27 September 2018
Ben Davidson: Corrs Chambers Westgarth – Melbourne – Partner - Construction Group
Emily Steiner: Corrs Chambers Westgarth – Melbourne – Senior Lawyer – Construction Group
Ben - Hello my name is Ben Davidson I am a partner in the Corrs Construction team based in Melbourne and welcome to Corrs High Vis. Today we will be talking about cladding and in particular the Lacrosse fire and aftermath. As most of you will be aware in November 2014 the residential Lacrosse Tower in the Docklands in Melbourne was rapidly set ablaze. The fire was sparked by a cigarette on the 8th floor balcony and quickly raced up the external wall of the building. The building was clad in panels with a highly flammable polyethylene core a material which has caused similar devastating fires around the world. After the fire about 300 Lacrosse owners have bought a claim in VCAT seeking $24 million in damages from the builder LU Simon. LU Simon has in turn claimed that the relevant building surveyor, architect, fire risk consultant and project managers were responsible for the disaster. Now a 30 day VCAT hearing has commenced. I am joined by Emily Steiner, Senior Lawyer in the Construction Group based in Melbourne and we are going to have a chat about is going on down in VCAT and where the Lacrosse hearing is likely to take things. Emily what changes in trends have you noticed in the market since the Lacrosse fire when the combustible cladding issue was brought to Australia’s attention?
Emily – So since the Lacrosse fire I think there has been a heightened public awareness about specifically the risks that are associated with the aluminium composite cladding that has a polyethylene core particularly those with a 30% plus polyethylene core and more generally there is a heightened public aware about the importance of using building materials that are compliant with the Building Code of Australia and using those materials in a manner that is compliant with the Building Code of Australia. Since the Lacrosse fire and particularly after the Grenfell fire in London the Victorian Government has committed to addressing issues with non-compliant cladding on publicly owned buildings and in particular public hospitals including the Royal Women’s Hospital in Melbourne. Anecdotally as well we have seen that local councils have really started to target the issue of non-compliant cladding by issuing more building notices that actually identify non-compliant cladding within them. So this is really causing owners to consider the materials that are used on their buildings and I suppose as well to consider the other fire safety systems that they have in place. In March 2018 Ministerial Guideline 14 was released. This provides that building surveyors are not permitted to issue building permits involving aluminium composite panels or expanded polystyrene products with a polyethylene content of 30% or more as part of an external wall unless the use has been determined as compliant by the Building Appeals Board. This provides an additional layer I suppose of prevention of use of these products and more recently the Planning Minister Richard Wynne has also introduced legislation to provide for what is called cladding rectification agreements. These provide for lenders to offer low interest loans that are guaranteed by local authorities through their rate system. This will allow owners to replace their cladding and pay back the loan through their rates over a minimum period of ten years. So those are really the high level updates that have happened since Lacrosse and Grenfell and I think it will be quite interesting to see how each of those play out.
Ben – Thanks Emily that’s really interesting. In terms of the current VCAT hearing that’s running it’s actually not the beginning of the story is it? The LU Simon and VBA matter in the Supreme Court ran I think earlier this year and produced a result that I think surprised the market a little bit. What do you see is the significance of that decision?
Emily – So in that case the Supreme Court of Victoria found that the VBA was not entitled to issue directions to fix after a certificate of final inspection or an occupancy permit had been issued. Sorry it is important to note that directions to fix can be issued with respect to cladding issues as well as all other issues of non-compliance with the Building Code of Australia. So this decision places a clear time bar on opportunities for the VBA to issue a direction to fix in turn this means that the immediate cost of rectifying any buildings that are non-compliant is immediately pushed back on to the building owners and owners corporations of live residential buildings. This is clearly a significant shift although it might be slightly more palatable in light of the new cladding rectification agreements that have just been brought in. It is also important to note that the decision does not prevent owners from later recovering those costs from responsible third parties the impact is really just on the immediate responsibility for costs.
BEN – Thanks what’s interesting then – so the consequence of the win by LU Simon is that the liability is shifted back to the owners from the builder. I think it will be interesting to hear from you some of your initial observations from the VCAT hearing so far. Whilst LU Simon have escaped the VBA’s attempt to have them rectify the building I think they rectified it themselves but are now presented with a $24 million claim. What have seen happen so far?
