Background
The Star Entertainment Sydney Properties Pty Ltd and The Star Pty Ltd (Plaintiffs) commenced proceedings against Buildcorp Group Pty Ltd t/as Buildcorp Interiors (Buildcorp) in relation to its involvement in three separate projects at The Star Casino in Pyrmont, Sydney, NSW (Projects) which were completed between November 2014 and March 2016.
The Plaintiffs alleged the cladding used for all Projects, Alpolic-FR, was combustible and did not comply with the Building Code of Australia (BCA).
Buildcorp cross-claimed against several parties including Ausrise Aluminium Pty Ltd (deregistered) (Ausrise), who were engaged by Buildcorp to supply and install the cladding for all Projects, and Malone Buchan Laird & Bawden Pty Ltd t/as The Buchan Group (Buchan), who were engaged by the Plaintiffs as architect for Projects 1 and 2.
Underwriters, the public liability insurers of Ausrise, were later joined to the Proceedings, following the deregistration of Ausrise, pursuant to the Civil Liability (Third Party Claims Against Insurers) Act 2017 (NSW).
Contractual arrangements
Buildcorp's contract with the Plaintiffs differed for each of the Projects. For Project 1 it was a construct only contract and expressly provided that Buildcorp 'will not have any Design Responsibility'. For Project 2 it was a design and construct contract. For Project 3 it was a minor works (design & construct) contract, which included a warranty that the works were fit for purpose. Ausrise's subcontracts were substantially the same for each of the Projects and included a warranty that the works would be fit for purpose (Ausrise Warranty).
Use of ACP
The design for Projects 1 and 2, prepared by Buchan, specified the use of 'solid core' or 'honeycomb core' aluminium cladding which was compliant with the BCA. However, a decision was made to use Alpolic-FR instead of the cladding specified due to availability and price of the product. Buchan initially resisted the proposed cladding change, however later:
- signed off a sample of Alpolic-FR for use on Projects 1 and 2;
- approved a set of shop drawings for Project 1 depicting the installation of 4mm aluminium composite panels (ACP); and
- revised drawings to include reference to Alpolic-FR in Project 2.
(together Buchan Representations).
Alpolic-FR was supplied and installed by Ausrise for Project 3 in accordance with a Façade Performance Brief prepared by a façade engineer.
BCA compliance
The BCA provides two pathways for compliance for external cladding, either through the 'deemed to satisfy' (DTS) pathway or the 'alternative solutions' pathway. To comply with the DTS requirements, cladding needed to be non-combustible. However, there was an exception if it was an attachment rather than part of the external wall. Typically, compliance through the alternative solutions pathway requires a report from a fire engineer.
Notably, Alpolic-FR was subject to CodeMark certificates at the time of installation. A CodeMark certificate is an official document issued under the CodeMark Certification Scheme which outlines the product’s BCA compliance, limitations, installation requirements and supporting technical data.
The Plaintiffs argued that Alpolic-FR was combustible and not compliant through the DTS provisions of the BCA at the time of construction. They submitted that the CodeMark certificate was insufficient to establish compliance in its own right.
Decision
Project 1: Her Honour found Alpolic-FR did not comply with the BCA. It was not compliant with the DTS provisions and no alternative solution report was prepared. Her Honour found the CodeMark certificate was not sufficient to establish BCA compliance in its own right, unless incorporated into a report prepared by a fire engineer.
Nonetheless, the Plaintiffs' claim against Buildcorp for Project 1 failed. Her Honour considered that achieving BCA compliance was a task falling within 'Design Responsibility'; which was not the role of Buildcorp.
In obiter, Her Honour noted that Buildcorp's Cross Claim against Buchan in negligence would also have failed as Buchan did not owe Buildcorp a duty of care. There was no contractual relationship between the parties, and Her Honour found Buildcorp was not vulnerable as it could protect itself (and did protect itself) through the terms of the contract.
