Due Diligence for Registered Certifiers with Emphasis on Combustible Cladding and Performance Requirements under the Building Code

Due Diligence for Registered Certifiers with Emphasis on Combustible Cladding and Performance Requirements under the Building Code

3 Oct 2023

The Court of Appeal in New South Wales has ruled recently that:

  • a failure by a Builder to obtain a certified Alternative Solution to allow combustible cladding to be installed on a building;
  • prior to the issue of the Construction Certificate;
  • is a substantive breach of the Building Code and statutory building warranties implied into the construction contract. 

It is not merely a ‘de minimis’ or technical breach.

Further, the Court of Appeal ruled that the onus to prove that an Alternative Solution could have been formulated and approved prior to the issue of the Construction Certificate was on the Builder. The onus to show this was not on the subsequent building owners.

If there is no Alternative Solution, then the performance requirements of the Building Code will not have been met and the Builder, and potentially other construction practitioners are likely to be liable for the full replacement costs of the combustible cladding.

The case decision is Owners SP 92450 v JKN Para 1 Pty Ltd [2023] NSWCA 114

The Owners Corporation of an apartment building known as “The Rise” in Parramatta were initially unsuccessful in their claim for full reinstatement costs (ie replacement of combustible cladding) at a lower court.

On appeal, the Builder / Developer was unsuccessful, with the decision in the lower court overturned. The was at the New South Wales Court of Appeal.

The Deemed to Satisfy provisions of the Building Code mandated the building’s external walls to be non-combustible, in accordance with the Australian Standards test of combustibility. 

Another pathway to compliance would be to satisfy the performance requirements of the Building Code with an Alternative Solution to allow acceptance of the external cladding product. 

Here, there was no evidence of the formulation, assessment and certification of an Alternative Solution either prior to the issue of the original building approval (the Construction Certificate) or prior to completion.

The building did not satisfy the performance requirements of the Building Code on fire resistance because:

  • the external cladding did not comply with the “Deemed to Satisfy” provisions; and
  • no Alternative Solution was prepared and approved prior to the issue of the Construction Certificate as a secondary pathway to compliance. 

Consequently, the building work involving the installation of this cladding was in breach of the statutory building warranty in section 18(1)(c) of the Home Building Act 1989.

A key question in the case to be determined was in relation to the correct measure of damages for breach of a statutory building warranty. 

During the appeal, the Builder conceded there had been a technical breach of the warranty as to fitness of materials (section 18(1)(c)) but maintained that this was not a substantive breach that would justify full replacement or reinstatement compensation.

In the key case decision of Bellgrove v Eldridge [1954] HCA 36, the High Court held that the measure of damages for compensating an owner for defective building works is the cost of rectifying the defects, subject to the rectification being necessary to produce conformity with the contract, and it is a reasonable course to adopt.

The test is whether the scope of rectification and the cost is what is “necessary” and “reasonable” to place the owner in the position they should have been in if the contract had been properly performed.

The Builder argued that a rectification involving full replacement and reinstatement of the cladding was unreasonable because “the as-built building, without modification, was capable of being certified at the relevant time by way of an alternative solution.”

Also, the Builder argued that the Owners Corporation bore the onus of proof to demonstrate that an Alternative Solution could not have been prepared and accepted prior to the issue of the Construction Certificate, or now (after the event).

Finally, it was argued that the breach of warranty was merely a formal or technical non-compliance (given the possibility of an Alternative Solution) and not a substantive breach leading to significant loss and damage.

However, the Court of Appeal rejected the Builder’s arguments.  It was held that the Builder had not shown that an Alternative Solution would have been available prior to the issue of the Construction Certificate or was now available. 

The Court also said it was the Builder’s onus to demonstrate this, not the Owners Corporation’s. 

It was found that the Builder’s failure to prepare an Alternative Solution in respect of the cladding was not merely a formal or technical breach.  Therefore, reinstatement damages were available to the Owners. 

