Form trumps substance as builder escapes liability for fire

In this important case, we discuss the Court of Appeal’s key findings, including what may prove to be the most important and far-reaching element of its decision, namely the determination that it is form, rather than substance, which is critical to determining whether a claim is ‘apportionable’ under the proportionate liability regime.

The background

In February 2019, we reported on the decision of the Victorian Civil and Administrative Tribunal related to a fire which occurred at Melbourne’s Lacrosse residential tower on 24 November 2014. The fire was sparked by a stray cigarette discarded by a French tourist but spread rapidly due the presence of aluminium composite panels (ACPs) used on the façade of the tower. The ACPs had a 100% polyethylene core and were highly combustible. The losses claimed as a result of the fire exceeded $12M.

At first instance His Honour Judge Woodward found that the use of ACPs did not satisfy the Deemed-to-Satisfy (DTS) provisions of the Building Code of Australia (BCA) and that as such, the builder involved in the project had breached warranties implied into the contract by s.8 of the Domestic Building Contracts Act 1995 (Vic) (DBCA).

Judge Woodward found that there was no failure to take reasonable care by the builder in the selection and use of ACPs as the builder had engaged and relied on advice provided by highly skilled professionals. Judge Woodward apportioned liability as follows:

1. Fire engineer - 39%
2. Building surveyor – 33%
3. Architect – 25%
4. French tourist – 3%

The decision on appeal

The VCAT decision was appealed by the building surveyor, architect and fire engineer (collectively referred to as the consultants). The Court of Appeal (CoA) comprised of Justices Beach, Osborn and Stynes considered 11 grounds of appeal. All but one very minor ground of appeal were unsuccessful.

Commentary on the CoA’s decision has largely focused on the following key takeaways:

1. the CoA endorsed the position that the Tribunal was correct in finding that the builder had no liability, because it was entitled to rely on the skill and expertise of the highly skilled professional consultants it had engaged and otherwise confirmed the consultants’ respective exposure;
2. any dispute regarding whether ACPs satisfied the DTS provisions of the BCA have been firmly dismissed; and
3. the building surveyor’s reliance on the peer professional opinion defence was found to be unsuccessful because approving combustible cladding under the DTS provisions of the BCA was unreasonable.

Whilst the above findings are significant, perhaps the most far-reaching element of the decision is the CoA’s finding that certain implied warranties under the DBCA were not apportionable and in particular the determination that it is form, rather than substance which is critical to determining whether a claim is apportionable. We discuss the decision in greater detail below.

Apportionability of the warranties under the DBCA

At first instance the owner applicants (Owners) implemented a strategy whereby they only pursued a claim under the warranties contained in the DBCA, in lieu of pursuing a negligence claim against all parties. This was seemingly done in an effort to avoid the proportionate liability regime under the Wrongs Act 1958 (Vic).

The warranties relied on by the Owners were contained in sections 8(b), (c) and (f) of the DBCA which warranted that the building would be:

• built with materials which were suitable for the purpose for which they are used;
• the building work would comply with the Building Act 1993 and regulations; and
• the building would be fit for the disclosed purpose for which it was built.

Notably, none of those warranties included reasonable care as an element.

On appeal, it was argued that the warranties under the DBCA were apportionable as they necessarily involved a ‘failure to take reasonable care’ as a part of their factual basis.

The CoA firmly rejected that position stating that whether a claim was apportionable will be determined by ‘the terms in which a claim is framed’. In reaching that decision the CoA noted that an interpretation which found that the statutory warranties were apportionable would undermine the purpose and function of the statutory warranties in the DBCA, by enabling a builder to avoid liability by introducing an element of reasonable care to a cause of action, which on its face, does not include failure to take care as an element.

The CoA decision is significant in that it clarifies that Courts prioritise form rather than substance when considering whether a claim is apportionable. In reaching this view, the CoA dismantled what many understood the position in Dartberg Pty Ltd v Wealthcare Financial Planning ¹ to be (i.e. that it was necessary to look beyond the expressly pleaded form of the case).

