Owners Corporation No.1 of PS613436T, Owners Corporation No. 2 of PS613436T, Owners Corporation No. 4 PS613436T & Ors v LU Simon Builders P/L, Stasi Galanaos, Gardner Group & Ors [2019] VCAT

Summary

After a six-week hearing ending in October 2018, his Honour Judge Woodward, Vice President of the Victorian Civil and Administrative Tribunal, last week handed down his decision regarding the liability of various parties for their involvement in the fire at Melbourne’s Lacrosse tower, which had heralded the start of the ‘combustible cladding crisis’ across the Victorian building industry and led to multiple enquiries involving the Victorian Building Authority, Local Councils and State Government, as well as a great deal of uncertainty within the general insurance and construction communities.

The decision itself confirmed the position that the implied warranties specified by the Domestic Building Contracts Act 1995 (Vic) (DBCA) in relation to suitability of materials, fitness for purpose and compliance with the law involve no requirement for the exercise of reasonable care on the part of the builder and as such are not apportionable under s24AH of the Wrongs Act 1958 (Vic) (Wrongs Act).

The builder LU Simon was found to have breached those warranties, which had been implied into its Design and Construct Contract (the D&C Contract) and therefore primarily liable to the 211 applicants comprising the Owners in the proceeding. However, it was also specifically found that the builder had not failed to exercise reasonable care in the construction of the Lacrosse tower by installing combustible aluminium composite panels with a core containing polyethelene (the ACP cladding).

His Honour then went on to find that:

1. each of the fire engineer, building surveyor and architect (whose consultant agreements had each been novated by the original developer to LU Simon) had breached their consultant agreements by failing to exercise due care and skill;
2. the failure to exercise reasonable care by each of the fire engineer, building surveyor and architect was a cause of the harm to LU Simon resulting in its breach of the D&C Contract; and
3. each was a concurrent wrongdoer within the meaning of s24H of the Wrongs Act,

and that, on this basis, 97% of the damages payable by LU Simon to the Owners were apportioned as between the consultants in the following proportions:

1. Building surveyor (33%)
2. Architect (25%)
3. Fire engineer (39%)

The occupant whose cigarette had started the fire was found to be a concurrent wrongdoer and 3% liable for the damages. However, as no party had sought judgment against him, there was no order against him, leaving LU Simon to pick up the shortfall.

No adverse finding was made against the tenant of the apartment involved in the fire as there was no evidence to support a finding that storage of items on the balcony had contributed to the ignition of the ACP cladding.

The facts

The incident that instigated this litigation occurred in November 2014, after an occupant of Apartment 805 left a cigarette burning in a plastic container which caught fire on the balcony of the level 8 apartment. The flames soon reached the balcony wall which was covered with the ACP cladding. The fire, despite the timely response of first responders, quickly spread up the face of the building and within minutes had reached the roof of the building above level 21.

It was contended by the Owners in the proceeding that the ACP cladding was highly combustible and non-compliant with the safety requirements of the Building Code of Australia, and that this was the ultimate cause of the spreading of the fire to the 13 balconies above apartment 805.

Litigation was commenced by the three affected Owners Corporations and 208 building apartment owners against LU Simon, claiming up to $24m in damages, with the principal claim being brought against the builder for breach of implied warranties under section 8 of the DBCA. The builders subsequently joined the architect, building surveyor (both the specific surveyor who signed off on the building permits and his employer company) and the fire engineering consultant to the action on the basis of their respective roles in the application of the ACP cladding, with the central issues being the selection, approval and installation of the ACP cladding, and its compliance with the Building Code of Australia at the time of construction.

The Issues

The key issues that were dealt with in the litigation:

1. Was ACP cladding BCA compliant?

The short answer was that it was not, as the deemed to satisfy provisions under the BCA required the external walls of Type A constructions to be constructed of noncombustible material, which no ACP (with the exception of Alucore which was not used in this case) would have done, as they would each have failed the relevant AS1530.1 flammability test.

2. Were the implied warranties under section 8 of the DBA apportionable?

The unequivocal response was that they were not, given the applicants did not rely upon the implied warranties concerning performing work in a proper and workmanlike manner or with reasonable care or skill. To this extent the court found that the implied warranties that the applicants did rely upon, being fitness for purpose, suitability of materials and compliance with the law, were not apportionable and were not qualified by any requirement to take reasonable care.

