Liability apportioned for combustible cladding: VCAT’s Lacrosse judgment will impact all building professionals

By Scott Higgins, Partner,  Lucy Hancock, Associate and Thomas Mangan, Lawyer

In November 2014, a 23 storey mixed-use building in Docklands, Melbourne (the Lacrosse Building) caught fire, which spread rapidly up the external face of the building, resulting in a substantive claim for damages in excess of $12 million.

In the first test case regarding liability for the installation of combustible cladding, the Victorian Civil and Administrative Tribunal (Tribunal) has determined that the use of aluminium composite panels (ACPs) with a highly combustible 100% polyethylene (PE) core to clad the façade of the Lacrosse Building did not comply with the Building Code of Australia (BCA).

An appeal is highly likely and the decision is not binding on Courts in other jurisdictions. Caution must also be taken given the specific facts and contractual clauses that were pertinent to the finding.  Nonetheless, the case, and particularly the underlying rationale for the decision, has wide-ranging implications for industry professionals.  It presents a first look by the judiciary into a problem that is far more widespread than the Lacrosse Building and presents the best available guidance at this stage as to how these matters may well play out for owners seeking recovery of rectification costs, and for the potential liability of building professionals (and their insurers).

In this article, Mills Oakley explains the key issues for industry stakeholders.

The decision

The 211 applicants (the Owners) commenced civil proceedings in the Tribunal against the builder (LU Simon). Subsequently, a number of parties were joined to the proceedings including the building surveyor[1] (Gardner Group), the architect (Elenberg Fraser), the fire engineer (Thomas Nicolas), the superintendent (Property Development Solutions), the primary occupier of the flat where the fire originated (Gyeyoung Kim) and Jean-Francois Gubitta who ignited the fire with an undistinguished cigarette butt.

Ultimately, LU Simon was held primarily liable to pay the damages to the Owners, however it was successful in passing through that liability to its consultants in the following proportions:

  • Thomas Nicolas (fire engineer) – 39% liability
  • Gardner Group/building surveyor – 33% liability
  • Elenberg Fraser (architect) – 25% liability

Mr Gubitta’s liability was held to be the remaining 3% of the total, but no order for him to pay the amount was made, leaving LU Simon to cover that portion of liability to the Owners.

Highlights and takeaways from the decision

The 227 page judgment delivered by His Honour Judge Woodward (Vice President) is a captivating read and it shines a light on many of the issues that are presently perplexing industry stakeholders, regulators and policy makers.

We set out below some of the highlights of the decision and our thoughts on the wider industry implications.

All ACP is “combustible”

  • Woodward J noted that the 100% polythylene (PE) core used on Lacrosse “has a calorific value of 44 MJ/kg, which is similar to petrol, diesel and propane”.[2]
  • The CSIRO testing “established unequivocally (and dramatically) that the Alucobest panels [which were 100% PE core] was deemed combustible according to the test criteria specified in clause 3.4 of AS1530.1.”[3]
  • However, it was also uncontroversial between the parties thatall ACPs (ignoring Alucore) are combustible (in that they would fail the test under AS1530.1)”[4]
  • Therefore in order for any type of ACP with a polyethylene component to in its core to be permissibly used in an external wall of Type A construction, in compliance with the BCA either:
    • an acceptable alternative performance-based solution would need to be implemented (none was implemented for the Lacrosse – so this option was not considered in the judgment – this is discussed in more detail at the end of the article); or
    • a DTS concession as to non-combustibility must be found.

The DTS concessions do not apply to ACPs

  • Perhaps unsurprisingly, given the context of the BCA provisions and their overarching objectives in Section C regarding elements to “avoid the spread of fire”[5], the Tribunal rejected the invitation to adopt a very narrow view of the DTS concessions. Instead it concluded that:
    • The ACP was a “bonded laminated material”,[6] but section C12.1(f) also required each of the laminates (including the PE interlayer) to be non-combustible;
    • the ACP cladding fixed with studwork and providing weatherproofing and acoustic benefits, was not a decorative “finish” (like a “paint, varnish, lacquer or similar finish”[7] and the concession at clause C2.4 of specification C1.1 was therefore not available.
  • Whilst the Tribunal pointed out that this matter turned on its facts and related to the use of ACP with a 100% polyethylene core, there is no reason to believe that the above findings would not apply in the same way to all ACPs regardless of the amount of PE contained within the core.
  • It follows from this decision (if upheld on any appeal and if followed in other jurisdictions) that, in respect of high-rise buildings with external walls that are clad in ACP (even with a lower ratio of PE in the core), the DTS provisions of the BCA are unlikely to be available.

