First Australian decision on liability for ACP Cladding – what does it mean for insurers?

First Australian decision on liability for ACP Cladding – what does it mean for insurers?

Owners Corporation No.1 PS613436T & Ors v LU Simon Builders Pty Ltd & Ors [2019] VCAT 286

Early morning on 25 November 2014, a resident of the Lacrosse Apartment building, in Melbourne, extinguished a cigarette in a makeshift ashtray sitting on a timber table on his balcony.  A small fire started in the plastic ashtray, spreading to the table and then to the external cladding of the building. The cladding was made of Aluminium Composite Panels (ACP). These panels had a core containing highly flammable polyethylene, which was not compliant with the Building Code of Australia (BCA). The fire spread quickly up the side of the building, racing up thirteen floors in roughly fifteen minutes and causing extensive damage.

The building owners’ corporations and the apartment owners claimed against LU Simon Builders Pty Ltd (LU Simon) in the Victorian Civil and Administrative Tribunal (the Tribunal). The resulting decision demonstrates a willingness to look to the wider contractual matrix of a building project when allocating responsibility.

LU Simon was found to have breached warranties implied in its design and construction contract by the Domestic Building Contracts Act 1995 covering suitability of materials, compliance with the law, and fitness for purpose. These warranties were held to be absolute and not qualified by a standard of reasonableness.

LU Simon was found to be liable to the claimants for AUS$5.7 million in damages associated with reinstatement of the fire damage.  A further AUS$701,000 was awarded to the owners for the actual and projected increases in insurance premiums associated with the unburnt ACP cladding that remained on the building.  

While LU Simon was found to have breached its contract in failing to install BCA compliant materials, it was not found to have failed to take reasonable care.  The Tribunal held that responsibility and the damages payable by LU Simon to the owners were to be apportioned amongst other parties involved in the project.

The fire engineer, Thomas Nicolas, was ordered to pay 39% of the damages.  The Tribunal found there was a disconnect between what the fire engineer saw as the scope of its role and what it had actually signed up to under the agreement for the project. The fire engineer attempted to limit its role to assessing issues raised by the building surveyor.  However, the agreement provided that the fire engineer assumed the obligation to assess construction materials for fire hazard and its failure to complete a full inspection was “essentially undisputed.”

The building surveyors, Stasi Galanos and Gardner Group Pty Ltd, were found to have failed to exercise due skill and care and were ordered to pay 33% of the damages.  The Tribunal noted the ACP failed to meet the ‘deemed-to-satisfy’ provisions of the BCA and this was something the surveyors should have turned their minds to.

The architect, Elenberg Fraser Pty Ltd, was found to have failed to remedy defects in design and had failed to ensure a sample of ACP it received complied with the design intention.  It was ordered to pay 25% of the damages.

The claimants sought not only the costs of repairing the damage caused by the fire but also the costs of removing and replacing the unburnt ACP cladding, being around AUS$5.6 million.  The Tribunal commented that the amount sought by the claimants seemed reasonable, but no formal order was made in respect of the unburnt cladding costs. Apparently, discussions on the reasonableness of the unburnt cladding costs are continuing.  Presumably, the Tribunal will rule on the issue if agreement cannot be reached between the parties.

While the Tribunal warned against using the decision as general commentary on ACP’s appropriateness, the decision will be of significant concern to the construction industry, especially those taking supervisory roles such as fire engineers, architects and building surveyors.  Their insurers will be very concerned as well.

Comment from Craig Langstone

Partner Craig Langstone says that the decision will be closely read by insurers in the UK, Australia and New Zealand alike.  ACP, and the liability resulting from its inclusion in buildings, has been a hot topic in insurance circles over recent years.  The fact that increased insurance premiums and (seemingly) the cost of removing undamaged ACP cladding may be awarded as damages will send shivers down the spines of liability insurers, for good reason.  

Craig Langstone is a Partner at Fee Langstone

Craig Langstone is a Partner at Fee Langstone