Lessons from Lacrosse

The origins of the November 2014 Lacrosse fire were disturbingly everyday: an abandoned midnight cigarette, a makeshift ashtray in the form of a plastic food container, and a wooden table. Within 12 minutes, 14 floors of the building’s external wall cladding were on fire. In ‘an outcome that should not go unremarked’,[1] all 400 or so occupants were safely evacuated.

However, not all have escaped the fire unscathed. The owners (and the owners’ corporation) suffered significant financial loss, and consequently brought a claim in the Victorian Civil and Administrative Tribunal (VCAT) against the construction professionals involved in the construction of the Lacrosse building. With VCAT’s long-awaited decision now released, it is the prime time to consider the lessons learned from Lacrosse and to ask: how can construction professionals protect themselves when faced with similar claims? And what lessons can developers, owners and builders take from this case?

The litigation

In this case, a group of over 200 owners claimed current and future losses of more than $12 million. They sued the builder for, amongst other things, breach of the warranties imposed by section 8 of the Domestic Building Contracts Act 1995 (Vic). As is now notorious, the use of aluminium composite panels (ACP) was the central issue.

Apportionment of liability was a critical question. Along with the builder, the other respondents were: the building surveyor, the architects, the fire engineer and three other parties who were not represented at the hearing (including the person who originally left the cigarette in the food container on the balcony).

Judge Woodward ordered the builder to pay the owners $5,748,233. It is noted that the position has been reserved on $6,823,165.65 of damages

His Honour ordered an apportionment of liability between several of the respondents. In Victoria, apportionment is regulated by the Wrongs Act 1958 (Vic). That Act provides that the liability of a defendant who is a concurrent wrongdoer must be limited to an amount reflecting the proportion of the loss or damage claimed that the court considers just, having regard to the extent of the defendant’s responsibility for the loss and damage.

In this case, several parties were found to be responsible and are required to reimburse the builder 100% of the damages currently awarded in the following propositions.

It can be seen that the builder has been largely absolved of responsibility for the loss. Instead, responsibility lies with the consultants who were subcontractors of the builder. Subject to the risk of insolvency of any of the respondents – and this risk is presumably high for the individual who caused the fire – although the builder remains primarily liable to the applicants for the judgment, the builder has received a complete indemnification from its subcontractors and other parties. Ultimately, this demonstrates a very effective risk transfer.

What are the implications of the decision? 

Judge Woodward was at pains to point out that in relation to the use of ACPs in construction, the judgment should considered in context, and with regard to the specific factual matrix. The decision should not be taken as a general statement of how and where liability will fall in similar cases (of which there are many both pending and yet to be brought).

That overarching point is both critical and apt. Given that an appeal is possible (and perhaps even likely), regulation and regulatory practices may change, and there is likely to be more litigation concerning the use of ACPs.

However, what is certain is that developers, owners, builders and consultants face increased scrutiny and potentially, increased risk. Although liability (if any) arising from use of ACPs in the past is already crystallised, the factual matrix contains important lessons for all parties involved in a development of this nature.

Lessons for developers and owners

Contractual protections

• Review contracting structures

In this case, the builder was liable for breach of warranties imposed by section 8 of the Domestic Building Contracts Act 1995 (Vic) (there are similar provisions in other jurisdictions). Importantly, it was held that the builder did not fail to exercise reasonable care by installing combustible ACPs. In 2011, when the ACPs were installed, there was a poor understanding among building professionals of the fire risks associated with ACPs, and there was no reason to expect a cohort of building professionals to have a superior understanding to that of architects, building surveyors or fire engineers.

It followed from the finding that the builder did not fail to exercise reasonable care that there was no ‘apportionable claim’ for the purposes of proportionate liability legislation.

The effect was that the builder was liable for all loss, as between the owners and the builder. The apportionment only operated among the builder, building surveyor, architect, fire engineer and the other unrepresented respondents.

More complex proportionate liability questions are likely to arise in future cases, since the risks of ACPs and some other defective materials generally are now well known. This means it is more likely that builders who have installed ACPs after they gained notoriety for their combustible traits (ie after the Lacrosse and Grenfell fires) will be subject to claims arising from a failure to take reasonable care, triggering the proportionate liability regime.