This means that, presently, there is a significant likelihood of non-compliance with the BCA unless there is an alternative performance-based solution that has been implemented and is considered, at law, to be acceptable.

It may well be that buildings clad in ACPs with a lower component of polyethylene in the core are more likely to be capable of satisfying an alternative solution, but that will depend upon a number of factors.  Performance-based solutions are, by their nature, more subjective and for those buildings clad in ACPs with a lower PE composition, this is likely to be tested in litigation already underway or to be commenced across the country.

In the meantime, a practical problem that is presenting itself, however, is that insurers are reluctant to insure against buildings with any ACP (regardless of PE levels) or to insure the design, engineering or certification work of those building professionals that are approving such measures.  Therefore the more nuanced position regarding certain ACPs being capable of compliance with the BCA via alternative solutions (which may yet be upheld in Courtrooms this year) is, practically, becoming a more difficult option to implement for many owners.

It is also worth noting that in His Honour’s consideration of whether the relevant professionals had breached their contractual obligations and common law duties of care non-compliance with the BCA was a factor, but it was not the only factor.  The use of 100% PE core ACP (as opposed to ACP with a lower ratio of PE) was highlighted throughout the decision as being relevant for the findings that each party breached their respective contractual obligations.

Breaches of absolute obligations by LU Simon, but no want of reasonable care

  • The Owners were successful in seeking complete recovery from LU Simon for breaches of statutory warranties that are implied into domestic building contracts with respect to the suitability of materials, compliance with legislative requirements (in particular the BCA) and ensuring the building was fitness for purpose.
  • Under the proportionate liability regime, if the above breaches related to a failure to take reasonable care then LU Simon’s liability to the Owners would have been diluted by reason of any contributory negligence of the Owners or the apportionment of that liability between concurrent wrongdoers.
  • However, the Tribunal was able to ensure that Owners received judgment wholly against LU Simon by reason of its finding that the above warranties were not qualified or limited by any obligation to use reasonable care and skill. Instead they were considered ‘absolute’.  LU Simon either complied or it didn’t.
  • This was particularly useful because, other than the surveyor, the Owners would likely have struggled to show a direct duty of care owed by the other concurrent wrongdoers – a necessary precondition if there was no contractual or statutory ‘line of sight’ to these parties.

An example of effective contracting models

  • Whilst many will point to the mere existence of litigation as a failing of the system, the ultimate decision in favour of the Owners, highlights the effectiveness of the design-and-construct (D&C) model as an effective transfer of risk wholly to a head contractor (and assisted by the statutory warranties) allowing the Owners in this case to obtain judgment wholly against LU Simon for their loss.
  • It is also an example of effective contracting down the supply chain by reason of the head-contractor, LU Simon then wholly transferring its own risk down to other relevant building professionals using well-documented consultancy agreements.
  • LU Simon was able to recover almost all of its liability from the architect, certifier and its fire engineer by reason of their breaches of the relevant contracts.
  • As a legal tool of risk-transfer this case presents an excellent example of the model working extremely well and the same lessons apply for developers of commercial buildings also. It highlights the need by head contractors for effective contracting models and good drafting in order to effectively pass through all risk that it accepts under D&C contracts to those specialist contractors (regardless of whether they were first engaged by the Principal).
  • As set out in the next section, the problem lay not with the contracting model itself, but with the naïve or misguided approach of the relevant building professionals who, in the Tribunal’s opinion, fundamentally misunderstood their obligations.

Consultants misunderstood the nature of their contractual obligations

The Architect

  • As far as the Architect was concerned, the judgment reveals the Tribunal’s surprise and frustration at the preoccupation of the Architect’s legal team with LU Simon’s design obligations to the Owner under its D&C contract to the exclusion of focusing on the Architect’s own, very specific, obligations of design under its consultancy agreement.
  • In reference to evidence led by the architect’s expert witness, His Honour offered this rather stinging rebuke:

“For example…in oral evidence (after discussing “the way the industry works”) and being asked about the role of the actual contract, he responded: “The contract’s certainly important – the contract, I don’t believe, can redefine basic professional roles”.[ T2221 ]  The lawyers’ response to this is, of course, yes it can.”[8]

  • The approach in this instance was consistent with common practice whereby architects (and other design consultants) are involved in the preliminary design for the developer, with their agreements and services subsequently novated to the builder (i.e. to transfer the risk and responsibility away from the developer and as between those parties). Naturally, the Builder sought to protect itself and did so with a new consultancy agreement with the architect.  The architect’s role as head-designer continued and the consultancy agreement was explicit as to this arrangement.
  • The Architect’s involvement in drafting the specification that specified ACP (which then came to be included as a requirement for LU Simon under its D&C Contract) was particularly problematic along with its failure to correct this when it was contracted to the builder and also its approval of a sample of the particular ACP that was provided.

