Fire in the sky: Lacrosse building consultants found liable for cladding

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A Frenchman lights a midnight cigarette on his balcony in Melbourne. In less than three hours, most of the 23-storey high rise building catches fire. The Docklands area narrowly avoids burning to the ground.

Thanks to the incredible work of the fire brigade, the occupants and the sprinkler system, not a single one of the tower’s 400 occupants or anyone in the Docklands was hurt by the towering inferno.

Like Deep Purple’s rock classic, this is a true story, the butterfly effect of nightmares for three consultants to a building project. They were found, in what was crucially a breach of their consultancy agreements, to have contributed in various ways to the installation of combustible cladding on the building. This was against the regulations that applied to the high-rise.

They have been ordered by the Victorian Civil and Administrative Tribunal per His Honour Judge Woodward to foot a $5.75 million bill. More damages may follow. A further $6.8 million in claims is still being heard by the judge, mostly for removal and replacement of the unburnt cladding.

It was a landmark decision, one of the first in Australia on liability in relation to combustible cladding. It will not be the last. High rise building owners and building consultants must carefully examine their properties (and their contracts), or they could be next.

To see the full 227-page judgment, follow this link.

For the key details and what builders, consultants and residents need to know moving forward, keep reading.

The events

At about midnight on 24 November 2014, one of the Lacrosse residents returned from work and had a cigarette on a level 8 balcony. Leaving the almost-extinguished cigarette butt in a plastic tray, he went to bed.

Unfortunately, the tray contained aluminium foil, a plant and a packet of seeds. After two hours, everything combustible on the balcony caught alight, including the timber table, some clothes and an air conditioning unit. High-rise balcony areas are high-risk fire hazards.

The building was clad in aluminium composite panels (otherwise known as ACPs) which had a core containing the highly combustible material, polyethylene. Polyethylene has a combustibility similar to petrol and diesel. In the space of twelve minutes the fire spread from floor eight to floor twenty-one.

The use of an ACP with a 100 percent polyethylene core as part of the external wall of the building was found to be “primarily responsible” for spreading the fire.

The applicants

The 211 owners of the various floors and individual apartments brought the case. This included three owners corporations.

The respondents

The case was brought against eight respondents:

  • L U Simon Pty Ltd was the builder;
  • Stasi Galanos and his employer Gardner Group Pty Ltd, who was the building surveyor;
  • Elenberg Fraser Pty Ltd was the architect;
  • Tanah Merah Pty Ltd trading as Thomas Nicholas was the fire engineer;
  • the resident who lit the cigarette;
  • the primary occupier of the smoker’s apartment unit; and
  • the superintendent of the build, Property Development Solutions.

This was the cast of characters in Owners Corporation No.1 of PS613436T v LU Simon Builders Pty Ltd [2019] VCAT 286.

Liability of the builder

The builder’s warranties (promises) stated in the Victorian Domestic Building Contracts Act 1995 were the basis for its overall liability. It was alleged that the builder:

  • Had failed to provide materials good and suitable for the purpose for which they were used;
  • Had not carried out work in compliance with the Building Act 1993 (Victoria) and the Building Code of Australia (BCA), and
  • Had not used materials reasonably fit for a particular purpose which was stated in the contract, in circumstances where the building owner clearly relied on the builder’s skill and judgment.

Such warranties are a part of every domestic building contract, and very similar warranties are implied into many home building contracts in NSW law.

In this Victorian case, combustible panels were found to be not good or suitable for the purpose of being used as external walls of a high-rise residential building. The cladding did not avoid the spread of fire in the building so as to prevent injury and property damage. The builder had made an error in selecting these materials.

However this was not the end of the story, as “not every error is negligent” at law.

To be found negligent, the builder had to have failed to take reasonable care in selecting the ACPs. Judge Woodward found that the builder had not failed, for three reasons:

  1. The builder had not known that ACPs were highly combustible and was not expected (at least in 2011) to know this;
  2. The installation of ACPs was a part of the building contract itself, forming the annexed performance requirements; and
  3. The builder had signed consultancy agreements with “highly skilled professionals” (consultants) to supervise and ensure that the complex project was compliant with the BCA. By engaging them, the builder had relied on their expertise.

