Cladding – who will pay?

Further, evidence generated through the regulatory process, and any non-compliance with statute, may be used by potential claimants to support civil claims. For example, the applicant in the Alucobond PE class action has relied upon alleged breaches of the BCA in support of their claim under trade practices legislation.

Cladding regulation

The Cladding Regulation amended the Building Regulation to impose obligations on owners of a "private building" in Queensland to identify whether combustible cladding exists.

"Private building" means a building:

• that is a Class 2–9 building. These classifications are broadranging and include, for example, apartment buildings, hotels, office buildings, shops, car parks, laboratories, production facilities, health care and aged care buildings, and certain buildings in schools, but excludes Class 1 buildings (eg. a single dwelling detached house or townhouses separated by a fire-resisting wall) and class 10 (non-habitable) buildings; and
• that is of type A or type B construction (ie. three storeys or higher, and for some buildings, two storeys or higher); and
• for which a building development approval was given after 1 January 1994 but before 1 October 2018 to either build the building or alter the cladding on the building; and
• that is privately owned (ie. more than a 50% private interest).

By 29 March 2019, owners of private buildings were required to register and complete Part 1 of a combustible cladding checklist. Part 1 of the checklist comprised four, broad questions to determine if the building is in Classes 2–9, its approximate size and what materials have been used on the outside of the building. Almost 14,000 private building combustible cladding assessments were completed and cleared in Part 1 of the checklist.

While 13,715 registrants completed the audit with no costs incurred, 5,026 owners of private buildings must now complete the following further steps:

• by 31 July 2019, engage a "building industry professional" to obtain a "building industry professional statement", then complete Part 2 of the combustible cladding checklist. Part 2 of the checklist is more complex and is designed to determine whether the building is of type A or B construction and whether the building has any external combustible cladding in its construction;
• by 31 October 2019, engage a registered fire engineer to prepare a "building fire safety risk assessment" stating whether the building has combustible cladding and obtain a "fire engineer statement" and, if the building has combustible cladding, display a conspicuous notice to that effect; and
• by 3 May 2021, complete Part 3 of the combustible cladding checklist. Part 3 of the checklist determines whether the building has an approved performance-based solution to address fire spread in the external wall assembly, whether test data has been obtained to assess the combustibility of the cladding material and whether the cladding will likely require rectification to prevent the spread of fire.

There are penalties for non-compliance with the process, ranging up to $21,540.75 for failure to complete Part 3.

Further, section 16ZM of the Cladding Regulation provides that the QBCC may, if it reasonably believes there is an immediate risk of serious injury, give a building owner notice that they must comply with the above requirements within a stated period, which may be shorter than would ordinarily apply.

Chain of responsibility amendments to QBCC Act

The Building and Construction Legislation (Non-conforming Building Products – Chain of Responsibility and Other Matters) Amendment Act 2017 (Qld) (Chain of Responsibility Act), which commenced on 1 November 2017, amended the QBCC Act to:

• impose additional, non-transferable, duties on persons in the supply chain for building products, being designers, manufacturers, importers, suppliers and installers. The primary duty is to ensure, so far as "reasonably practicable", the product is not a non-conforming building product for an intended use. A product will be non-conforming if it is not or will not be safe, or does not or will not comply with regulatory provisions. "Reasonably practicable" is defined by reference to, among other things, the availability and suitability of rectification, including whether the cost associated with rectification is grossly disproportionate to the risk;
• impose duties on "executive officers" of companies to exercise due diligence to ensure the company complies with its duties. This means a director, secretary or a person who is concerned with, or takes part in, the company's management regardless of position. Failure to exercise such due diligence may attract penalties of up to $130,550. An executive officer may be prosecuted and convicted of an offence regardless of whether the company has been prosecuted;
• broaden the compliance and enforcement powers of the QBCC. In particular, whereas the QBCC's powers were previously focused mainly on regulating building industry professionals and active building sites, the QBCC's powers in respect of non-compliant cladding have been expanded to regulation of building products used by all persons in the supply chain;
• enable the relevant Minister to order a person in the supply chain to recall a stated building product from use, whether or not that product has already been, or is proposed to be, incorporated into a building;
• enable inspectors to enter buildings and take for examination a sample of a building product and grant power to the QBCC to have that sample tested; and
• grant power to inspectors to direct the person in control of a building that contains combustible cladding to take any action the inspector considers necessary to remove or minimise the risk, including rectification works. Where such a direction is not complied with, an inspector may take any remedial action the inspector believes reasonable to remove or minimise the risk and the QBCC may recover, as a debt, the reasonable costs of any remedial action from the person to whom the direction was, or could have been, given.