Liability of the Builder

An issue of significance during the trial at first instance was whether the builder ought to bear some liability given that it selected the particular ACPs product that was used on the building (i.e. Alucobest). The architect had specified the use of a ‘cladding system indicative to Alucobond’. The evidence at trial was that the Alucobond range included products with a 100% polyethylene core such that the experts agreed that the combustibility of the Alucobond product specified would have been equivalent to the Alucobest product which was ultimately used.

On appeal, it was determined that it was appropriate to find that there was no failure to take reasonable care on the part of the builder. The CoA found that the evidence established that, even though the builder had selected the particular ACP product used, it sought and obtained approval to use the Alucobest product from the architect. Further, the CoA endorsed the view that the product used was a substitution of a specified product, which had the same characteristics and was equally likely to have been combustible. In the circumstances, the builder had engaged, and was entitled to rely on the skills and expertise of highly qualified consultants.

Were the DTS provisions of the BCA misinterpreted

The building surveyor contended that the Tribunal had incorrectly determined that the ACPs did not fit within the DTS provisions of the BCA, because the Tribunal incorrectly interpreted the relevant sections of the BCA.

The DTS provisions of the BCA provided that although parts of the product may be combustible, ‘bonded laminate’ materials could be used where combustible materials were required provided that ‘each laminate is non-combustible’.

The building surveyor contended that the ACPs satisfied the requirements of the BCA because the DTS provisions did not require the polyethelene core to be non-combustible because it was a ‘core’, rather than a ‘laminate’. The Tribunal rejected this interpretation of the DTS provisions and found that the clear intention of the BCA was that each layer of the bonded laminate product (excluding the adhesive) was a ‘laminate’, such that the polyethelene core was required to be non-combustible.

On appeal, the CoA concluded that the use of the word ‘laminate’ had been deliberately used to refer to the structural elements of the product, rather than the word ‘layer’, because the adhesive layer and exterior paint were not required to be non-combustible. The CoA observed that the interpretation advanced by the building surveyor lacked logic and did not give effect to the plain meaning of the DTS provisions of the BCA. As such this aspect of the building surveyor’s appeal failed.

Peer professional opinion

At first instance the Tribunal rejected the building surveyor’s peer professional opinion defence, finding that while treating ACPs as satisfying the DTS criteria under the BCA was commonly accepted as competent practice by a significant number of building surveyors, the practice lacked a logical basis and was unreasonable. In finding that the practice was unreasonable Judge Woodward noted:

‘that otherwise experienced and diligent practitioners were beguiled by a longstanding and widespread (but flawed) practice into giving insufficient scrutiny to the rationale for that practice’

Save that the CoA determined that it was the acceptance of the practice, rather than the practice itself which had to be unreasonable, the CoA firmly rejected this ground of appeal finding the criticism of the Tribunal’s decision had no basis.

Implications for you

The CoA’s decision firmly puts to bed the suggestion that the Tribunal misinterpreted the DTS provisions of the BCA, such that it provides a clear direction for future cladding claims. While each case will turn on its own facts, it appears to endorse the Tribunal’s apportionment of liability and provides guidance for future claims of a similar nature, given the judicial authority which comes with a CoA judgement.

Of far greater significance is the impact the decision will have on the current application of the defence of proportionate liability. In particular, the decision confirms that a claimant can avoid the proportionate liability regime by carefully selecting the cause of action it chooses to pursue. It is now clear that sections 8(b), (c) and (f) are not apportionable. However the CoA’s decision is not limited to the implied warranties under the DBCA and will extend to any warranties or indemnities having application to any claim for property damage or economic loss which do not include reasonable care as an element.

Moving forward defendants will need to take particular care to pursue claims for contribution and indemnity wherever there is any ambiguity about whether a claim is apportionable, particularly where statutory warranties directed at consumer protection.

Lawyers and insurers of building professionals alike should now carefully review each of their claims, particularly those involving statutory warranties, and consider whether their litigation strategy needs to be reviewed so as to ensure that they do not miss out on seeking contribution from any potential wrongdoers.

Tenah Merah Pty Ltd v Owners’ Corporation No 1 of PS63436T [2021] VSCA 72.