Liability of the consultants

Point (3) just above meant that there was a possibility that the consultants (the fire engineer, the building surveyor, and the architect) were responsible for the damage. It was alleged that these were the parties who had failed to exercise due care and skill in relation to the installation of the ACPs.

Judge Woodward agreed. Courtesy of the consultancy agreements, the builder was able to pass almost all of the risk in relation to the BCA compliance of the cladding down to the consultants. The consultants were ultimately at fault, and apportioned the $5.7 million in damages as follows:

  • The fire engineer was found liable for 39 percent of the damages;
  • The building surveyor was found 33 percent liable; and
  • The architect was found 25 percent liable.

The French smoker was found 3 percent liable, but given he did not appear in the proceedings and his responsibility was found to be “minimal’ by the judge, the builder copped this amount instead.

Each judgment was made considering the particular consultancy agreement between the consultant and the builder.

The fire engineer: 39 percent liable

As the “primary consultant responsible for fire safety compliance”, the fire engineer was always going to be in trouble.

It had failed to conduct a full fire engineering assessment that would inquire into and assess the range of construction materials. The purpose of this assessment was to identify potential fire hazards of the building.

The fire engineer made the almost-deadly error of assuming that it was not required to conduct an assessment under the consultancy agreement that it had signed. This was incorrect. It was in fact required to conduct some proactive investigation and assessment of the building materials, which it did not do.

It had also failed to warn the builder (and also the other consultants) that the ACPs used for the high-rise residential building did not comply with the Building Code of Australia. Finally, it had also failed to advise about a solution to the non-compliance.

The fire engineer was found the most liable out of everyone, for the simple reason that it was the only professional on the project who actually knew that ACPs were not compliant and were fire risks. A simple email or comment at a meeting may have got it out of trouble. Its inaction was costly.

The building surveyor: 33 percent liable

The builder surveyor was in the firing line primarily because it had decided to issue a Stage 7 Building Permit. Through this, ACPs were approved for use on the façade of the building despite not being in compliance with the BCA. This was allegedly a breach of its consultancy agreement.

However, it was also alleged that the building surveyor’ failed to query the incomplete description of the cladding systems in the fire engineering report, and also that it failed to properly inspect the work during construction for compliance with the BCA.

Judge Woodward found that, notwithstanding some expert evidence to the contrary, the building surveyor’s had failed to give adequate consideration to whether the ACP was compliant with the BCA before issuing the permit.

The building surveyors might have had a defence if the builder did not give them insufficient information about the materials used in construction. Unfortunately for the Lacrosse tower building surveyors, this was not the case.

The architect: 25 percent liable

The other consultant in hot water was the architect.

The allegation was that the architect had made an agreement to prepare architectural drawings of the external cladding that satisfied legislative requirements, and it had breached this agreement. The allegation was also that it had failed to check whether the sample of the ACP provided to it complied with the BCA and was fit for purpose.

Both allegations were proven. The design specified ACPs for the external walls of the tower, including one with 100% polyethylene core, which was a breach of the BCA. Secondly, as head design consultant, it was also responsible for ensuring that the ACP sample it provided was compliant with its design intent and the BCA. In approving of a sample of the ACP, it had failed to exercise due care and skill.

Overall

In summary, the consultancy agreements between the builder and the consultants existed for the commercial purpose of ensuring ongoing involvement from consultants in the project, and therefore ongoing responsibility for the work.

Judge Woodward found that the involvement of the consultants, on terms that they would advise on non-compliance of building materials, meant that they and not the builder were liable for the fire damage.

The lesson for consultants: know exactly your obligations under a contract, whether they are immediate or over a longer period of time, and warn of non-compliances with the law consistent with your knowledge.

Whose line is it anyway?

The line between what is the builder’s responsibility and what is a consultant’s responsibility is a difficult one for the law to trace. There are no hard and fast rules, especially as much will depend on the particular builder-consultant contract.

There will be cases where a commercial builder, given its expertise and experience, will be expected to identify and correct errors by another building professional.

