners Corporation had the onus of establishing that an alternative solution could not then or now be performed;^[4]
• the Owners Corporation were not required to go further by providing that the respondents could not have complied by acting differently with respect to an alternative solution;^[5] and
• the respondents did not adduce evidence which would have shown than an alternative solution that would satisfy the performance requirements of the BCA regarding fire resistance could have been assessed and certified prior to the issue of the construction certificate.

In doing so, the Court of Appeal found that by installing cladding which did not comply with the performance requirements of the BCA, the respondents provided the Owners Corporation with a building which did not meet the minimum standards for public safety.^[6] The Owners Corporation was entitled to a building with cladding that either complied with the DTS provisions or had been assessed by a fire engineer, certifying authority and the Fire Commissioner as an alternative solutions to ensure that the cladding’s “functional and performance equivalence was resistant to fire”. It was not reasonable for the Owners Corporation to carry the real risk of fire damage that may occur as a result.^[7]

Lavan Comment

This case provides much needed clarity in the industry, particularly for building professionals and their lawyers involved in combustible cladding related litigation. It is also a timely reminder on the matters that needed to be at the forefront of negotiation when claims (including insurance related claims) arise in relation to this issue.

This decision highlights that in these type of cases the Owners Corporation will be required to establish that that there has been a breach of the BCA.^[8] On the flipside, the defendant builder/developer will bear the onus of proof in establishing that the cost of reinstatement of non-compliance cladding would be unreasonable in circumstances where there has been a breach of the BCA at the time the works were undertaken (in this case, when the cladding was installed).^[9] 

Given the risk posed to public safety as a result of combustible cladding and the non-compliance with the minimum standards for public safety which owners/occupants are entitled to, it is unlikely that a court would find replacement of all non-compliant cladding to be an unreasonable remedial measure. This may be contrasted with a situation where the defect poses an aesthetic concern in which case the court may consider several factors in determining whether the remedial measure is unreasonable such as the degree of non-compliance, the feasibility of rectification and the risk of economic waste (amongst other things).^[10]