3. Did the builder not exercise reasonable care in circumstances where the ACP cladding installed lacked a test certificate under AS1530.3 and otherwise its failure to ensure that the ACP installed was noncombustible in accordance with the BCA?

His Honour found that the builder had not failed to exercise reasonable care, stating that not every instance of contractual breach necessarily meant that the builder had been negligent. Whilst the use of ACP cladding was an error, the court found on the evidence presented that, outside the fire engineering community, there would have been no knowledge amongst builders of fire risks associated with ACP cladding. Of particular interest, his Honour laid special emphasis on the fact that no expert evidence was led by any of the other respondents against the builder that its act of installing ACP cladding amounted to a failure to take reasonable care under the contract.

4. Did the building surveyor fail in its responsibilities?

The terms of its fee proposal described the building surveyor’s skills and competencies as including ‘understanding the facility with using Risk Assessment techniques in assessing compliance with the performance requirements of the technical aspects of the BCA’.

His Honour found as follows:

• The building surveyor had breached its Consultant Agreement by failing to exercise due care and skill in;
  
  • issuing the building permit and approving the architect’s specification of ACP cladding which did not comply with the BCA as in force in 2011; and
  • failing to notice and query the incomplete description of the cladding systems in the Fire Engineering Report.
• The peer professional opinion defence (s 59 of the Wrongs Act) maintained by the building surveyor failed as the opinion represented by the relevant practice was deemed to be unreasonable.
• The representation by the building surveyor that the Alucobond Specification and drawing complied with the BCA constituted misleading and deceptive conduct towards LU Simon in contravention of the ACL.

5. Did the architect fail in its responsibilities?

His Honour found that the architect had breached its Consultant Agreement by failing to exercise due care and skill in the following respects:

• Failing to remedy defects in the design causing it to be non-compliant with the BCA and not fit for purpose.
• Failing to ensure the ACP cladding sample provided by LU Simon was compliant with the architect’s design intent as articulated by the T2 Specification and the BCA.

6. Did the fire engineer fail in its responsibilities?

The fire engineer was engaged to undertake the Fire Engineering Design, as required for the development to meet the performance life, safety and protection requirements of the nominated provisions of the BCA.

His Honour found that the fire engineer had breached its Consultant Agreement by failing to exercise due care and skill in the following respects:

• Failing to conduct a full engineering assessment of the tower in accordance with the requisite assessment level dictated within the International Fire Engineering Guidelines, and failing to include the result of that assessment in the fifth Fire Engineering Report (FER).

A ‘full fire engineering assessment’ should have at least required the fire engineer to inquire into and assess the range of construction materials for the purpose of establishing ‘potential fire hazards’ of the building.

• In assessing potential fire hazards the engineer should have recognized that the ACP cladding proposed did not comply with the BCA and at least warned LU Simon (and probably the other respondents) of that fact, whether by disclosing this in the FER or otherwise. A subsequent failure to advise about a solution to the non-compliance followed on from this.

There was a clear disconnect between the fire engineer’s understanding of his duties and those which were expressly required under the contract he had signed.

The fire engineer clearly did not turn his mind to the proposed use of ACP cladding and the issues that came with this, though any assumption by him that the ACP cladding proposed was non-combustible was unjustified and unsound. The deletion of sprinklers from the balconies further emphasized this mindset.

The representation by the fire engineer that the ACP cladding complied with the BCA constituted misleading and deceptive conduct towards LU Simon in contravention of the ACL.

Implications

This decision is set to have a widespread impact on the construction industry and relevant construction risk and professional indemnity insurers, with a further 1369 buildings around Victoria reportedly being constructed with ACP cladding.

The issue with the use of ACP cladding has been further highlighted by the recent Spencer Street fire.

Certainly, his Honour’s decision in apportioning liability between the building professionals involved in this case in the manner he has will give professional indemnity insurers pause for thought, particularly in light of the fact that the contractual chains identified in this matter are not abnormal in larger multi-storey residential building development. This will be particularly so in a space where insurers were already considering reducing underwriting capacity and limitations on cover.

We do wonder whether consultants may choose, in similar circumstances, in future to run a more robust case against the builder for having failed to exercise reasonable care.

It will be interesting to revisit the impact of this decision in twelve months’ time.