By Stephen Aroney, Partner and Sindri Bergsson, Senior Associate

Tanah Merah Vic Pty Ltd & Ors v Owners Corporation No 1 of PS613436T & Ors [2021] VSCA 72

The Victorian Court of Appeal has handed down its appeal decision in respect of the VCAT Lacrosse decision. In doing so, it has affirmed all but one of the findings made by VCAT. Combustible ACP is installed in many buildings across Australia. As a result of the Court of Appeal’s decision, the risk associated with the costs of replacing the combustible product appears to have been shifted from builders to their designers and consultants, and by extension to the insurers of the designers and consultants.

Background

On 24 November 2014, a fire at the Lacrosse tower caused significant damage, largely as a result of the aluminium composite panel (ACP) cladding fitted to the exterior of the tower which allowed it to spread. It was later found that the ACP contained a polyethylene core which was 100% combustible.

The Owners Corporation and individual lot owners (Owners) sued LU Simon (the Builder) and various consultants engaged during the design and construction of the development (including the building surveyor (also known as a certifier), architect, fire engineer and the superintendent), alleging the Builder had breached its statutory warranties under the Domestic Building Contracts Act (VIC) and alleging that the Builder and each of the consultants had failed to take reasonable care. The Builder argued that it was not liable as it had relied on the expertise of the consultants in the design and selection of the ACP; whereas the consultants argued that the Builder had failed to take reasonable care as the installer of the ACP and was therefore a concurrent wrongdoer.

VCAT found that the Builder breached warranties concerning:

1. suitability of materials;
2. fitness for purpose; and
3. compliance with the law (being compliance with the Building Code of Australia (BCA)).

As a result, VCAT found that the Builder was liable to the Owners. However, the VCAT found that the Builder had not breached its duty of care. Further, the VCAT found that various consultants had breached their duties of care and that they were liable to the Builder.

The Appeal and Findings

It is important to note that this was not an appeal brought by the Builder. The appeal was brought by the fire engineer, building surveyor and the architect.

On appeal, the consultants challenged some of the findings made by VCAT in favour of the Owners including:

1. that the Builder had not breached its duty of care. In particular, the design consultant argued that a reasonably competent builder ought to have been aware of the combustibility of the ACP. However, the Court of Appeal upheld the VCAT’s finding that the Builder had not failed to take reasonable care as the Builder reasonably relied on the advice of expert consultants.
2. the component of the Owners’ claims for the cost of increases in their insurance premiums as a result of the risks with having combustible cladding on the building. The Court of Appeal found there was no error of law as to how the loss was sustained and found the Owners were entitled to recover their significant losses brought about by increases in insurance premiums as a result of the ACP.
3. whether combustible cladding is allowed (under the Deemed to Satisfy provisions of the BCA) which permit certain laminated bonded surfaces to be used even if they are combustible. The Court rejected the argument and said it would not make sense for cladding, which is made up of multiple layers and a combustible core, to be considered a laminated bonded surface.
4. whether the certifier’s defence, that his conduct was consistent with reasonable peer practice, was justified. The Court of Appeal confirmed that it was not justified. The Court’s rationale was that just because other certifiers also believed it acceptable to use combustible cladding without applying proper scrutiny and without obtaining advice from a fire engineer, the circumstances of this matter meant that it was not reasonable for the certifier to accept and adopt that practice.

The Court of Appeal upheld the whole of the VCAT’s decision except for one point of appeal where there was an inconsistency in a factual finding relating to dealings between the certifier and the fire engineer. The practical outcome of this is yet to be determined, but it appears that it may affect the apportionment of liability between the certifier and the fire engineer. It remains to be seen whether the Court or the VCAT will be required to make any further findings on this point or whether the parties will resolve that issue between themselves.

Implications of the Court of Appeal’s Decision

It is important to note that because of the way the VCAT and Court of Appeal proceedings were conducted, including the particular strategies taken, evidence given and concessions made by the parties, one must be careful to avoid generalisations and applications of principles arising from the Court of Appeal’s decision.

For example, neither the Builder nor the consultants appear to have argued that the ACP can be considered an attachment to an external wall and that it is therefore compliant under the BCA provided it does not create an undue risk of fire spread. This argument may have been unavailable due to the ACP containing a core which was 100% combustible, but this is an argument which is presently being considered by the NSW Supreme Court in another cladding case, where the Court’s decision remains reserved.

Nevertheless, there are a number of implications of this decision for the building and insurance industries. For example:

1. if builders are found to have breached their statutory warranties relating to the presence of combustible ACP, builders have the ability to recover from certifiers and design and fire engineers. It remains to be seen how Courts will deal with claims involving premium grade cladding which was not 100% combustible, such as those which contain fire retardant and/or had CodeMark certificates in place at the time of installation. The presence of a CodeMark certificate means that the building product is deemed to meet the performance requirements under the BCA.
2. in NSW, if an owners corporation brings a cladding claim against a builder under the Design and Building Practitioners Act for breach of a statutory duty of care, the owners will face a hurdle because the Court of Appeal in the Lacrosse matter found that the Builder did not fail to take reasonable care when it installed highly combustible cladding.
3. there is likely to be an increase in the volume of professional indemnity insurance claims relating to cladding, as owners pursue claims against builders and builders will likely be bringing cross claims against their designers and consultants.