Building Code of Australia

The BCA, which has legal effect in Queensland pursuant to the Building Act 1975 (Qld), stipulates that:

• all building products and materials must be "fit for purpose";
• for the acceptance of design and construction, evidence of suitability must be established to demonstrate that a material, design or construction meets all relevant "Performance Requirements" or "Deemed-to-Satisfy Provisions"; and
• in the case of Performance Requirement CP2, a building must have elements that will avoid the spread of fire in a building and between buildings. Deemed-to-Satisfy Provision C1.9 provides that this requirement can be met, in part, by use of non-combustible external walls. Combustible material includes material deemed to be combustible by Australian Standard 1530.1-1994.

Trade practices legislation

The Australian Consumer Law (ACL) imposes various guarantees relating to the supply of goods to a "consumer", including that the goods are of acceptable quality and are reasonably fit for any disclosed purpose. Goods are taken to be supplied to a consumer even if they are affixed to land or premises at the time of the supply.

A person will be a "consumer" if the amount paid or payable for the goods is no more than $40,000, or the goods were of a kind ordinarily acquired for personal, domestic or household use or consumption. A consumer may apply for a failure to comply with a guarantee to be remedied and may recover for loss or damage if it was reasonably foreseeable that the consumer would suffer such loss or damage as a result of such a failure.

Further, any "affected person" may recover damages from the "manufacturer" of goods if the guarantee that the goods are of acceptable quality is not complied with. In this context, an "affected person" extends beyond a consumer to include a person who:

• acquires the goods from the consumer, other than for the purpose of re-supply; or
• derives title to the goods through or under the consumer.

A "manufacturer" includes an importer if the manufacturer does not have a place of business in Australia.

The applicant in the Alucobond PE class action is an owners corporation of a residential apartment building and has claimed against the German manufacturer and Australian importer on the basis the applicant is a consumer or alternatively a person who acquired the cladding from, or derives title to the cladding from, the consumer to whom the goods were supplied (being the prior owner and developer of the building).

The ACL also prohibits misleading or deceptive conduct by any person in trade or commerce. This action is not restricted to consumers.

Depending on when the relevant acts or omissions occurred, the former Trade Practices Act may instead be relevant.

As noted above in relation to the discussion of the Domestic Building Contracts Act 1995 (Vic), State building legislation may also imply warranties into domestic building contracts.

Customs legislation

In respect of imported cladding products, the Senate Committee recommended on 6 September 2017 that the Australian Government implement a total ban on the importation, sale and use of PE core ACPs as a matter of urgency. In February 2018, the Australian Government rejected the recommendation as "neither effective or practical". A Bill to ban the import of PE core ACPs lapsed at the end of Parliament on 1 July 2019.

Further to the discussion at "Chain of Responsibility Amendments to QBCC Act" above, the QBCC may seek to use against importers its investigative and enforcement powers in relation to persons in the supply chain.

Legal basis – common law

In addition to legislation, prospective defendants are exposed to claims based on common law duties, most likely in tort for negligence or for breach of contract.

Negligence

Any claim in negligence will depend upon the following three basic elements:

• the existence of a duty of care owed by the defendant to the claimant;
• a breach by the defendant of the standard of care applicable to that duty of care; and
• damage to the claimant caused by the breach of duty.

Negligence – property owners

Property owners will generally owe a duty of care to occupiers and entrants. This applies to both owners of a "private building" (who will be subject to the Cladding Regulation process) and owners of other buildings (eg. public buildings and houses).

The applicable standard of care is reasonable care. This standard will not be met merely because the owner of a private building has complied with the Cladding Regulation process (or other regulations), or because another owner is not subject to the Cladding Regulation.

In Queensland, the question of whether or not a defendant has breached its obligation of reasonable care will generally be governed by sections 9 and 10 of the Civil Liability Act 2003 (Qld) (CLA). Those sections provide, in essence, that a person does not breach a duty of care to protect against a risk unless the risk was foreseeable, not insignificant, and in the circumstances, a reasonable person would have taken precautions. This is a similar, but not equivalent, test to the "reasonably practicable" criterion in the Chain of Responsibility Act (see the discussion above at "Chain of Responsibility Amendments to QBCC Act").

