The New South Wales Court of Appeal, in Owners SP 92450 v JKN Para 1 Pty Limited, has found that the builder or developer bears the burden of establishing that the cost to remove and replace non-compliant aluminium composite panel (ACP) cladding is unreasonable.
The Plaintiff (Owners Corporation) was the Owners Corporation of a 28-storey residential and commercial tower in Parramatta (Building). The Owners Corporation brought proceedings against the developer and builder on the basis that by installing the ACPs they had breached the statutory warranties under the Home Building Act 1989 (NSW) (Home Building Act) because:
- the cladding did not comply with the Home Building Act or ‘any other law’ – this included the Building Code of Australia (BCA);
- the cladding was not ‘good and suitable material’ because it was combustible; and
- the apartments in the Building were not reasonably fit for occupation because they were combustible.
The BCA is a ‘performance-based’ building code. Each section of the BCA has minimum mandatory levels of compliance. The BCA provides two pathways for compliance that can be utilised separately or in combination, being through the ‘Deemed to Satisfy’ (DtS) pathway or the ‘alternative solution’ pathway (ie by formulating an alternative solution that complies with the BCA requirements for fire resistance).
Relevant to this matter, the BCA provides that the material used in the construction of an external wall must be ‘non‑combustible’. This means that the materials need to be either tested to AS1530.1:1994 (DtS provisions) or certified as compliant using the ‘alternative solution’ pathway.
First instance decision
The trial judge found that ACP cladding did not comply with the DtS provisions of the BCA and had not complied by way of an ‘alternative solution’ as no alternative solution report was prepared by a fire engineer prior to the issuing of a construction certificate.
However, the Court refused to award reinstatement damages on the basis that the Owners Corporation had failed to demonstrate that an ‘alternative solution’ was either not available now, or at the time of construction (such that reinstatement damages were appropriate).
The Court also found no breaches of the other Home Building Act warranties identified above because the Owners Corporation had not established that:
- the cladding was not ‘good and suitable’ for its intended purpose (because it was not demonstrated that the cladding was combustible). This was even though the ACP cladding had since become a banned product under the BCA; and
- the apartments in the Building were not reasonably fit for occupation (although this was later conceded by the builder and developer, on appeal).
Critical to this finding was that the Owners Corporation had failed to obtain evidence to show the rate of combustibility of the ACP cladding and the extent of any risk that fire would spread across the exterior of the Building or adversely impact its exit by reason of the use of ACPs.
Court of Appeal decision
The Court of Appeal overturned the first instance decision.
It was held that establishing that the cladding was non-compliant through the DtS provisions, and no ‘alternative solution’ pathway was prepared, was enough for the Owners Corporation to show non-compliance with the BCA.
Importantly, the Court also awarded reinstatement damages and found that it was not necessary for the Owners Corporation to demonstrate that an ‘alternative solution’ was not available. While the Owners Corporation bore the burden of proof to show the cladding was non-compliant, from a damages perspective, the builder and developer had the onus of establishing that the cost of reinstatement would be unreasonable. As the Respondents had not discharged this evidentiary onus, the Owners Corporation was entitled to the costs of rectification.
The decision provides helpful clarification:
- on the requirements for a plaintiff to establish a breach of the BCA in combustible cladding cases; and
- that defendant builders and developers (not owners) will have the onus of establishing that the cost of reinstatement of ACP cladding would be unreasonable if a BCA breach is established.
While construction professionals and their insurers may be initially perturbed by the implications of the decision, there is a clear benefit in having specific guidance on the evidentiary burdens and hurdles involved in combustible cladding cases. This clarity may serve to assist building professionals and their insurers to:
- accurately assess exposure when claims arise, at an earlier stage, and make more informed judgments on appropriate settlement ranges; and
- if there is a plausible argument that rectification costs are unreasonable; prepare more specific and tailored evidence, to support that position (and therefore streamline evidence preparation costs).