The fire engineer

  • In the case of the fire engineer, the misunderstanding of the nature of his obligations was even more fundamental. The evidence suggested that the engineer saw his obligations as being very limited to being reactive and responsive only to specific requests from the building surveyor and not to try to identify possible non-compliances with the BCA.  The Tribunal held as follows:

“It may have been Mr Nicolas’s usual practice to limit his assessment to matters identified for his consideration by the building surveyor, but the TN Consultant Agreement demanded more than this. Under that agreement, Thomas Nicolas assumed an express obligation at least to assess the construction materials for any fire hazards. The obligation may not have extended to undertaking “never ending searches…for non-compliances”. But it at least required some proactive investigation and assessment of the principal building materials.”[9]

  • Ultimately the Tribunal found that the builder, the architect and the surveyor each had sufficient information about the potential combustibility of ACPs “but, for a variety of reasons, they each failed to identify or conclude the ACPs were non-compliant”.[10] The Tribunal then drew a distinction with the fire engineer – who bore the lion’s share of liability – because it “failed to conduct the investigations and assessments necessary to confirm the relevant features of the ACPs proposed for use [but] had it done so, it would have come to a different conclusion about compliance to that reached by these other parties”.[11]
  • His Honour offered this salutary lesson for Building Professionals:

“It is worth observing that the reason for this apparent disconnect between Mr Nicolas’s evidence of what he understood his role to be, compared to the terms of the contract he signed, may have been hinted at by his reference to the use of templates. My impression generally of Thomas Nicolas’s approach to the FERs and other documents, was that there were a number of instances of the use of template or “boilerplate” language (as well as reference to out-of-date guidelines), without much attention being given to what the words actually meant or required. Thomas Nicolas is, of course, not alone in this.

It is often the case that diligent and competent professionals blithely reuse standard documents that have served them well over the years, focusing only on those parts that need to be tailored to each job. It is only when something goes wrong and the lawyers become involved, that any real attention is given to how that boilerplate language informs potential liability.”[12]

  • The case serves as a reminder of the importance of building practitioners properly understanding and then discharging their functions in accordance with the standards that they have agreed to do under those contracts (which may indeed be higher than what they ‘usually’ would do).

The Building Surveyor

  • The building surveyor sought to downplay its departure in exercising reasonable care as “minor” compared to that of the architect and the fire engineer. The Tribunal did not agree and considered that the surveyor:
    • “failed critically and robustly to examine the application of clause C1.12(f) of the BCA”;[13] and
    • held a significant “gatekeeper” role and therefore assumed a special responsibility to ensure that the design and materials complied with the BCA.
  • In reaching these findings there are a number of important considerations which are worth setting out in more detail as they have implications for the entire industry, particularly given the present reform focus that appears to the targeted at the certification regime.
  • The Tribunal held that, whilst it was “finely balanced”, the obligations under the Consultancy Agreement were not absolute and were instead qualified by and coextensive with the common law duty to exercise reasonable care. LU Simon was successful in arguing the surveyor failed to take reasonable care.
  • Whilst His Honour described Mr Galanos as “an honest witness” his evidence was nonetheless very concerning in its descriptions of rather cursory treatment of important issues and did not demonstrate a great deal of professional diligence. If one wishes to get an insight into why there is so much consternation about the private certification regime, paragraphs [334]-[341] of the judgment present a rather troubling picture of what can go wrong under the current system.
  • The surveyor sought to argue that the task of interpreting BCA C1.12(f) was “not straightforward” and that a “counsel of perfection” should not be imposed. The Tribunal emphatically rejected these arguments:

“Indeed, a competent professional with experience in the building industry and a comprehensive understanding of the Objectives and Functional Statements in the BCA, was probably in the best position to land on the correct construction, without the need for “concentrated legal analysis based on statutory interpretation principles”.”[14]

  • The surveyor sought to rely heavily on the alleged “industry wide understanding that ACPs were BCA compliant” and for the purposes of the “reasonable peer professional opinion” defence to negligence (a version of which is applicable in most Australian jurisdictions).
  • After finding that surveyors were professionals (so that the defence could be utilised), the Tribunal then considered whether the ‘relevant practice’ was widely accepted in Australia as competent professional practice by a significant number of building surveyors. After analysing the evidence of multiple witnesses and notwithstanding the evidence of several of the respected fire engineering experts offering differing opinions, the Tribunal found that on balance the compliance of ACPs with the BCA was a widely held peer professional opinion amongst surveyors.
  • However, the surveyor’s defence failed at the final hurdle – demonstrating that the peer professional opinion was “reasonably held”.
  • His Honour drew upon well-established principles of behavioural science to describe the approach of the surveyor (and the expert witnesses it led) to the task of assessing compliance with the relevant sections of the BCA as being “infected by confirmation bias”.

