Defective Building Works and Cladding
The road for an Owners Corporation, when confronted by defects in common property and complaints by unit owners about the construction of their unit, is not an easy one.
In NSW, the Home Building Act 1989 (“HB Act”) imposes statutory warranties in building contracts to protect owners of units, subsequent purchasers of those units and owners corporations from loss caused by defective building works. The warranties include:
- a warranty that the work will be done with due care and skill and in accordance with the plans and specifications set out in the contract;
- a warranty that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new;
- a warranty that the work will be done in accordance with, and will comply with, the HB Act or any other law;
- a warranty that the work will be done with due diligence and within the time stipulated in the contract, or if no time is stipulated, within a reasonable time; and
- a warranty that, if the work consists of the construction of a dwelling, the making of alterations or additions to a dwelling or the repairing, renovation, decoration or protective treatment of a dwelling; the work will result, to the extent of the work conducted, in a dwelling that is reasonably fit for occupation as a dwelling.
Consequently, the warranties impose a requirement to comply with Building Code of Australia (BCA).
The BCA prescribes minimum standards for building and construction works and standards can be subject to performance criteria.
To comply with the BCA, a builder or designer can use “Deemed-to-Satisfy” solutions which will prescribe various methods of design and construction including materials, components,
design factors, and construction specified in the BCA to demonstrate compliance with the BCA.
A builder and developer can also demonstrate compliance with the BCA through an Alternative Solution where performance criteria specified in the BCA and the design and construction solution meets the required performance criteria.
Despite legislative obligations to deliver building works that are fit for purpose and without defects, defects in buildings are far too common and not all builders and developers are prepared to address complaints about defects.
To enforce rights against a builder or a developer it will often mean the Owners Corporation is off to Court.
Litigation is costly and the process is demanding.
Outcomes in litigation are uncertain and perseverance is essential.
A recent decision of the NSW Court of Appeal in Owners SP 92450 v JKN Para 1 Pty Limited  NSWCA 114, highlights the challenges that confront an Owners Corporation forced to sue a builder over defective building works.
The case has also clarified that builders and developers bear the onus of proving that proposed rectification costs are unreasonable once defects have been established.
JKN Para 1 Pty Ltd (“JKN”) contracted with Toplace Pty Ltd (“Toplace”) to design and construct a 28-storey mixed residential, commercial and retail tower in Parramatta.
The external cladding was Vitrabond FR aluminium composite panels (“ACP”).
After the interim Occupation Certificate was issued, Fire & Rescue NSW (“FRNSW”) provided a Final Fire Safety Report to the certifier recommending that, in light of the “worldwide spate of fires involving ACPs burning rapidly to the roof of multi storey buildings” there should be certification that the ACP was compliant with an internationally recognised fire protection listing.
A Final Occupation Certificate was issued without this certification.
The subdivision of the development created Owners SP 92450 (the “Owners Corporation”).
With concerns over the cladding, the Owner Corporation brought claims against JKN and to place for breaches of the statutory warranties imposed by the HB Act. The Owners Corporation claimed:
- the cladding did not comply with the Building Code of Australia (BCA) as it applied in 2013;
- the cladding was not suitable and was combustible; and
- the dwellings, as built, were not reasonably fit for occupation due to the combustibility of the cladding.
The Owners Corporation claimed damages for the cost of removing and replacing the cladding. It was not in dispute that the cost of replacing the ACP was $5 million.
There was a dispute about whether replacement of all ACP was necessary, or a different and cheaper solution was available to overcome any concerns.
The BCA required the external walls of the building to be non-combustible.
Compliance with this requirement could be achieved through the “Deemed-to-Satisfy” provisions of the BCA or through an “Alternative Solution” that complied with the performance requirements of the BCA. The question was whether there was an alternate solution or compliance with the “Deemed-to-Satisfy” provisions.
There was no real dispute that the ACP product was combustible but there was an issue whether the actual product installed was combustible.
The case proceeded to hearing in the NSW Supreme Court before Black J, who found that the Owners Corporation failed to establish a breach of warranty because the evidence did not show that the cladding was combustible for the purposes of the BCA, or in a general sense.
As to whether the cladding could comply as an Alternative Solution or satisfy the Deemed to Satisfy provisions of the BCA, the Court concluded that the Owners Corporation’s expert evidence left the issue of whether there was an Alternative Solution up in the air as further testing would be necessary to determine if there was an Alternative Solution that would comply with the BCA, rather than remove the cladding.
Black J, in those circumstances, found that the Owners Corporation had failed to discharge its evidentiary onus to demonstrate that the cladding required removal for want of compliance with the performance requirements of the BCA.
Black J rejected arguments that:
- the cladding was composed of material that was not good and suitable for its purpose and in breach of statutory warranties simply because it was a banned product under the Building Products (Safety) Act, and
- the cladding installation resulted in the building not being reasonably fit for occupation as a dwelling.
An expensive bit of litigation and a loss for the Owners Corporation – but it did not stop there!
The Owners Corporation challenged the decision of Black J. This time, as a result of an
appeal, the Owners Corporation won its claim.
On appeal, the key issues were:
- whether the trial judge erred in declining to award reinstatement damages on the basis that the Owners Corporation had not shown there was no Alternative Solution available, and
- whether the builder/developer had an evidentiary onus of displacing the prima facie rule for assessing damages, the cost of reinstatement of the building is the proper measure of damage.
The Court of Appeal found that:
- The building did not satisfy the performance requirements of the BCA with respect to fire resistance because the external cladding did not comply with the deemed-to- satisfy provisions and no alternative solution was prepared prior to the issue of the construction certificate.
- The burden of proof for establishing loss lies on the claimant. However, a party in breach of contract has an evidentiary onus of displacing the prima facie rule for assessing damages as the cost of reinstatement, by showing that reinstatement would be unreasonable.
- After establishing that the builders and developers did not comply with the BCA, the Owners Corporation did not have to go further and prove that they could not have complied with the BCA by acting differently with respect to hypothetical alternative solutions
- As the builders and developers did not establish that an alternative solution would have been available prior to the issue of the construction certificate, or was now available, they did not discharge the evidentiary onus of establishing that the costs of rectification would be unreasonable.
- The builder’s failure to prepare an alternative solution in respect of the cladding was not merely a formal or technical breach which did not warrant reinstatement damages.
- By installing cladding which did not comply with the performance requirements of the BCA with respect to fire resistance, the builders provided the Owners Corporation with a building which did not meet the minimum standards for public safety, which they had to do under the warranties.
The Owners Corporation’s loss was the reasonable cost of removing the cladding and replacing it with cladding which is non-combustible within the meaning of that term in the BCA.
A win for the Owners Corporation but a long and expensive battle to get an order for compensation and now the Owners Corporation faces a battle to extract damages out of the coffers of the builder. The builder will have no insurance for the claim.
Defective building work provides fertile ground for legal practices and it is best to get help from experts when disputes arise.
Our team is ready to help you navigate the challenges of a construction dispute and deliver the most cost-effective outcome when you need to deal with a building dispute.