However, in this case Judge Woodward ruled that “where (as here) the skill involved is beyond that which can be expected of a reasonably competent builder and there is no actual relevant knowledge”, the liability of a skilled consultant will be possible.

Knowledge of consultants

The lack of knowledge about the combustibility of ACPs, and the failure of the few who had this knowledge to pass it around, proved very costly and almost deadly.

In another important lesson for consultants, the building surveyor tried to argue that because its peers held similar (incorrect) assumptions about ACPs and their compliance with the BCA, it should not be liable. However, Judge Woodward was unimpressed, as these incorrect assumptions formed “organically and apparently without any practitioner seeking any kind of assessment or endorsement from a professional body or regulatory authority”.

Uncritically adopting a practice perceived to be widespread will not save a consultant. He or she must logically consider each issue they come across, and seek professional advice such as that of a fire engineer.

Conclusion

The judge emphasised that this decision was based on the specific facts of the case. If the building contract and the building had been different, or if ACPs had been used on buildings without obvious ignition sources like barbeques and air conditioning units, then the outcome of the case may have been different.

Nevertheless, building owners and consultants, especially those who have been involved in installing combustible cladding, should be on high alert.

They will need to review their building and consulting contracts immediately, not to mention their professional indemnity insurance. This applies not just for current projects, but for previous ones too. The Lacrosse fire happened in 2014 and the companies are paying dearly for it today.

Building owners will also need to go about registering their buildings on the NSW Cladding Registration portal (see link for more).

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Security of payment: no work, no pay

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Participants in the commercial building industry generally rely on security of payment legislation to resolve payment disputes. As a preliminary means of recovering money under a construction contract, those in the industry are usually keen to hear of developments regarding a court’s interpretation of the legislative provisions.

Shape Australia Pty Ltd v The Nuance Group (Australia) Pty Ltd [2018] VSC 808 (‘Shape’ and ‘Nuance Group’) recently considered two issues under the Building and Construction Industry Security of Payment Act 2002 (Vic) (the ‘Act’), namely:

  • whether a reference date can be ‘refreshed’ for a payment claim when there has been no further work carried out since the previous reference date; and
  • whether an amount in a payment claim which attempts to recoup liquidated damages (previously offset in a payment schedule) constitutes an ‘excluded amount’ under the Act.

Background

In July 2016, Shape and Nuance Group entered a contract for the demolition and associated works at Melbourne International Airport.

On 2 March 2018, Shape issued payment claim #13 for $3,533,233.84. Nuance Group responded with a payment schedule stating the amount payable as nil. Shape applied for adjudication for a reduced sum of $2,243,105.55.

On 13 April 2018, a First Adjudication Determination for the sum of $1,400,007.12 issued, which after review instigated by Nuance Group, was reduced to $1,216,715.72.

Nuance Group challenged the validity of the original and reviewed determinations and, on 2 June 2018, in Nuance Group (Australia) Pty Limited v Shape Australia Pty Limited [2018] VSC 362 the Court quashed the determination on the basis that the adjudicator had “failed to perform his basic and essential function” under the Act.

Subsequently:

  • On 10 July 2018, Shape issued payment claim #14 for $1,285,579.62 which included “uncontested individual line items claimed in payment claim #13”. Nuance Group responded with a payment schedule stating the amount payable as nil.
  • Shape applied for adjudication, and on 23 August 2018, a Second Adjudication Determination issued which essentially declared the claim invalid for want of a valid reference date and that (in any event) the amount payable was nil on the basis that the claim was for an excluded amount.
  • Shape applied for orders remitting the first or second adjudication determination for review.

Decision

Was the payment claim invalid for want of a reference date?

Section 9(1) of the Act provides that there must be a valid reference date to avail rights for a person to a progress payment. A payment claim must be supported by a valid reference date, which is a precondition to an adjudicator making a determination under the Act.

Clause 42.1 of the construction contract entitled Shape to make payment claims on the 28th day of each month, and that such claims should include “the value of work carried out by the contractor in the performance of the contract to that time …”. On that basis, the Court considered that the requirement for work to be carried out “to that time” established a threshold for making a claim.

