Recent fire events such as the Melbourne Lacrosse Building fire in November 2014 and the London Grenfell Tower fire in June 2017 have brought to the forefront the risks associated with combustible Aluminium Composite Panelling (ACP), commonly referred to as 'cladding'.

The number of buildings in Queensland or Australia that are cladded with ACP is presently unknown, however it is understood to be a significant number. Clearly, removal of unsafe, fire spreading material is essential, but who is liable to pay for this removal and what are the insurance implications?

Who will pay for the removal of non-compliant ACP?

Position at common law

The Australian courts have demonstrated a general reluctance to recognise the duty of care of a builder to subsequent purchasers in pure economic loss cases involving transactions concerning commercial buildings. This has been highlighted in the High Court decisions of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 (2014) 254 CLR 185 (Brookfield) and Woolcock Street Investments Pty Ltd v CDG Pty Ltd (2004) 216 CLR 515 (Woolcock).

The cases of Woolcock and Brookfield have confirmed that subsequent purchasers of commercial buildings cannot sue builders, engineers, designers and the like for pure economic loss arising from rectification works required to remedy latent defects that are discovered after purchase. The High Court in both Woolcock and Brookfield reasoned that this is due to subsequent purchasers not being in a position of 'vulnerability' and being able to negotiate protection in contract law by way of a warranty from the seller. In these cases, it was the subsequent purchaser who ultimately had to pay to rectify the latent defects.

In relation to residential properties, the High Court has previously determined in the case of Bryan v Maloney (1995) 128 ALR 163 (Bryan) that a subsequent purchaser of a residential property is in a position of vulnerability such that the builder of the property owes a duty of care for pure economic loss suffered by the subsequent purchaser for latent defects. However, in recent cases before lower courts, such as Ku-ring-gai Council v Chan (2017) NSWCA 226 (Chan) it has been determined that, due to legislative changes since Bryan that provide statutory warranties for latent defects, subsequent purchasers of residential properties are no longer in a position of vulnerability.

Despite the availability of statutory warranties for defects that can be enforced by subsequent purchasers, pursuant to the Queensland Building and Construction Commission Regulation 2003 (Qld), these warranties apply for a maximum of 6 years and 6 months from the commencement of construction, and many owners of residential buildings may find themselves outside this time period, leaving them essentially with no recourse against those responsible for the installation of non-compliant ACP.

The position of the High Court in Brookfield is directly applicable to body corporates seeking compensation for pure economic loss to replace non-compliant ACP on common property. In other words, a builder will not owe a duty of care to a body corporate, as agent of the owners of residential lots in a building. In these circumstances, the required element of vulnerability will not be present (applying the principles from Brookfield). This is because the first purchasers of lots in residential buildings are purchasing their lot from a developer and as such, it will be deemed that they had the opportunity to negotiate warranties into the contract with the developer. In essence, body corporates are in the same position as subsequent owners of commercial properties when it comes to pursuing an action against builders for pure economic loss, as outlined earlier in this article.

Despite the above, the consideration of ACP as being a latent defect remains untested by the courts and it is not presently known whether a case involving ACP would be determined strictly along the same lines as Woolcock, Brookfield and Chan. However, given any loss suffered in relation to the removal and replacement of non-compliant ACP will be pure economic loss, it is likely that subsequent purchasers of both commercial and residential properties will have difficulty in progressing claims against builders, architects and construction companies for the removal of non-compliant ACP from their buildings.

Amendments to the Queensland Building and Construction Commission Act 1991 (Qld)

Recent amendments to the Queensland Building and Construction Commission Act 1991 (Qld) (QBCCA) have made it an offence for any person involved with the design, manufacture, import or supply of a building product to install a product when it 'knows or is reasonably expected to have known' that the product does not comply with the relevant regulatory provisions. Combustible ACP is non-compliant with the Building Code of Australia (BCA) and would fall foul of the recent QBCCA amendments. A particular penalty under the QBCCA is the requirement that the offending party remedy the contravention of the QBCCA (which would involve the removal and replacement of ACP).

