Australia: Non-compliant cladding in construction of buildings – a year in review

Audits – Increased regulation – Court decision – Insurer responses

Introduction

Significant reviews of the building industry in Australia are underway following the fire at the Lacrosse Apartments in Melbourne, which was caused by cladding similar to that involved in the deadly Grenfell Tower fire in London in 2017.

The response from government and building regulators has seen sweeping audits of buildings across Australia's major cities, with legal reforms being introduced. We examine these, as well as a recent Court decision and the responses from insurers.

Lacrosse

The Lacrosse building was a 23-storey mixed-use building with residential apartments spanning 15 levels. A fire started in the early hours of 25 November 2014, affecting all the residential levels. The fire spread vertically, resulting in nearly 500 people requiring evacuation. Fortunately, there were no fatalities or serious injuries.

The spread of the fire raised questions regarding the building's compliance with the Building Code of Australia (BCA), the objective of which is to regulate minimum building standards. It was subsequently identified that the external wall between the relevant apartment's balcony and bedroom was made of material that was not non-combustible, contrary to the requirements of the BCA.

The Victorian building regulator, the Victorian Building Authority (VBA), referred the fire safety engineer, the builder, the surveyor and the architect of the building to their respective disciplinary boards.

Melbourne's municipal building surveyor found that the way the polyethylene core aluminium composite panels (ACP) were used did not comply with the BCA and the Melbourne City Council issued building orders to the individual apartment owners requiring that the building be reclad. Despite a challenge by the builder, on behalf of the owners, to instead install wall wetting and a sprinkler system on the balconies, the orders were upheld.

The residents sought compensation against the builder via the Victorian Civil and Administrative Tribunal (VCAT), which saw the builder agree to undertake the works by mid-2018 at significant cost.

Government responses

Following this fire, and the Grenfell Tower tragedy, each state government has caused extensive audits of high rise buildings across the main cities to be undertaken.

In Victoria, an audit of 170 buildings found that 51% failed to comply with the BCA, with one building requiring immediate remediation.

In NSW, the inter-agency "Fire Safety and External Wall Cladding Taskforce" identified 1184 buildings that may have aluminium cladding. The Taskforce proposes to visit each of those buildings and has already identified 220 buildings, including 58 high-rise residential buildings necessitating further investigation. The Taskforce will also launch an advertising campaign aimed at residents in high-rise apartment buildings in NSW that may have cladding installed to raise awareness of the potential fire-safety issue.

In Queensland, nearly 50 buildings are under investigation, including several major hospitals.

In Western Australia, 478 buildings were identified as having cladding, with building reports requested for 228 of them.

An audit in Tasmania found that 42 of the 43 which used ACP were "low risk" and only one building was required to undertake further assessments.

In South Australia after an initial investigation of 4,500 buildings, 77 were identified as warranting further investigation.

The Senate Committee into non-conforming building products released its interim report into ACPs on 6 September 20171. The report recommended, among other things, that a national licensing scheme for cladding be introduced and that a nationally consistent duty of care protection for end users in the residential strata section across the country be implemented. The final report is due for release in April 2018.

The Australian Building Codes Board (ABCB) is also introducing changes to the National Construction Code (2016) (NCC), which comes into effect in March 2018, to improve fire safety in high-rise buildings. Whilst the NCC sets the minimum requirements for the design, construction and performance of buildings throughout Australia, some argue its historical interpretation allowed the use of ACPs on projects as long as they were attached to an appropriately fire rated external wall. Such an interpretation of the NCC is very quickly changing.

Legislation introduced

New South Wales

On 30 November 2017, the Building Products (Safety) Act 2017 (NSW) came into existence in NSW. It purports to prevent the use of unsafe materials in construction and was specifically fast-tracked following the Grenfell Tower fire.

The Act empowers the Commissioner for Fair Trading or the Secretary of the Department of Finance to:

  • launch an investigation into whether a product is unsafe, including requiring a person to provide documents or answer questions;
  • order a person to undertake a product assessment and provide a product assessment report regarding whether any reasonable use of a product in a building is unsafe;
  • identify potentially unsafe buildings and order the owners to rectify the safety risk;
  • prohibit the use of products if the product is unsafe; and
  • impose penalties for e breach of the Act.

A decision making a rectification order can be appealed to the NSW Land & Environment Court. Further, a decision to impose a ban on the use of a product, classify a building as one that may have used a product banned by the Secretary, identify a building as one that contains a safety risk or order a person to undertake a product assessment can be appealed to the NSW Civil and Administrative Tribunal.