However, Her Honour stated that Buchan would have had an exposure under s 18 of the Australian Consumer Law (ACL) based on the Buchan Representations.
Project 2: The Plaintiffs' claim against Buildcorp also failed for Project 2, but for different reasons. Importantly, Her Honour found that the ACP was an attachment to the external façade and therefore compliant with the BCA at the time of installation.
Project 3: Her Honour found that Alpolic-FR was not compliant with the DTS provisions at the time of installation and no alternative solution report existed. On this basis Alpolic-FR was not compliant with the BCA. However, Buildcorp, pursuant to its contract with the Plaintiffs, warranted BCA compliance and that the works would be fit for purpose. Buildcorp was therefore found to be in breach of its contract and liable to the Plaintiffs. However, it is notable that rectification costs for Project 3 only comprised about 7% of the Plaintiffs' loss such that the award made was for $285,662 only (the Plaintiffs' total loss claimed being some $4 million).
Similarly, Her Honour found that Ausrise, as façade installer, breached the Ausrise Warranty and was fully liable to Buildcorp as the Alpolic-FR was clearly not fit for purpose given it was not BCA compliant.
Indemnity under the Ausrise Public Liability Policy
As to the question of whether the Ausrise liability policy responded to Ausrise's exposure, the policy contained the usual insuring clause that covered Ausrise's liability for property damage caused by an occurrence in connection with its business.
Following the recent decisions in Capral Ltd v Insurance Australia Ltd (t/as CGU Insurance) v Capral Ltd and The Owners – Strata Plan No 91086 v Fairview Architectural Pty Ltd (No 3) , Her Honour found that affixing non-compliant ACPs to the buildings constituted property damage, as there was a physical alteration to the buildings which impaired its value or usefulness in two ways, being:
- the building had a combustible external façade; and
- due to the nature of the defect the incorporated product needed to be removed.
Her Honour noted that removing the product would damage the building as it would be necessary to undo how the Alpolic-FR was affixed to the building in the first place.
Underwriters were therefore found liable to Buildcorp on the Cross Claim but only for the cost of repairing the damage to the building caused by affixing the Alpolic-FR. The insuring clause and Underwriters' liability did not extend to the costs of supplying and installing the replacement cladding.
Furthermore, Her Honour decided that a contractual liability exclusion in the policy was not engaged because the Ausrise Warranty only applied in circumstances where Ausrise was at fault and therefore the exclusion had no application.
Implications
The decision indicates that the issue of BCA compliance in relation to non-combustible ACPs is to be assessed on a case-by-case basis. The existence of non-combustible ACP on the exterior of the building will not necessarily result in a finding that the ACP was not BCA compliant.
Is consistent with a long list of authorities such as Brookfield Multiplex Ltd v The Owners - Strata Plan No 61288, that the courts will rarely impose a duty of care to non-contracting parties for pure economic loss, especially in circumstances where the parties are able to protect themselves through contractual terms.
Is a timely reminder that in relation to exposure of builders, subcontractors and design consultants, the specific terms of the contract are essential in relation to assessing each party's roles, responsibilities and liability exposure and that the provision of a warranty may significantly increase overall exposure of the providing party.
Highlights that design consultants should be careful in relation to approvals or sign offs, as they may face exposure under the ACL for misleading representations.
Relevant to liability insurers, the decision confirms the recent 'trend' of the Courts to take an expansive view of what will constitute property damage. Specifically, that affixing a defective or non compliant product may itself be property damage, even in the absence of any physical failure.
The case is also a reminder that Courts tend to give a narrow interpretation to exclusion clauses, and insurers will need to pay close attention to the breaches claimed against their insureds in order to assess whether they can rely on contractual liability exclusions to reduce exposure.
Going forwards, insurers should keep a close eye on the Court's willingness to interpret the meaning of 'property damage' in a liability insuring clause more expansively. It remains to be seen whether the Court's recent approach will result in an increase in claims for indemnity arising from non-compliant cladding exposures, or exposures in similar matters.
