Councils regularly engage in the delivery of construction projects, including new buildings, fitouts and rectification following damage. Such projects often see council entering into contracts with professional consultants such as architects and building surveyors.

The recent Lacrosse tower decision contains a number of salient reminders for councils in such situations.

Background

In November 2014, the 23-storey mixed-use Lacrosse tower in Docklands, Victoria caught fire after Jean-Francois Gubitta, a resident of the building, left a smouldering cigarette butt in a plastic food container on a level 8 balcony.

By the time the first fire crew arrived, the fire was travelling rapidly up the external wall cladding and spreading onto the balcony on each level. The fire had already climbed to level 14 and a few minutes later reached the top of the building. About 500 residents had to be evacuated.

How the fire spread so quickly and so far became the subject of a Fire and Emergency Services Board Post Incident Analysis Report and, unsurprisingly, subsequent litigation.

Cause of fire

In its post-fire report, the FESB found that Alucobest brand aluminium composite panels (ACPs) on the external façade of the building had contributed to the spread of the fire.

Following the report, the Municipal Building Surveyor, City of Melbourne directed the Lacrosse Owners Corporations to replace Building Code of Australia (BCA) non-compliant cladding with compliant non-combustible cladding.

The Owner's Corporations and the individual owners of the affected lots (together Owners) then commenced proceedings in the Victorian Civil and Administrative Tribunal (VCAT) against the builder (LU Simon) for the recovery of current and anticipated future losses exceeding $12 million.

The building surveyor (certifier), the architect, the fire engineer, the Superintendent, the occupier (lessee) of Apartment 805 and Mr Gubitta were later joined to the proceedings.

The Decision

On 28 February 2019, at the end of a 22-day trial involving 91 volumes of Tribunal books and evidence from seven lay witnesses and 13 expert witnesses, Judge Woodward of the Victorian Civil and Administrative Tribunal (VCAT) handed down his decision in the case.

The judge found that Chinese-sourced ACPs used on the building's facade, which had a 100% polyethylene core, were combustible within the meaning of the BCA and in accordance with the test prescribed in AS3530.1.

He stated that 'the polyethylene core has a calorific value of 44MJ/kg, which is similar to petrol, diesel and propane' and that 'the use of an ACP with a 100% polyethylene core as part of the external walls of the Lacrosse tower was primarily responsible for causing the spread of fire up the side of the building'.?1

The judge determined that:

  • the external cladding specified in the original design (Alucobond) failed to comply with the deemed-to-satisfy provisions of the BCA
  • the external cladding actually installed (Alucobest) also failed to comply with the BCA (it was also combustible within the meaning of the BCA)
  • the builder breached the implied warranties of suitability of materials, fitness for purpose and compliance with the Code as set out in the Victorian Domestic Building Contracts Act
  • these implied warranties run with the building, so the Owners were allowed to bring proceedings against the builder
  • the builder was liable for breach of contract to the Owners.

Judge Woodward ruled that the builder was liable for damages and ordered it to pay the Owners $5,748,233 for the replacement cost of the non-compliant combustible cladding. Judge Woodward then looked at the consultancy agreements entered into between the builder and a number of the consultants involved in the delivery. He ordered the building surveyor, the architect and the fire engineer to proportionately reimburse the builder for their respective failure to exercise due care and skill in the selection, approval and installation of the cladding, which amounted to a breach of their respective consultancy agreements.

Each was found to be a concurrent wrongdoer and the damages payable by the builder to the Owners was reimbursable by the consultants (and Mr Gubitta) apportioned as follows:

  1. building surveyor - 33%

    • failed to exercise due care and skill in issuing the building permit which approved the architect's specification of ACPs "indicative to Alucobond"
    • failed to notice and query the incomplete description of the cladding system in the fire engineering report

  1. architect - 25%

    • failed to exercise due care and skill in failing to remedy defects in its design and to ensure that the ACP sample provided by the builder was compliant with its own design intent articulated in the specification and the BCA

  1. fire engineer - 39%

    • failed to conduct a full engineering assessment
    • failed to recognise that the ACP's proposed did not comply with the BCA
    • failed to warn the builder and other consultants of that fact

  1. Mr Gubitta - 3%

What can councils take away from this?

Resist caps on consultant's liability

Consultants often propose caps on their liability, frequently linking the cap to the consultancy fee payable. For example, if the fee is $100,000, the consultant may propose a liability cap of exactly that amount or a multiple thereof.

But the fee is often a poor proxy for the quantum of loss that a consultant can actually cause.

Case in point: In the Lacrosse tower case, the fire engineer's consultancy fee was $33,500 + GST. Its liability, however, was over $2.2 million.

At the very least, any cap on liability should exclude liability recoverable under a policy of insurance.

Consider adequacy of professional indemnity insurance limits

Council should ensure that the building contractor and the consultants maintain adequate levels of liability insurance. In some cases, council should require them to increase their current level of cover, even if the cost of the additional cover increases the contract sum.

Many construction and consultancy agreements give the principal the right to review and approve insurance policies and limits, and to require the consultant to provide evidence of the currency of insurance throughout the project.

Does your council have appropriate procedures to ensure your risk officers review consultants' insurance policies and require evidence of currency at least once a year? If not, we suggest you put such procedures in place.

Obtain 'fitness for purpose' warranties

Construction and consultancy agreements entered into by Council should provide a range of contractual warranties for council's protection.

In the Lacrosse case, the builder was found to have breached statutory warranties of suitability of materials, compliance with the law, and fitness for purpose implied in the construction contract by the Domestic Building Contracts Act 1995 (VIC).

In NSW similar statutory warranties are implied in all contracts for 'residential building work' by the Home Building Act 1989. However, as councils are rarely involved in residential building work they should ensure that relevant warranties are expressly provided for in the contracts they enter into.

Understand the scope of the services and contractual obligations

It is apparent from the judgement in the Lacrosse case that the consultants misunderstood the full nature of their contractual obligations; the fire engineer, Thomas Nicolas, fundamentally so.

Just as a consultant must fully understand the nature of the services to be provided, so should councils. Functions and obligations agreed to under a contract may be considerably more or less than what might 'usually' be done.

The more accurately councils specify and detail the scope of the services, the less opportunity there is for dispute.

Also, as Judge Woodward cautioned, use template documents carefully. How often does one see contracts with irrelevant clauses carried forward from previous projects?

In the Lacrosse decision, Judge Woodward said about the fire engineer and the 'boiler plate' clauses that were carried forward:

the reason for this apparent disconnect between Mr Nicolas's evidence of what he understood his role to be, compared to the terms of the contract he signed, may have been hinted at by his reference to the use of templates .... It is often the case that diligent and competent professionals blithely reuse standard documents that have served them well over the years, focusing only on those parts that need to be tailored to each job. It is only when something goes wrong and the lawyers become involved, that any real attention is given to how that boilerplate language informs potential liability.

Footnote

1Owners Corporation No's 1, 2 and 3 of PS613436T v LU Simon Pty Ltd & Ors [2019] VCAT 286 at [193]

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.