Clearly, risks associated with combustible cladding are both foreseeable and significant. The key question is likely to be whether a reasonable person would have taken precautions. That depends on the facts, but in general:

• property owners are not invariably obliged to ensure that no harm befalls occupiers or entrants, to make the building as safe as possible or even to improve the safety of the building;
• that said, if:
• it is relatively inexpensive for an owner to ascertain whether or not a building has combustible cladding, the owner is probably duty-bound to do so (even if they are not subject to the Cladding Regulation process and, if they are subject to the Cladding Regulation process, potentially more quickly than that process requires); and
• combustible cladding is known or discovered in the building, the owner should ascertain:
• the magnitude of the risks and the degree of the probability of their occurrence, and balance that against the expense, difficulty and inconvenience of rectifying the cladding, and any other conflicting responsibilities the owner has; and
• whether there are other relatively inexpensive steps the owner can take to mitigate the risk, for example, warning of the risk (noting that in any event, if it is a "private building" the owner will have a statutory obligation to do so), ensuring that fire warning and protection systems and evacuation plans are effective and maintained, and ensuring that other risk issues such as those referred to in "Factual basis" above are managed. Of course, because no system of warning, maintenance and inspection will eliminate all risk (and the more intensive, the more costly and intrusive it will be), such measures alone may be insufficient to meet the applicable standard of care.

Property owners should be mindful that unless such risk assessments are undertaken subject to a valid claim for legal professional privilege, the report and associated documents will be disclosable in any subsequent litigation and may be used by potential claimants to support their claim.

Likewise, if property owners undertake a proper risk assessment and balancing exercise as described above, that is likely to be powerful evidence that they have discharged any duty of care owed in respect of such combustible cladding risks which subsequently materialise.

If a property owner:

• is ordered to rectify combustible cladding;
• determines that it is duty-bound to do so; or
• is compelled to do so by the unavailability of affordable insurance (addressed in Part IV below),

the question turns to whether another person is liable to pay that cost.

Negligence – supply chain and construction process

In a pure economic loss case such as a claim for the costs of rectifying combustible cladding (or for loss of value of the building), it may be difficult to establish the existence of a duty of care. In Brookfield Multiplex Ltd v Owners – Strata Plan No 61288, the High Court observed that in a pure economic loss case, a building practitioner only owes a duty of care to a subsequent purchaser who relies on the practitioner or is unable to protect themselves from suffering the loss. The High Court dismissed a claim by the owners corporation, which was, in effect, a subsequent purchaser from the developer, against the design and construct contractor for the costs of defects rectification because the owners corporation had the ability to protect itself by contract, which meant that it was not vulnerable and no duty was owed to it by the design and construct contractor.

Presumably because of such difficulties, the applicant in the Alucobond PE class action has claimed only against the manufacturer and importer under trade practices legislation.

However, in cases where there is a fire causing property damage and personal injury, claims are likely to involve multiple parties across the supply chain and construction process, such as in the Lacrosse litigation. In respect of claims for property damage or economic loss for damages arising from a breach of duty of care,[5] the CLA contains a proportionate liability regime which limits the liability of a defendant who is one of two or more persons whose acts or omissions independently caused the loss or damage the subject of the claim (referred to in the CLA as "concurrent wrongdoers") to an amount reflecting the proportion of the damage the court considers just, having regard to the extent of that defendant's responsibility (as was done by the tribunal in the Lacrosse case). In Queensland, it is not possible to contract out of that proportionate liability regime.

As demonstrated by the Lacrosse case, any apportionment exercise will be highly fact dependent. Further, in practice such exercise is likely to be very difficult, in particular having regard to:

• the complexity of the (current and historical) legislative and regulatory overlay and in particular, how that influences the issue of breach of duty and responsibility as between concurrent wrongdoers;
• the degree of knowledge (actual and constructive) of each concurrent wrongdoer. This will be complicated where there has been false or misleading conduct, or product substitution, in the supply chain. For example, compliance documents may be difficult or impossible to verify for imported goods. Further, in the Grenfell Tower case, it was reported that in 2012 an architect recommended that non-combustible cladding be used, but during the refurbishment works in 2016, cladding was changed to a cheaper combustible version;
• the contractual overlay, which may be very complex and influence issues of duty and breach (as demonstrated by the Lacrosse judgment); and
• issues of causation are also likely to be complex, for example, determining the extent to which combustible cladding caused or contributed to loss or damage in the event of a fire that was not initially caused by the cladding and may have been accelerated by other sources.

A claimant may also have their damages reduced for contributory negligence. For example, an owners corporation claimant may have its damages reduced if deficiencies in a fire warning and protection system contributed to the extent of loss or damage caused by a fire.

There may be claims which are not subject to the proportionate liability regime, if the damages do not arise from a breach of duty of care or if the claim is for personal injury. In such cases, liability will generally be joint and several, meaning that the claimant may elect to pursue the defendant with the deepest pockets.