Where it is possible to contract out of proportionate liability legislation (for example in NSW), developers may consider this.

• Never cap liability at the consultant’s fee

The fees paid to subcontractors, suppliers and consultants are often a poor proxy for the losses these parties can cause. In this case, the fire engineer’s fee was $33,500, plus GST. Its liability exceeded $2.2 million, ignoring additional claims and interest.

Although the decision does not disclose whether the fire engineer’s liability was capped, the substantial discrepancy between its fee and its liability highlights the necessity for owners to ensure that any liability cap be connected to the value of the construction work (or major repairs to it).

Any liability cap, provided it is enforceable, has obvious ramifications on the ability of a claimant to recover the full apportioned amount from that concurrent wrongdoer. In the factual matrix applicable to Lacrosse, an enforceable liability cap may also impact the overall amount recoverable from LU Simon (as it will have to pick up the balance of any amounts not collected from its concurrent wrongdoers).

• Carefully review the characterisation of the professional’s obligation

Judge Woodward discussed whether the obligation imposed was absolute or qualified by the exercise of a standard or reasonable care or skill. Although the imposition of an absolute warranty may be superficially attractive, it can raise issues under PI insurance policies.

• Insist on adequate professional indemnity insurance limits

For similar reasons, owners must require adequate professional indemnity insurance, and ensure the insurance is in place. In this case, the individual liabilities of the building surveyor, architect and fire engineer all exceeded $1 million, which is a common PI limit used for smaller consultancies.

Lessons for builders

• Understand you are on notice 

ACPs were first proposed for the Lacrosse building in 2007. Events since then mean the industry is now well aware of the risks they pose. The Lacrosse builder avoided liability for a failure to take reasonable care, but that finding may be less likely to be made for more recent (and for future) construction.

• Review contracting structures

Builders must pay renewed attention to how they contract with subcontractors, suppliers and consultants.

In particular, they should be concerned about bearing the risk of concurrent wrongdoers becoming insolvent. One approach is to contract out of proportionate liability legislation where possible. Another is to seek an indemnity from consultants extending to any losses arising from the operation of proportionate liability legislation.

• Avoid 'fitness for purpose' warranties if possible

Overarching warranties are sometimes the simplest claims to sustain. In this case, the builder was found to have breached a statutory (not contractual) warranty, but the principle is the same. Judge Woodward accurately described the owners’ claim against the builder as ‘ultimately both confined and straightforward’.

Providing contractual 'fitness for purpose' warranties may also mean that the builder assumes greater liability under contract than at common law. Professional indemnity insurance policies may not fully cover the builder’s loss in this situation.

• Subcontract with care

It is elementary to note that, from a builder’s perspective, risks should be passed down the contracting chain. The aim is to ensure the builder is not caught between a harsh risk allocation under its head contract and weak protections under its subcontracts. Of course, as the patchy nature of the consultancy agreements in this case shows, ‘subsidiary’ agreements are often poorly tailored. Inconsistencies can be particularly difficult to avoid – in many cases, key design consultants are engaged by the developers years before the work is put out to tender for builders (and therefore sometime before a construction contract is drafted). Under the typical D&C model the consultants agreements are presented to the builder ‘as is’ for execution, and it is a rare builder who will seek to negotiate wholesale amendments to the risk allocation.

Lessons for consultants

• Understand the tactics owners and builders use against you

Consultants, subcontractors and suppliers often receive relatively low fees but assume substantial risks. The building surveyor and fire engineer in this case are typical examples. These consultants’ fees were both less than $90,000 each, but both were ultimately liable for damages in the range of $2 million.

Liability caps and exclusions are an important protection.

• Insurance and asset protection

Professional indemnity insurance may benefit other parties, but it also provides vital protection for consultants. Any consultant who may have been involved in buildings constructed with ACP cladding should, if it has not already done so, promptly notify its insurer that circumstances have arisen which may lead to a claim under its policy.

To manage the ongoing risk of potential cladding claims, where a policy is about to expire (and may not otherwise be renewed due to, for example, retirement), insureds should obtain advice about whether the policy should be renewed.

Finally, the last line of defence will typically be the use of trusts and corporate structures to protect assets.

For all involved in the construction industry, warnings are sounding. A ‘business as usual’ approach to risk will not do.