Corrs High Vis: Episode 35 – Cladding after the Lacrosse decision – clarity or crisis?

David Hastie (Senior Associate) & Emily Steiner (Senior Associate)

Our podcast looks at cladding issues and will focus on the VCAT decision in the Lacrosse dispute.

On 25 November 2014 a resident on the 8^th floor of the Lacrosse Tower left a cigarette in a plastic container which caught alight. The fire quickly spread up the external cladding wall to the roof of the tower causing millions of dollars in damage. The inspections after the fire raised questions about the suitability of the combustible cladding used in the external façade wall. Almost five years after the fire took place VCAT has handed down its decision in relation to liability for the combustible cladding used in the Lacrosse building.

David and Emily, welcome. Can you tell us more about the decision?

So this case arose out of as you said, the fire that took place in the Lacrosse building in 2014. Around 200 owners claimed current and future losses of more than $12 million in connection with that fire. They said the builder, the building surveyor, the architect, the fire engineer and three other parties who weren’t actually represented at the VCAT proceeding including the person who lit the cigarette that initially set the fire off. As is pretty common knowledge at this stage, the primary issue was the use of aluminium composite panels for the external wall cladding. The owner sued the builder LU Simon for breach of the warranties imposed by section 8 of the Domestic Building Contracts Act, which are general implied warranties that apply to builders of all domestic building work including life scale domestic building work like that done for Lacrosse.

And Em I might chime in there that we obviously know in New South Wales there’s also, that’s reflected and replicated effectively by section 18B of the Home Building Actsthere as well.

Yes, so those warranties are essentially that, for example, the builder warrants that the work will be carried out in a proper and workmanlike manner in accordance with the plans and specifications in the contract.

Due care and skill – all that sort of thing.

So Judge Woodward at VCAT ordered that LU Simon pay to the owners just under $6 million because it had breached these implied warranties regarding materials, compliance with the law and fitness for purpose. But in an interesting plotline twist, LU Simon didn’t end up having to pay the majority of that – that’s because Judge Woodward found that the building surveyor, architect and fire engineer were concurrently liable for the losses suffered by the owners. So they were each found to have breached their respective consultancy agreements by failing to exercise due care and skill when it came to the specification in terms of the architect and approval of the ATPs for the fire engineer and building surveyor.

That’s right and I suppose it is very interesting when you have a look and break down those respective percentages. Obviously we’ve got the building surveyor – Gardner Group, they copped 33%, the architect, Eilenberg Fraser 25%, the fire engineer Thomas Nicholas 39% and now the individual whose cigarette actually started the fire was apportioned 3% but as you mentioned that was effectively worn by LU Simon.

And that’s effectively just because it was an individual not a company who started the fire, so the individual wasn’t represented at VCAT and was unable to make payment of that 3% of the $6 million. That fell to LU Simon to pay, which is a pretty extraordinary outcome given that it was LU Simon that the claim was originally brought against. And if we are being honest, I’m not sure that much of the construction industry expected that this would be the outcome.

No, definitely – obviously what we would always do is try and take contribution downstream, but for it to play out like it did was quite fascinating to read in the decision of Justice Woodward.

And it should also be noted as well that the position was reserved on the remaining $7 million of the claim, so we will have to watch this space to see what comes out of that.

Thank you Emily and David for taking us through the VCAT decision. Are you able to tell us what would be some of the potential implications?

That’s a really good question Julia. I think importantly, coming out of this decision is the fact that Judge Woodward made it extremely clear that the judgment should be considered in context and with regard to the specific factual matrix of the case. It shouldn’t be taken as a general statement about how and where liability will fall in other cladding cases.

And I suppose Em I might jump in there too is that that is standard with your typical Belgrave v Eldridge analysis where you really do have to look at the facts before the court or the relevant tribunal and assess them.

Yes, absolutely, but having said that and putting at the forefront that that was how the decision was framed. What we can take away is I suppose most specifically to the cladding issue is that builders are now officially on notice of the risks associated with ACPs. So the judge in this case found that LU Simon had not failed to take reasonable care. Primarily because at the time that the ACPs were installed on Lacrosse there was a poor understanding among building professionals about the risks associated with ACPs, so there was no reason to expect a group of building professionals to have a better understanding to that of architects, building surveyors and fire engineers, who in this case were ultimately found to bear the brunt of the liability.

And let’s be clear, we are talking about pre-2014. This has more than played itself out in the media in recent years, so obviously there’s going to be a more stringent analysis by the relevant court and tribunal placed on any further litigation that might come before that respective court or tribunal, I would have thought.

Yes, absolutely I think builders are much more unlikely to enjoy this kind of leeway for too much longer given the now high profiles of the dangers of ACPs, particularly after the Lacrosse and Grenfell fires.

