Court of Appeal decision clarifies its approach in combustible cladding claims

Case note: Owners SP 92450 v JKN Para 1 Pty Limited [2023] NSWCA 114

On appeal from the NSW Supreme Court, the Court of Appeal has put the onus firmly back on builders and developers to demonstrate that loss measured by the cost of full removal and replacement of non-compliant cladding is unreasonable.

Facts

The appellant is the Owners Corporation of a 28-storey building in Parramatta, constructed by the Respondents. Aluminium composite panels (ACPs) were used to clad the exterior of the building. The ACPs contained more than 30% polyethylene.

The Owners Corporation contended that the ACPs were combustible and did not comply with the Building Code of Australia (BCA) and therefore constituted a breach of the statutory warranties under section 18B of the Home Building Act 1989 (NSW) (HBA).

The Respondents accepted that the ACPs did not comply with the Deemed-to-Satisfy (DtS) provisions of the BCA and the main issue in dispute at first instance was whether the ACPs were otherwise compliant with the BCA by way of an alternative solution.

First instance decision

The Court found that the ACPs did not comply with the DtS provisions and were also not compliant by way of an alternative solution.

However, this did not assist the Owners Corporation in obtaining substantive relief as the Court found that it had failed to establish that an alternative solution was unavailable either prior to the construction certificate being issued or in its evidence and, accordingly, no breach of the BCA or the statutory warranty at section 18B(1)(c) was made out. The Court also found that the Owners Corporation had not established a breach of the statutory warranties at 18B(1)(b) and (e) because it had not raised evidence demonstrating the combustibility of the ACPs to the AS1530.1 standard.

For an in-depth summary of the first instance decision, see our previous case note.

Appeal decision

The main issues on appeal were whether the primary judge erred in:

1. finding no breach of s 18B(1)(c) of the HBA had been established by the installation of the ACPs on the building; and
2. declining to award reinstatement damages on the basis that the Owners Corporation had not established that an alternative solution "could not then or now be performed".

As to the first issue, which was conceded by the Respondents, the Court confirmed that because the ACPs did not comply with the DtS provisions and no alternative solution was prepared by the Respondents prior to the issue of a construction certificate, there was a breach of the BCA and the statutory warranty at section 18B(1)(c).

As to the second issue, the Court accepted that the burden of proof for establishing loss lies on a claimant. However, the Court helpfully summarised the authorities which make clear that the party in breach of contract (in this case, the Respondents) has the evidentiary onus of displacing the prima facie rule for assessing damages as the cost of reinstatement, by showing that reinstatement would be unreasonable.

Contrary to what was submitted by the Respondents, the Court found that "compliance with the performance requirements of the BCA does not distinguish between substantive and purely formal breach[es]". Having established that the Respondents did not comply with the BCA and breached the statutory warranty at section 18B(1)(c) of the HBA, the Court found that the Owners Corporation was not required to go further and it was a matter for the Respondents to produce evidence that an alternative solution was available prior to the issue of a construction certificate, or alternatively was now available. As a result, the Court found that the Respondents did not discharge the evidentiary onus of establishing that the costs of rectification (in this case full removal and replacement of the ACPs) would be unreasonable.

The Court allowed the appeal and ordered the Respondents to pay the reasonable cost of removal and replacement of the ACPs with cladding which is non-combustible within the meaning of that term in the BCA.

Implications for industry

This decision is helpful for parties involved in cladding litigation as well as their legal representatives and experts as it provides greater clarity and practical guidance on what evidence those parties will need to produce. The costs for respondents and their insurers in preparing evidence of the type envisaged by this decision (involving preparation of a full alternative solution) are likely to be very high and it is yet to be seen whether there are practical barriers (such as establishing that the alternative solution would satisfy the certifying authority or Fire Commissioner) to such evidence being produced.

For more information on the implications of this decision for building practitioners and their insurers, please contact a member of our team.

Photo by Leon Baldry on Unsplash.