Cladding recovery claims: Is ADR the solution to avoiding heated litigation?

31 October 2022

As previously reported in June 2020, Cladding Safety Victoria (the body tasked with assisting owners and owners corporations to rectify non-compliant or non-conforming cladding products on buildings), announced it had fast tracked Victorian cladding rectification works in the wake of COVID-19. Those works, funded by CSV, form part of the Victorian Government’s $600 million cladding rectification plan. Notably, associated legislative reforms allow for the Crown to be able to ‘stand in the shoes’ of an owner who receives government funding for rectification works, to bring recovery claims against the builders involved in the installation of non-compliant cladding.

Recently, as a next step in the cladding rectification process, the Victorian Government announced it is proposing to implement Alternative Dispute Resolution (ADR) as a first step to resolving recovery disputes, with a view to limiting the legal costs and reducing the need for prolonged litigation. The Department of Environment, Land, Water and Planning has invited industry feedback on the proposed ADR Scheme Terms which will allow parties to resolve disputes outside of the court system in the first instance. The invitation for feedback will close by 5pm on 31 October 2022.

How does the Proposed ADR Scheme work?

Below is a brief summary of the proposed process set out in the Proposed ADR Scheme Terms which can be viewed in full here.

Importantly, while the ADR Scheme proposes a conciliation process, akin to that adopted at Domestic Building Dispute Resolution Victoria, the proposed ADR Scheme Terms describe the process as a ‘voluntary process’, as opposed to a mandated step, prior to commencing recovery proceedings.

1. Request for Conciliation from the State

  • The State may provide a Builder with written notice of its intention to stand in the shoes of an owner under s 137F of the Building Act 1993 (Vic) and bring a Request for Conciliation.
  • The State would then need to provide written submissions and supporting material, outlining the legal basis for the claims which the Owner has against the Builder.

2. Builders and Subconsultants respond to Request for Conciliation

  • The Builder would then need to respond to the Request for Conciliation within 10 Business Days of receipt of the Request for Conciliation indicating whether it would be willing to participate in the conciliation and responding to each point in the Request. The Builder would need to indicate whether the cladding claim or claims against any Subconsultants may be covered by an insurance policy.
  • The Builder would then be responsible for notifying any Subconsultants and providing them with a ‘without prejudice’ invitation to participate in the ADR Scheme.
  • If a Builder agreed to participate in the conciliation, it would then need to prepare written submissions within 15 business days of receipt of a copy of Request for Conciliation.
  • Subconsultants would also be required to respond within 10 business days on receipt of a copy of the Request for Conciliation and provide submissions (if they agreed to participate in the conciliation process) within 15 business days of receipt of the Builder’s Response to Request for Conciliation.

If the Builder does not agree to participate in the conciliation process, including by taking the steps outlined above, the State may notify a sub-consultant directly and invite that subconsultant to participate in the proposed conciliation.

3. Conciliation

  • A conciliator would then appointed by formal agreement with a view to undertaking conciliation conferences of up to 3 days in duration.
  • After the conciliation process is completed, a conciliator would then issue a written view about the merits of the disputed issues, the likely outcome of litigation between the Participants and a reasonable settlement outcome including proposed financial contributions of any parties.
  • If settlement is not reached, the State has a discretion to commence proceedings.
  • Where a Builder or Subconsultant is not willing to participate in the conciliation process, the parties will need to consider their options including possible litigation.

While in the ‘implementation phase’ of the Scheme it is proposed that, subject to the agreement on a case-by-case basis, the State may fund the conciliator’s fees, room hire, and ‘limited document printing’, with parties to otherwise bear their own costs of the conciliation process.

Benefits and Challenges

In our view, the use of an ADR Scheme is a step in the right direction on the Government’s part with the goal of reducing the costs of litigation and promoting the timely resolution of cladding recovery disputes.

However, the current terms propose tight timeframes that may be difficult to comply with in practice, particularly where expert material is relied upon, given that in our experience, there are presently delays in obtaining expert reports post-COVID-19. This may result in pressure on builders and insurers to turn around material in a short period.

Similarly, the proposed requirement that the Builder outline whether the cladding claim or claims against subconsultants may be covered by an insurance policy, and to invite those insurers to participate in the conciliation process, could pose difficulty. This is particularly so in circumstances where many potential cladding claims have been bulk-notified by builders prior to reforms to the building practitioner insurance ministerial order, and decisions on indemnity may require additional time and information from insureds.

The extent of voluntary uptake of the scheme also remains to be seen. Insurers will need to consider the potential pros and cons of their insureds’ participation noting that should conciliation be unsuccessful, it could result in further costs if litigation is commenced by the State. We look forward to seeing how the terms progress with a review of industry feedback to commence from 31 October 2022 to 15 November 2022.

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