Another thing to take away from a builder’s perspective at least, is that risks should always be passed down the contracting chain. No that’s not a new proposition but it is something that is worth noting anyway. The risk transfer was done so effectively by LU Simon that its effective liability was reduced from what could have been one hundred percent to three percent – and that three percent, as we said earlier, was only because the individual whose cigarette lit the fire was unable to pay.

I suppose the flip side of that for consultants, is that they should be aware of the types of tactics that owners – and builders, for that matter – use to pass the risks downstream. It has played out through this VCAT decision and again, it is obvious that consultants should do what they can to manage the risk being passed down to them, so risks can be managed effectively with liability caps for example, and obviously exclusions. Having appropriate insurance in place is also another obvious and critical risk management measure to adopt.

On that as well Dave, it is important to have the appropriate insurance in place. It is also really important to make sure that if there is a potential claim that is coming your way you notify your insurer properly and effectively under the insurance policy. If you don’t, for example, provide enough detail about the type of claim or the type of cladding that has been used, it may be open to the insurer to not provide coverage if they haven’t accepted your notification as a valid notification under the policy, so that is just something to keep in mind – that insurance is important but you have to use it appropriately as well.

Yes definitely.

Thank you, now can we turn our minds to the likelihood of an appeal. Do you think that is something that is possible in this case?

I might take that one Em. So I guess in this case there are four potential parties who might want to appeal the decision. They are obviously the building surveyor, the architect, the fire engineer and the individual whose cigarette started the fire and now has run home to France.

I query whether he will – he got off reasonably scot free given that LU Simon footed the bill. I don't think he will be appealing.

So look these parties could only appeal the decision on a question of law, so in other words, by identifying specific mistakes made by VCAT in applying the law. Now that is the relevant section of the VCAT Act is section 148 and those considerations are whether the tribunal has identified and applied the relevant legal test, ie whether there is an error of law and whether there is sufficient evidence to support a finding of a particular fact. So I guess then that takes us to the requirement under the Supreme Court Actsection 14C, and the question that you need to ask and satisfy in terms of seeking special leave to the Court of Appeal is – is there a real prospect of success? Now I guess we are not going to be answering that today, but it will be very interesting to see how this plays out. I anticipate that obviously there would be an intention to appeal – an intention to appeal I should say. Whether or not that is successful we will no doubt know sooner rather than later.

Yes I agree with that. I would expect that at the very least all of the parties who had to make some payment under this decision would be at least considering their options for appealing, so I don’t think we have to watch this space pretty closely.

Yes definitely. Another consideration that we really should be turning our minds to is what sort of weight this particular decision will have going forward. Now in the event that leave to appeal isn’t granted and the decision of VCAT stands, will the Supreme Court follow this decision? More importantly, will courts and tribunals of other jurisdictions within Australia follow this decision? Again, not something that I guess we can give you a conclusive answer on today, but hypothetically will the District Court of New South Wales or the Supreme Court of New South Wales follow VCAT’s decision? I’m not necessarily convinced that they would – Em what are your thoughts?

Dave I think that’s a good question. I suppose something to remember here is that VCAT really was engaged in an exercise of reasonably standard consideration of proportionate liability, contract interpretation, assessment of loss and damage, etc so there wasn’t really any ground breaking precedent that has been set here. It is just that this is the first major cladding decision, so I’m not too sure how – if at all this will be directly applied in other cases in other jurisdictions, but it is very possible that it will be referred back to so we will just have to see how that goes.

That’s right, Em and as you have rightfully pointed out the decision of Justice Woodward really did turn on the facts before His Honour, so again I guess we say we just have to watch this space.

Before we finish, is there anything else that we might take away from the VCAT decision?

I guess a decision like this if it stands is obviously going to impact on questions of insurance, insolvency and we have already seen cladding rectification agreements and even a relief fund proposal in the work,s and there’s even been mention of a Royal Commission into cladding.

Yes that’s right, so a Royal Commission has been flagged as a potential option but Planning Minister Richard Winn has dismissed that idea – effectively on the basis that the Victorian Cladding Taskforce has already revealed the nature and extent of the problem, and has identified what needs to be done to fix it. But the fact that it has even been raised as a potential option is really reflective of just how big the issue is, and how seriously it has been taken in the community and the industry.

Thank you David and Emily, that was a really insightful discussion on the VCAT decision in the Lacrosse building we will watch this space. My name is Julia Korolkova and thank you for listening. We look forward to you joining us for the next edition of Corrs High Vis.

This podcast is for reference purposes only. It does not constitute legal advice and should not be relied upon as such. You should always obtain legal advice about your specific circumstances.