Cladding case outlines development in courts' approach to defective building claims

In Owners SP 92450 v JKN Para 1 Pty Limited [2023] NSWCA 114, the NSW Court of Appeal recently clarified that defendants, including builders and developers, bear the onus of proving that rectification costs are unreasonable. While the decision related to removal and replacement of combustible cladding, the principles can be applied more broadly to claims for rectification of building defects.

Background

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 NSW. The external cladding was constructed with Vitrabond FR aluminium composite panels (ACP) manufactured by Fairview Architectural Pty Ltd (Fairview).

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”, the ACPs be certified compliant with an internationally recognised fire protection listing for full scale façade tests. FRNSW requested written confirmation once the necessary rectification works had been completed.  A final occupation certificate was issued without this certification.

Claim

Owners SP 92450 (the Owners Corporation) alleged that JKN and Toplace breached statutory warranties in the Home Building Act 1989 (NSW). Namely:

• the cladding did not comply with the Home Building Act or the Building Code of Australia (BCA) as it applied in 2013
• the cladding was not good and suitable material as it was combustible, and/or
• the dwellings were not reasonably fit for occupation because they were combustible.

The Owners Corporation sought damages for the cost of removing and replacing the cladding, which the parties agreed at $5 million. This involved complete replacement of all ACP.

The critical issue in the case was whether complete replacement of all ACP was necessary and appropriate, or whether another (less costly) rectification method could be utilised, and who bore the onus of proof.

Expert evidence

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” (DtS) provisions of the BCA or through an “Alternative Solution” that complied with the performance requirements of the BCA (Alternative Solution), or a combination of both.

Expert evidence was obtained as to BCA compliance, combustibility of the ACP and rectification methods, which would satisfy the DtS provisions or provide an Alternative Solution.

The parties’ joint expert[1] recommended that the ACP be removed and replaced with a product that had been tested and attained a “non-combustible” criteria or had been deemed non-combustible in accordance with the DtS provisions of the BCA. He did not believe any Alternative Solutions were available.

The Owners Corporation’s expert[2] stated that, whilst a performance solution could have been carried out in 2013, certain information was not available to allow a comprehensive performance solution to be undertaken. This included, for example, test reports outlining the calorific value of the ACP and a lack of commercially available cavity barriers in Australia.

JKN and Toplace’s expert[3] was of the view that the as-built building, without modification, was capable of being certified at the relevant time by way of an Alternative Solution. Whilst the expert did not identify what an Alternative Solution would be, he gave evidence of an assessment method to be adopted for an Alternative Solution to comply with the performance requirements of the BCA.

The absence of any recommendations as to an appropriate Alternative Solution was significant.

Trial judge

The trial judge found that the cladding did not comply with the DtS provisions and was not compliant with the BCA by way of an Alternative Solution. Nevertheless, his Honour found no breach of statutory warranties and declined to award reinstatement damages on the basis that the Owners Corporation had not established that an Alternative Solution ‘could not then or now be performed’ and that the evidence did not show the cladding was combustible for the purposes of the BCA in a general sense. 

The trial judge also found:

• The Owners Corporation’s evidence involved a degree of speculation to steps that were not taken to develop a full Alternative Solution.
• JKN and Toplace’s evidence did not establish the functional equivalence of an Alternative Solution to the DtS provisions of the BCA.

Appeal

On appeal, JKN and Toplace conceded that the statutory warranty in the Home Building Act had been breached.

The central issues were whether the trial judge erred in declining to award reinstatement damages on the basis that the Owners Corporation had not established that an Alternative Solution ‘could not then or now be performed’, and who bore the evidentiary onus of displacing the prima facie rule for assessing damages as the cost of reinstatement.

The Court of Appeal found that JKN and Toplace bore the onus of proving that complete reinstatement would be unreasonable by proving an Alternative Solution was available prior to issue of the construction certificate or alternatively, is now available.

JKN and Toplace were not able to establish that the costs of complete reinstatement would be unreasonable, and they were therefore ordered to pay the agreed rectification cost of $5 million.

Implications

This decision provides important clarity as to the nature of evidence required in defective building cases.

Defendants, including builders and developers, are required to prove that alternate (usually less costly) rectification methods comply with the BCA, are effective, and do not require Plaintiffs to carry unreasonable risks of failure.

[1]     Mr Mark McDaid of MCD Fire Engineering Pty Ltd, appointed by the parties pursuant to court order

[2]     Mr Allan Harriman of Jensen Hughes

[3]     Mr Mardiros Tatian