The NSW Court of Appeal recently found in the case of Owners SP 92450 v JKN Para 1 Pty Limited [2023] NSWCA 114 that builders and developers bear the burden of demonstrating that any loss in rectifying non-compliant cladding is unreasonable.

Facts

The Plaintiff was the Owners Corporation (OC) of a 28-storey mixed use development in Parramatta. The Respondents constructed the exterior of the building with aluminium composite panels (ACPs)

On 18 May 2016, Fire and Rescue NSW identified that the ACP cladding was used by the respondent and subsequent testing confirmed it contained more than 30% polyethylene and thus was combustible. It was suggested that remediation measures be conducted to ensure fire compliance.

As successor in title, the OC commenced proceedings in the Supreme Court, asserting that the ACPs did not comply with the Building Code of Australia (BCA) and therefore warranted a breach of the statutory warranties under section 18B of the Home Building Act 1989 (NSW) (HBA) because:

• the cladding did not comply with the HBA or ‘any other law’ – this included the requirements of the BCA as it applied on 5 July 2013, being the date to place (respondent) applied for a construction certificate.
• the cladding was not ‘good and suitable material’ because it was combustible; and
• the dwellings were not reasonably fit for occupation due to the fire-retardant properties of the ACP.

Procedural History

The trial judge determined that the ACP cladding did not meet the requirements of the BCA in terms of a ‘deemed to satisfy’ provisions. Additionally, no report from a fire engineer was prepared to support an ‘alternative solution’ as per the BCA.

However, the trial judge denied the OC’s claim for damages due to a lack of sufficient proof that an ‘alternative solution’ was not possible, during any stage of the construction period.

The finding that the builder had not breached the statutory warranties under s18B(1)(b), (c) and (e) of the HBA, was primarily made on basis of the OC’s inability to provide sufficient evidence as to the combustibility rate of the ACP cladding and the extent of the fire risk.

Issues

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

1. Finding no breach of s18(1) (c) of the HBA had been established by the installation of the ACPs on the building; and
2. Had the primary judge erred in declining to award reinstatement damages on the basis that the OC had not established an ‘alternative solution could not then or now be performed”.

Appeal Decision

In overturning the decision of the trial judge, the Court of Appeal found that the ACPs violated the ‘deemed to satisfy’ provisions and the Respondents failed to provide an ‘alternative solution’ before obtaining a construction certificate, resulting in a breach of the BCA and the statutory warranty at section 18B(1) (c).

The Court also awarded damages for reinstatement and held that it was not necessary for the OC to prove that an alternative solution was not available. While the burden of proof to show non-compliance rested on the OC, the onus of proving unreasonable costs for reinstatement fell on the builder and developer, who were unable to provide sufficient evidence.

The Court of Appeal confirmed that the cladding breached the BCA and statutory warranties and stated that compliance with BCA provisions does not differentiate between substantive and formal breaches. Importantly, the Court found that it was the responsibility of the builder and developer to prove the availability of alternative solutions, which they failed to do.

As a result, the Court ordered the Respondents to pay for the removal and replacement of the non-compliant cladding with non-combustible cladding as defined by the BCA.

Impact

The decision clarifies the requirements for proving a breach of the BCA in cases involving combustible cladding. Additionally, it shows the burden of proving that the cost of reinstatement would be unreasonable rests with the builder and/or developer. Such clarification may assist builders, developers and their insurers in preparing for and defending combustible cladding claims and where rectification costs appear unreasonable, inform the scope of evidence required to support that position.