Supreme Court Judgment highlights obligations for building owners and strata plans regarding non compliant cladding

Construction of buildings, particularly multi-story mixed residential and commercial buildings, is a complex process involving many contributors. Cladding cases have become more common in the wake of the 2017 Grenfell Tower fire that occurred in London. This catastrophic event and other building fires that have occurred in the Middle-East, Europe and Australia resulted in bans on cladding made from polyethylene core composite aluminium (known as ACPs) by various governments around the world. This in turn has led to an uptick in litigation involving buildings that are clad with that type of panel: it has caused implications for policyholders and insurers generally.

Often enough cases brought in the Supreme Court are premised on a breach of the Home Building Act 1989 (NSW). That Act applies to residential building works and implies a number of statutory warranties in every contract for such works. Examples of such statutory warranties include that all materials supplied by the holder or person will be good and suitable for the purpose for which they are used and that works will comply with the Building Code of Australia (BCA).

In the recent decision of Strata Plan 92450 v JKN Para 1 Pty Ltd & Toplace Pty Ltd [2022] NSWSC 958 allegations were made that polyethylene-aluminium composite cladding, which in fact have been banned under recent legislation, posed an unacceptable fire risk. The product had been installed before the product ban was implemented so the question was whether the cladding complied with the BCA at the relevant time.

In the JKN case, the Supreme Court has sent a strong reminder of the necessity to obtain robust evidence in order to prove that a particular product is defective and that an “alternative solution” cannot be implemented that remedies the issue.

In this instance, the plaintiff failed to obtain expert evidence that proved that the particular ACP product used was “combustible” as that term is defined in the BCA. The expert called in favour of the Strata’s case had assumed that two different products were the same, one of which was proven to have been combustible by CSIRO – the other not. The product used on the building was not the same product upon which the expert report or the CSIRO findings were premised.

The plaintiff Strata also failed to prove that an “alternative solution” was not available – the burden being on it to prove its case rather than the developer/builder needing to prove that an alternative solution was available. For the above reasons the plaintiff’s case failed.

It follows, the case establishes that it is unreasonable to force a developer or builder to go to the cost and expense to remediate an entire building and reclad it if the material cladding the building is either not a risk or, if it is a risk, a cheaper but equally effective method could be employed to remove or reduce that risk – in this case the availability of an alternative solution that would ensure the cladding performed within the applicable fire safety standards.

Needless to say, litigation of the above type is expensive to defend and can be complex in terms of establishing or refuting any particular defect. The insurance market has introduced various exclusions attempting to exclude coverage, particularly under professional indemnity policies for non-compliant cladding. Public and product liability policies are rather restrictive (without bespoke endorsement) if intended to respond to claims for remediation, of non-compliant cladding. The strata insurers ordinarily will not cover such losses as there is no “damage”. Furthermore, there is a preference for insurers to reduce or remove their participation on buildings with any ACP fixed to the external façade of the building. Insurers will generally specifically request any information in relation to ACP as part of renewal disclosure and prior to issuing terms. If they continue to provide cover they will want a specific plan and timeline for the removal and replacement of any non compliant cladding products.

It is important for any building owners to understand their exposure in relation to cladding and have an active strategy and plan to rectify any non compliant building issues. Insurers are unlikely to continue to provide cover or are likely to seek significant price increases where no such plan exists, as their reinsurance providers are unwilling to be exposed to losses arising from ACP.

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