EMILY – LU Simon has clearly escaped the direction to fix but I think that there is still, you know they are potentially on the hook. I guess we have to see what happens with this Lacrosse hearing. So LU Simon for example is largely passing blame for the fire on the architect in turn the architect’s say that they are not responsible just because they designed the building. They say that at fault with a building, fire engineer and building surveyor as the building surveyor says that if it is found to have caused the fire in part which it denies the occupants of the building have to share part of the blame on the basis that the owners corporation didn’t conduct any inspections to ensure that the balconies weren’t being used for storage purposes or were otherwise used inappropriately. In the first week of the hearing it’s been suggested by an expert for the Lacrosse owners that at the time the building designed there was no aluminium composite cladding on sale in Australia that would have meet the façade or balcony requirements for the Building Code of Australia. This suggests that the relevant consultant should have known that the cladding being installed was not compliant. We haven’t heard a lot more about that so far but we can definitely expect to hear more about this as the hearing goes on.
BEN – Just before we move away from the hearing I saw just reported in the newspaper the other day that the issue of mitigation had been raised in the sense that the counsel for LU Simon had indicated that the ultimate rectification costs I think was about $9 million in circumstances where there was an offer as I understand it from LU Simon for $5 million. Senior counsel indicated that it was inappropriate then that the owners corporation had elected to use the most expensive fix. Did you have any sort of views on what happened in that instance?
EMILY – So the owners response to that was that they had an expert review all of the quotes and the expert came back and said that the $9 million quote was the most appropriate and on that basis the owners relied on that. It will be interesting to see whether that is adequate mitigation in the current circumstances.
BEN – Okay putting Lacrosse aside for a minute. The issue of cladding is cropping up more broadly and fairly regularly now. A couple of weeks ago H Buildings which is a subsidiary of Hickory Group was placed into voluntary administration. We know that when a company goes into VA there is a moratorium on any action being brought against the company. We are aware of two claims against H Buildings being stopped in their tracks as a direct result of the administration of H Buildings. One relating to apartments in Richmond one relating to apartments in Brunswick. So Emily for the owners of the Richmond and Brunswick apartments if the administrator is unable to turn H Buildings around the impact and loss could be significant. What do you see as the key lessons to be learnt from this matter?
EMILY – I think an important lesson is to remember that before entering into any sort of construction or building arrangement that comprehensive due diligence is absolutely necessary in terms of understanding the parties that you are contracting with, what their financial positions are, you know even what other sorts of projects they are working on, how ongoing they might be, what their cash flow might be, and all of that sort of thing.
BEN – So when you see cladding issues going from here. It seems that they are popping up far more regularly and are covered by the media pretty aggressively. What do you think that the next series of issues will be?
EMILY – I think that it will interesting to see whether there is a greater use of the cladding rectification agreements that have recently been legislated for and indeed if there is a greater use of them how they will play out. I think that they could be a useful mechanism to ensure that any unsafe cladding is removed as soon as possible. So it is interesting I think that will be an interesting space to watch. In light of the cladding rectification agreement as well once those initial costs are covered for by the building owners I think that we can probably expect to see some increased litigation in the same vein as the Lacrosse hearing. In that respect it is also important to note that limitation periods are critical for litigation so anybody that is seeking to raise any disputes with respect to any cladding issues they might have should be very aware of the limitations that exist on their building. I think that we can also expect to see that there will be less buildings being built in the future that have non-compliant cladding given that there such a heightened awareness of this issue in the public and most definitely in the building and construction industry. But having said that I think that this will be a very long lasting issue given how popular the use of this type of cladding was at a particular point in time and how expensive rectification works and time consuming rectification works can be.
BEN – Emily thank you. It’s been fascinating to hear where things are up to. We are going to keep a weather eye on cladding and what’s happening in respect of the VCAT hearing. So look forward to talking to you again in week or so to find out where that hearing has got to.
This has been Ben Davidson and Emily Steiner at Corrs. Thank you very much for listening.
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