Payment claim 14, which had a reference date of 28 June 2018, was identical to payment claim 13, which carried a reference date of 28 February 2018. No further work had been carried out since issuing payment claim 13 and accordingly, 28 February was the last available reference date under the contract.

It followed that payment claim 14 was invalid for “want of a reference date”. The claim was either made in respect of the (same) 28 February reference date and therefore in breach of the Act, or a claim served out of time, namely, outside of the three-month period prescribed by the Act.

Shape’s application was dismissed, the Court agreeing with the adjudicator’s determination and finding nothing further to conclude otherwise.

Are liquidated damages an excluded amount?

The Act sets out certain classes of amounts that are “excluded” and must not be taken into account when calculating an amount of a progress payment. Essentially, excluded amounts include certain variations of the construction contract, amounts claimed for compensation due to the “happening of an event” (latent conditions, time-related costs and changes in regulations), amounts claimed for damages in relation, or incidental to, a breach under the construction contract or other claims arising at law.

The concept of an excluded amount in the Victorian Act underpins a key objective, namely, to facilitate cashflow within the industry by dealing with payment disputes promptly, whilst maintaining the parties’ legal rights to argue more complex issues later.

The Second Adjudication Determination declared the amount payable in the claim as nil on the basis that “…the entirety of the purported claim was for an excluded amount, being an attempt to recoup the first defendant’s asserted entitlement to liquidated damages”.

The Court confirmed this decision, reiterating the adjudicator’s findings that:

  • when the individual items listed in payment claim 14 were “adjusted and reconciled” the total equated “to the amount of Nuance Group’s asserted entitlement to liquidated damages”; and
  • the amount claimed could be “explained on no other basis, given no new work had been performed and the other claims in payment claim 14 [had] been satisfied”.

Takeaways

Seabay Properties Pty Ltd v Galvin Construction Pty Ltd [2011] VSC 183 determined that a set-off claimed in a payment schedule (by way of a deduction in response to a payment claim) constitutes liquidated damages and is therefore, an excluded amount for the purposes of the Act.

The present case however confirmed that an attempt to recoup liquidated damages through a payment claim will also constitute an excluded amount.

Industry participants should take note that:

  • Liquidated damages claimed as an offset in a payment schedule as well as amounts claimed in a payment claim to recoup liquidated damages are excluded amounts for the purposes of the Victorian security of payment legislation.
  • Claimants wishing to dispute liquidated damages should do so at the time they are levied. Where offsets have previously been raised in a payment schedule and the corresponding payment claim settled, a challenge to these levies in a subsequent payment claim will likely be considered an excluded amount.
  • If the right to make a payment claim under a construction contract is subject to the carrying out of work ‘up to the time’ for making the claim, there will be no available reference date unless work has been carried out since the last reference date.

If you or someone you know wants more information or needs help or advice, please contact us on +612 9248 3450 or email info@bradburylegal.com.au.

Does a payment claim survive the termination of a contract for convenience?

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Security of payment legislation continues to receive significant attention across Australia’s building and construction landscape, with many cases being deconstructed to shed light on a court’s interpretation of various provisions.

Impero Pacific Group Pty Ltd v Bonheur Holdings Pty Ltd [2019] NSWSC 286 recently established that, despite a construction contract being terminated for convenience, a contractor may still claim for work carried out between the last accrued reference date and the termination date. Much will depend on the wording of the contract.

The decision diverges from previous case law which holds that a contract terminated for convenience does not provide ongoing reference dates, and consequently no entitlement for a contractor to claim for work carried out between the last reference date and termination.

Background

The contractor, Impero Pacific Group Pty Ltd (Impero) entered into a contract with Bonheur Holdings Pty Ltd (Bonheur), as principal, for construction of a residential strata complex, with a completion date of 1 March 2019.

The reference date, for the purposes of making payment claims was the 25th day of the month.

Crucially, the contract contained a termination for convenience clause (clause 39A), allowing the principal at its discretion to terminate the contract and complete any part of the works either itself or through another party. If invoked, the contractor would be entitled to payment for certain works carried out to the date of termination that would otherwise have been payable if the contract had not been terminated.