The NSW government is also proposing to introduce further regulations to assist in the identification of buildings that may use offensive cladding2. The proposed regulation will require owners of a building to provide the Secretary of the Department of Planning and Environment with details of the cladding used and require owners of buildings with combustible cladding to register with the NSW government and prepare a report setting out whether the cladding presents any risk(s) and what actions will be undertaken to address the identified risk(s).

Queensland

On 1 November 2017, the Queensland Building and Construction Commission Act 1991 (Qld) was amended to make it an offence for any person involved with the design, manufacture, importation or supply of a building product to install a product when that person "knows or is reasonably expected to have known" that the product does not comply with the relevant regulatory provisions. As ACPs do not comply with the BCA, they fall under this Act, although this only applies to cladding installed on or after 1 November 2017.

Tasmania

In Tasmania, the Director of Building Control can use powers under the Building Act 2016 (Tas) to ensure the use of cladding for any commercial building over 2 levels will require approval under a product accreditation scheme expected to be implemented in February 2018.

Federal forum

The Building Ministers' Forum, consisting of State and Federal ministers responsible for building policy endorsed the legislation introduced in Queensland, above, as model legislation to be considered by other jurisdictions. We can therefore expect the other states to shortly follow suit.

Victorian decision

A recent decision of the Supreme Court of Victoria in LU Simon & Ors v Victorian Building Authority3 has clarified the limits of the powers of the Victorian building regulator, VBA, in relation to rectification works orders against builders long after completion of construction projects.

The VBA ordered the builder to undertake repairs to 6 apartment buildings it had constructed almost 9 years before the rectification order. The rectification order related to the use of ACPs.

The builder resisted the order as it argued that section 37B of the Building Act 1983 (Vic) only empowers the VBA to make such orders prior to the issuance of occupation certificates. The VBA initially said that an order under section 37B could be made at any time, however, during the hearing it posited an alternative position that its power is impliedly limited to a reasonable time after the issuance of an occupation certificate. The decision was appealed to the Supreme Court of Victoria.

The Court found for the builder. It held that, when the Building Act is read as a whole, Part 1 related to preliminary matters; Part 2 dealt with building standards; Part 3 contained provisions prohibiting the carrying out of building works without a proper permit; Part 4, which contained section 37B, broadly related to inspection of building works and, finally; Part 5 related to occupancy permits.

In the judge's mind, when viewed in that context, the provisions of the Building Act mirrored the stages of a construction project. The fact that section 37B fell within the part between the obtaining building permits and issuing occupancy certificates, meant that parliament must have intended that orders under section 37B could only be made before the issuance of an occupancy certificate.

The placing of such temporal limits on rectification orders will clearly limit the exposure of builders (and their insurer), particularly in circumstances where there is considerable media and government scrutiny on the use of combustible products in cladding.

While we have seen no cases in NSW dealing with the corresponding provision (section 48E of the Home Building Act 1989 (NSW)), it is likely that the position will be similar.

We have otherwise seen owners who have received with rectification orders commence proceedings against builders and other building professionals alleging breaches of their professional duties.

Impact on owners, professionals and insurance

Insurers will have seen, and can continue to expect to see, an increase in claims for investigation and representation expenses and in respect of industry investigations and disciplinary action as authorities crack down on the use of non-conforming building products.

There has also been a spike in litigation against engineers, architects, builders, surveyors, valuers and certifiers, where minimum BCA standards have not been met. There is currently a solicitation of interest for class actions arising out of non-compliant ACPs.

The risk of fire in non-compliant buildings has seen insurance premiums for building owners and strata/owners corporations increase substantially, with some buildings effectively being uninsurable.

Underwriters have understandably started to write exclusions dealing with combustible cladding, and brokers will no doubt now arrange more vigilant inspections and investigations of buildings owned by large insureds.

In terms of better assessing a risk, the Insurance Council of Australia has formulated a protocol, the "Residual Hazard Identification Protocol", which provides information on the chemical composition of cladding considered to be dangerous. Armed with building reports prepared by building owners addressing the composition of cladding, underwriters should be better equipped to set an appropriate premium for the risk at hand.

Underwriters may also wish to to specifically ask whether the subject property has been contacted by any relevant body (for example, in NSW, the Fire Safety and External Wall Cladding Taskforce) regarding cladding or fire-related issues. In states where legislation will be enacted requiring home owners to prepare reports addressing any cladding-related issues at the direction of a relevant body or person (again, such as NSW), underwriters should ask for copies of those reports.

Footnotes

1 Parliament of Australia, Aluminium Composite Cladding, Interim Report (Sept 2017)
2 Draft Environmental Planning and Assessment Amendment (Inventory of Buildings with Combustible Cladding) Regulation 2017
3 LU Simon & Ors v Victorian Building Authority [2017] VSC 805

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.

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