Further, in claims subject to the proportionate liability regime, a concurrent wrongdoer who has contravened the ACL prohibition against misleading and deceptive conduct will be severally liable for the damages awarded against any other concurrent wrongdoer.^[6]

For manufacturers and suppliers, it is established they owe a continuing duty to purchasers and foreseeable users to take reasonable care to prevent a product from causing harm, including after the product is sold, and failure to recall a product that causes harm may amount to negligence.

Lastly, both potential claimants and defendants will need to consider carefully at the outset any applicable limitation periods. A "wait and see" approach may not be appropriate due to the limitation periods that may apply, or for property owners if they will be found to have had a common law duty to rectify cladding more quickly than the regulations dictate.

Insurance considerations

Property owners and lessees

Property owners will typically hold or be insured by:

• first-party property insurance or industrial special risks insurance (building insurance), covering the owner for damage to building and possibly business interruption loss consequent upon such damage; and
• public liability insurance (liability insurance), covering personal injury or property damage suffered by third parties.

Usually, these policies of insurance will not respond to costs of rectifying combustible cladding, or loss of value, where there has been no property damage to the building (exceptions may be where the building insurance policy covers defects rectification or where there is applicable "mitigation" cover for costs incurred to prevent loss or damage). Accordingly, property owners who are required to rectify defective cladding are unlikely to be insured and will be liable to foot the bill or claim against third parties which, given the impediments to establishing a duty of care in pure economic loss cases noted in "Negligence – supply chain and construction process" above, will be complex and, in some cases, may not be possible.

In the event of a fire and damage to property or personal injury, although building insurance will generally cover the owner for damage to the building, and liability insurance will generally cover personal injury or property damage suffered by third parties, insurers are very conscious of the combustible cladding issue and are taking steps to reduce their risk, including applying exclusions. IAG Australia delivered a submission to the Senate Committee on 21 July 2017 identifying that:

• the use of combustible cladding placed upward pressure on premium cost for consumers;
• non-compliance was a hidden risk and there were gaps in regulation and compliance; and
• if it could not accurately assess risk, uncertainty results in sub-optimal outcomes for customers and insurers.

In practical terms, property owners will need to consider the following:

• if the owner knows the building has combustible cladding, it is highly likely that fact will need to be disclosed to the building and liability insurers before entry into the policies, in accordance with the duty of disclosure imposed by the Insurance Contracts Act 1984 (Cth) (ICA);
• if there is non-disclosure, and a relevant claim is later made, the insurers are likely to seek to reduce their liability or potentially avoid the claim in accordance with section 28 of the ICA; and
• if there is disclosure and no accompanying compelling explanation that the risks are adequately managed, or if the insurers are not satisfied with the disclosure or that explanation, the insurers may impose exclusions in respect of any damage or liability caused by the combustible cladding, or seek to increase the premium, perhaps to a point where it is uneconomical to insure (which may cause owners to breach statutory requirements, contractual provisions or mortgage covenants requiring the insurances to be held).

Lessees who are obliged to effect and maintain relevant insurance on behalf of the lessor may confront similar issues, which may cause them to breach the terms of the lease.

Professional service providers

Building professionals will typically hold (and often will be required by legislation or contract to hold) professional indemnity (PI) insurance covering claims for breach of professional duty.

Like property owners, professionals involved in the supply chain or building and construction process may be confronted with rising premiums and potential uninsurability of risks associated with combustible cladding, particularly risks which they cannot satisfy their prospective insurer have been adequately managed. The Lacrosse judgment heightens those risks.

Professionals will need to consider the following:

• if they know buildings in respect of which they have performed work have combustible cladding, it is highly likely that will need to be disclosed to their PI insurer before entry into the policy in accordance with the duty of disclosure imposed by the ICA;
• if there is non-disclosure, and a relevant claim is later made, the insurers are highly likely to seek to reduce their liability or potentially avoid the claim in accordance with section 28 of the ICA;
• if there is disclosure and no accompanying compelling explanation that the risks have been adequately managed, or if the insurers are not satisfied with the disclosure or that explanation, the insurers may impose exclusions in respect of any liability caused by the combustible cladding or seek to increase the premium, perhaps to a point where it is uneconomical to insure (which may cause professionals to breach statutory requirements or contractual provisions requiring the insurances to be held); and
• as PI policies are "claims made" or "claims made and notified" policies, it is the policy in place when the claim is made against the insured, rather than the policy in place when the event or underlying conduct occurred, that must respond to a claim. This will not assist the professional if their insurer has imposed a cladding exclusion. This is the way "claims made" policies operate, unless, before the claim is made, the insured gave the insurer a valid notification of facts or circumstances which had the potential to give rise to a claim. If that is done, then the policy that will respond to the claim is the policy in place at the time the notification was given to the insurer, rather than the policy in place at the time the claim is made against the insured. It follows that:
• if insurers intend to impose a partial or total exclusion on the incoming policy, the insured should, to the extent possible, give a matching and effective circumstances notification under the expiring PI policy; and
• in any event, if practical, professionals may like to consider whether to give a comprehensive notification of known facts and circumstances under their existing PI policy to reduce the risk that the insurer of a subsequent policy will assert non-disclosure.