“Namely, that otherwise experienced and diligent practitioners were beguiled by a longstanding and widespread (but flawed) practice into giving insufficient scrutiny to the rationale for that practice.”[15]

  • Essentially, a ‘groupthink’ mentality had developed, and in the absence of any serious attempt to scrutinise, confirm or test the approach, it was not considered to be reasonable.
  • The need to seek input from fire engineers was confirmed by the evidence that was provided by one of the experts who described the building surveyor’s role thus:

“[A] building surveyor is more like a general practitioner doctor or an auditor. We …know a little bit about a lot, but we don’t know a lot about anything in particular.  Each and every one of those standards, codes, or 95 per cent of them have a discipline behind them – so the mechanical engineering standard has a mechanical engineer, four years’ training.”[16]

  • His Honour highlighted that no evidence was provided of any building practitioner ever “seeking any kind of assessment or endorsement from a professional body or regulatory authority” and that there was “no evidence of any approach to the ABCB for guidance on the issue”.[17]   

Surveyor and Fire Engineer contravened the Australian Consumer Law by engaging in conduct which was misleading or deceptive

  • The Tribunal referred to previous authority in support of the proposition that where negligence and misleading and deceptive conduct are pleaded from the same material facts they will tend to succeed or fail together.
  • This allowed His Honour to deal with the contravention of the Australian Consumer Law in a fairly brief manner in the judgment, however, the findings of contravention are no less important for practitioners.
  • Essentially the Tribunal held that, by issuing the Building Permit and the Fire Engineering Report, the surveyor and the fire engineer respectively represented to the Builder (who relied on those representations) that the design of the Lacrosse Building incorporating the use of ACPs in the external facade complied with the BCA. This was misleading or likely to mislead.

No duty of care owed by Superintendent

  • Whilst dependent on the particular facts, it will still come as some relief to superintendent’s and project managers that the Tribunal held that there was no duty of care that was owed by the Superintendent to the Owners.

The Tribunal is the appropriate entity to interpret the BCA

  • In a finding that will come as no surprise to lawyers, but may surprise some other building professionals who have become accustomed to a lack of oversight over matters of BCA interpretation, the Tribunal emphatically confirmed that:
    • pronouncements on the correct interpretation of the BCA are squarely within its jurisdiction; and
    • such determinations are to be made “according to law, not by reference to what may, or may not be, the opinion of an expert or an assumption about the practical operation of the BCA amongst fire control experts”.[18]
  • One of the recommendations proposed by Mills Oakley in a submission to the Building Ministers Forum in 2018[19] was the implementation of a national body charged with quasi-judicial status for determining questions of interpretation of the BCA and relevant technical standards.

Such questions of interpretation undoubtedly arise frequently, but they are invariably determined within industry circles and without much (if any) useful guidance from relevant regulatory institutions like the Australian Building Codes Board (ABCB).  The absence of judgments or guidance notes to which industry professionals can look to for guidance along the way (and the failure of certifiers and other professionals to seek such guidance or determinations – as found by the Tribunal in this case) is surely a major factor that has led to ACP products being used for so many years in ways that are now likely to be found to have been non-compliant with the BCA.

 

[1] Note that in Victoria the ‘building surveying’ process is, for all intents and purposes, a similar system to the private certification system in NSW and other jurisdictions.  These terms along with ‘surveyor’ and ‘certifier’ may be used interchangeably in this article.

[2] See discussion at [193]

[3] At [289]

[4] At [246]

[5] At [263]

[6] At [257]

[7] At [277]

[8] At [485]-[486]

[9] At [481]

[10] At [497]

[11] At [497]

[12] At [487]

[13] At [592]

[14] At [352]

[15] At [388]

[16] At [390] and citing the expert evidence of Mr Shane Leonard [T2524]

[17] At [377]

[18] At [38] and citing from the decision of Lindsay J in The Owners – Strata Plan No 69312 v Rockdale City Council & Anor; Owners of SP 69312 v Allianz Aust Insurance [2012] NSWSC 1244 at [111]

[19] The submission was titled ‘Rebuilding Confidence: An Action Plan for Building Regulatory Reform’ by the Building Products and Innovation Council (BPIC)

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