The contract was terminated for convenience by Bonheur on 29 or 30 October 2018.

Impero served a payment claim on 27 November 2018 for approximately $1.4 million relating to work undertaken between the last reference date being 25 October 2018 and the termination date, namely 29 or 30 October 2018.

Bonheur failed to respond to the claim as required under the Act and Impero sought judgement from the Supreme Court.

Bonheur argued that the payment claim was invalid as it was not supported by an available reference date pursuant to clause 8 of the Building and Construction Industry Security of Payment Act 1999 (NSW) (the ‘Act’).  It contended that if the contract was terminated for convenience, “the Act cannot be used to obtain a progress payment for work done between the last contractual progress payment date and the date of termination.”

It was also submitted that, if Impero did have a right to a progress payment, it was “limited to part only” on the basis that it had claimed for items not within the scope of the Act and therefore no judgement could be obtained.

Impero argued that on construction of clause 39A, termination resulted in the creation of a new reference date and a consequential entitlement to claim and receive payment.

Decision

Justice Parker was not persuaded by the principal’s submissions and ordered the judgement sought by Impero.

The Act provides that on and from each reference date under a construction contract a person is entitled to a progress payment for work carried out under the contract.

Justice Parker acknowledged that under the current Act “there is no entitlement to a progress payment, and there can be no valid progress claim, unless there is an available reference date”. A reference date is defined as:

“(a)    a date determined by or in accordance with the terms of the contract as the date on which a claim for a progress payment may be made in relation to work carried out…under the contract, or

(b)     if the contract makes no express provision with respect to the matter – the last day of the named month in which the construction work was first carried out…and the last day of each subsequent named month.“

The last reference date prior to termination (on 29 or 30 October) was 25 October, which would have been available to claim for work carried out up to that date, but not beyond. Had the contract not been terminated, the next available reference date would have been 25 November.

Justice Parker considered the present matter in the context of previous cases and clause 39A of the construction contract. Clause 39A provided an entitlement for Impero to claim for work carried out under the contract up to the date of termination, and crucially this clause expressly stated that it would survive termination.

In the circumstances it was determined that “termination of the contract gave rise to a fresh reference date for the purposes of the Act“ and the entitlement for Impero to claim up to termination.

As to the contention that Impero’s right to a progress payment, if awarded, should be limited to part only, Justice Parker confirmed that “the Act does not permit the Court to make its own assessment of the extent to which the claimed amount represents payment for construction work or the supply of related goods or services. In that sense, it is an all-or-nothing provision.” The opportunity for a principal to argue that items fall beyond the scope of the Act arises by serving a payment schedule in response to a contractor’s payment claim. In the present case, the principal failed to do this.

Key takeaways

  • The exercise of a right to terminate a construction contract for convenience will not prevent a contractor from claiming for work carried out up to the termination date;
  • Progress claims should specify the works carried out between the last accrued reference date and the date of termination and relate only to works defined within the scope of the Act; and
  • Principals who terminate a contract for convenience should anticipate that a contractor may make a claim up to the date of termination. Items considered to be claims beyond the scope of the Act should be identified in the payment schedule.

Readers should be aware that Justice Parker makes it clear that termination for convenience is not the same as termination for breach nor is it similar to accepting the repudiation of the other party. The situation may be different in these cases. The High Court of Australia has previously ruled that in these cases, unless the contract expressly provides so, reference dates do not accrue after termination or accepted repudiation.

Where to next?

Determinations such as this are frequently analysed, particularly as participants in the building and construction industry await reforms yet to commence under the Building and Construction Industry Security of Payment Amendment Act 2018 (NSW). For more details on these amendments, click here.

Upon commencement of the current reforms proposed, the reference date system will be abolished, and a contractor will be able to make a progress claim for work carried out up to the date of a terminated contract, whether the contract is terminated for convenience or otherwise.

The policy behind these amendments is to discourage principals from strategically terminating a contract primarily to avoid a final payment claim being made under the Act.

If you or someone you know wants more information or needs help or advice, please contact us on +61 2 9248 3450 or email info@bradburylegal.com.au.