The recent amendments to the QBCCA may provide recourse for building owners to have non-compliant ACP on their buildings replaced, however, it may take considerable time for the proper investigation of who the responsible parties are and correct apportionment of the responsibility between multiple responsible parties before rectification occurs.

In this intervening time, responsible parties such as body corporates run the risk of a catastrophic fire event occurring, when they know of the relevant risk posed by the ACP.

If those parties who are responsible for the design, manufacture, import or supply of the non-compliant ACP do not have any insurance cover, the building owner may still be left in a position where it needs to pay for the rectification work itself.

Additionally, the maximum penalty for failing to comply with an order to remedy the contravention is 1,000 penalty units or $126,150. This penalty is significantly lower than the likely costs to remove and replace non-compliant ACP from high-rise buildings, which in the case of the Lacrosse Building in Melbourne are estimated to be in excess of $15 million.

The amendments to the QBCCA commenced on 1 November 2017 and will therefore only apply to cladding installed on or after this date.

Building owners and body corporates who discover that their buildings are clad with non-compliant ACP installed before 1 November 2017 may be left without any statutory remedy against those parties who were responsible for the design, manufacture, import or supply of the ACP.

Interestingly, recent media articles indicate that certain builders of buildings covered in non-compliant ACP have been volunteering to replace the cladding at their cost. Without any legal liability to do so, this approach by builders may be viewed as a commercial decision, made with a view to preserving their reputations in the building industry in light of the level of media and other scrutiny. However, this is entirely voluntary and no doubt some (particularly smaller) builders will not voluntarily undertake such work in the absence of a legal obligation to do so.

Insurance implications

Insurance implications flowing from non-compliant ACP relate both to building owners and those parties who are responsible for the design, manufacture, import or supply of the non-compliant ACP.

It is therefore critical that businesses revisit their insurance programs to ensure they comply with the conditions of their insurance policy and have the right level of cover in place. Some of the key considerations are outlined below.

Building owners and body corporates

Should a building owner become aware that its building is cladded with non-compliant ACP, it is obliged to disclose this heightened risk factor to its insurer in accordance with the Insurance Contracts Act 1984 (Cth).

This is because insurers may otherwise decline indemnity for a claim due to non-disclosure.

This may be relevant in the event of property damage and consequential loss claim or a public liability claim.

Notification of non-compliant ACP may represent a 'Catch 22' for some owners, in that, as a result of notifying their insurer, the insurer may be:

  • unwilling to renew cover
  • only willing to insure at a higher cost, and/or
  • only willing to insure for limited circumstances, which exclude the adverse outcome from the ACP remaining in situ.

Further, if a building owner is refused cover by one insurer, that information and the reason for the denial of cover, is required to be disclosed on applications to another insurer. Building owners may have difficulty securing appropriate cover.

For body corporates, failure to obtain insurance cover for the common property is a breach of the Body Corporate and Community Management Act 1997 (Qld).

Companies who design, manufacture, import or supply non-compliant ACP

Professional indemnity

Subject to disclosure obligations and other terms and conditions of insurance policies being complied with, professional indemnity insurers may be required to indemnify those required to perform remedial works, such as replacement of non-compliant ACP, pursuant to the QBCCA.

If you operate in this space post the amendments of 1 November 2017, we recommend an urgent review of your professional indemnity insurance to confirm that cover is available. It not, Allegiant IRS may be able to assist in procuring appropriate cover.

Statutory liability

In the regulatory space, businesses must also consider the impact of the introduction of penalties under the QBCCA.

A responsive Statutory Liability Insurance program is becoming increasingly important in ensuring that businesses are insured for costs of defending regulatory claims.

One of the widest insurance covers available to businesses is the Statutory Liability+ Policy developed by McCullough Robertson and Allegiant IRS. For further information please contact a member of our team.

Commentary

Despite the recent amendments to the QBCCA, there remains uncertainty in this area, particularly in relation to who will be liable to cover the costs of replacing non-compliant ACP on buildings and practically, who will actually pay.

Each case will turn upon its own facts in this regard and if you think you may be affected by non-compliant ACP or the amendments to the QBCCA, we encourage you to contact McCullough Robertson or Allegiant IRS for further advice regarding your potential exposure and the best response to this emerging risk for your particular circumstances.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.