For the same reasons, parties (eg. property owners) with valid potential claims against professionals (ie. those who may hold PI insurance) in respect of known cladding issues may consider putting those professionals on notice now so that the professionals can notify their PI insurers and trigger their insurance now and before the insurers impose a cladding exclusion.

Other potential defendants

Property valuers may be exposed to claims for negligent overvaluation of buildings with combustible cladding, and should also consider the implications for their PI insurance, which are similar to those for other professionals above (and parties with valid potential claims against property valuers may consider putting them on notice).

Entities whose directors and officers may be exposed to executive officer liability under the Chain of Responsibility Act should ensure there is cover under directors and officers insurance or statutory liability insurance for penalties that may be imposed under that Act and costs of defending associated enforcement proceedings.

Those involved in the product supply chain should consider the implications for their product liability and product recall insurance.

Listed entities should consider the adequacy of their insurance cover for shareholder claims (both for the company and its directors and officers). In the United States, a shareholder class action was brought in 2017 against a New York-based cladding manufacturer associated with the Grenfell Tower fire alleging that the company knew the ACPs had a combustible core and that the company failed to properly disclose the information.

Conclusion

Property owners and prospective defendants are exposed to civil causes of action in respect of combustible cladding, separately to their regulatory compliance obligations.

For property owners with combustible cladding exposures, it is preferable to get on the front foot now, before an event occurs or a claim is made, and assess whether the owner will be duty-bound to rectify combustible cladding or to take other, less expensive steps to mitigate the risks, regardless of what the Cladding Regulation may require.

If the owner determines that it should rectify combustible cladding, or is ordered to do so, the question shifts to whether there are rights of recovery against a third party. Because of the difficulty associated with pure economic loss cases in tort, and as indicated by the Alucobond PE class action, the better claims may be in respect of warranties implied by trade practices legislation or building legislation, but relevant warranties are likely to apply only in respect of certain residential buildings. Alternatively, if there is a fire causing property damage, claims are likely to be complicated by the proportionate liability regime and an array of parties seeking to apportion blame to one another.

The legal liability assessment goes hand in hand with insurance considerations for property owners, who will need to carefully consider:

• what must be done to comply with their duty of disclosure and convince the owners' first-party property and third-party liability insurers that the owners' combustible cladding exposures are being adequately managed, failing which that cover may be excluded, limited or significantly more expensive; and
• whether to put third parties (in the supply chain or construction process) who may hold PI insurance in relation to those exposures on notice of potential claims so they can trigger their insurance before exclusions are applied.

Professionals need to separately consider their combustible cladding exposures and what must be done to comply with their duty of disclosure, as well as developing a comprehensive notification of facts and circumstances which can be given to trigger existing policies, particularly in the event that incoming or subsequent insurers seek to impose a total or partial exclusion for combustible cladding liabilities. That risk is heightened by the recent judgment in the Lacrosse case.

This article was first published in (2019) 35 Building & Construction Law Journal 91.

^[1] Similar warranties are implied into domestic building contracts in Queensland pursuant to the Queensland Building and Construction Commission Act 1991 (Qld), and apply to all domestic building contracts for work associated with a single detached dwelling or duplex not intended to be used only for business or farming purposes. ^{Back to article}

^[2] In Queensland, the proportionate liability regime is set out in the Civil Liability Act 2003 (Qld) Ch 2 Pt 2, and cannot be contracted out of.^{Back to article}

^[3] Victorian Cladding Taskforce, n 3. ^{Back to article}

^[4] In the Lacrosse case, the building surveyor alleged, but later abandoned the claim, that the owners corporation was at fault for failing to identify that balconies were used for storage. ^{Back to article}

^[5] This does not include personal injury, which will generally be subject to the Personal Injuries Proceedings Act 2002 (Qld). ^{Back to article}

^[6] Civil Liability Act 2003 (Qld) section 32F. ^{Back to article}