In fact, the breach by the Builder was a substantive one that meant the building did not meet minimum standards of fire safety, thus placing owners and occupants at risk.

Some key findings of the Court of Appeal were, citing from the Reasons:

“Having established that the Respondents did not comply with the Building Code of Australia, the Owners Corporation were not required to go further by proving that the Respondents could not have complied by acting differently with respect to an alternative solution.”  [Paragraph 81].

“By installing cladding which did not comply with the performance requirements of the Building Code of Australia, the Respondents provided the Owners Corporation with a building which did not meet the minimum standards for public safety.” [Paragraph 107].

This decision is relevant to Certifiers because they could be drawn into the liability net for full replacement costs of cladding if a Builder is found at fault, and the relevant compliance check has not been done at the Occupation Certificate stage.

Code of Conduct

Registered Certifiers are included within the definition of “public official” in the ICAC Act 1988 and a “public authority” in the Ombudsman Act 1974

Public officials occupy positions of public trust and there is a public right to be assured that they will function in an open and honest way and based on high ethical standards.

There are 13 requirement headings in the Code of Conduct and some of the key ones are as follows:

1. Acting in the public interest: a Registered Certifier shall carry out their functions and duties, and exercise any discretionary powers, in ways that promote or preserve the public interest.

4.   Treatment of others: a Registered Certifier shall act with honesty, good faith and equity, and without discrimination, towards any person in the community.

5.  Duty of Care: a Registered Certifier shall exercise reasonable care and attention in carrying out his or her duties, and in the exercise of his or her powers.

6. Making decisions and taking actions: a Registered Certifier shall take all reasonable steps to obtain all relevant facts when making decisions and carrying out certification and other statutory functions.

7. A Registered Certifier shall ensure that his or her decisions and actions are reasonable; fair and appropriate to the circumstances; based on consideration of all the relevant facts he or she has obtained; and supported by adequate documentation.

9. Acting within his or her competence: notwithstanding the category(ies) of registration that a Registered Certifier has been registered in, they shall only carry out certification functions that are within his or her competence.

11. Gifts and benefits: a Registered Certifier shall not seek or accept a gift or benefit that is intended to, likely to, or could be perceived by an impartial observer as likely to, cause him or her to act in a biased or unfair manner in the course of their duties.

13. Bias: where a Registered Certifier has an affiliation, disposition, or any material, pecuniary or other interest that would lead to a reasonable apprehension that the Registered Certifier may be biased in carrying out an aspect of his or her professional role, he or she shall not carry out the conduct of that aspect.

[The receiving of a fee for carrying out certification functions paid by the applicant / owner of the land does not count as a conflict of interest].

Conflict of Interest

The Building and Development Certifiers Act 2018 came into force in NSW on 1 July 2020, and it superseded the previous conflict of interest provisions in the Building Professionals Act 2005 (“the BP Act”).

Under the earlier BP Act, section 68 provided that having an “employment relationship” with another person involved in the design of a project or having any pecuniary interest in the outcome could lead to a conflict of interest for the Certifier.

This was already quite prohibitive, but under the B&DC Act the ambit of what is meant by “employment relationship” has broadened simply because this new Act does not narrow down or specify the scope of that term, or its related concepts.

New key terms in the B&DC Act 2018 include “private interest” and also “business relationship”, while the old term “employment relationship” also appeared in the BP Act.

Section 29 of the new Act sets out the definition and relevant elements of “conflict of interest”, and Registered Certifiers should be familiar with it.

Section 29(1) of the Act says that a Registered Certifier has a conflict of interest in certification work if a “reasonable person” would conclude that:

  • The Registered Certifier has a “private interest” with respect to the certification work; and
  • The private interest comes into conflict with, and may affect, the duty of a Registered Certifier to act in the public interest when undertaking the certification work.

As well, the would be a conflict of interest “in any other circumstances prescribed by the regulations” (section 29(1)(b)).

Note that the test is what a “reasonable person” would conclude if that third party observer was dispassionately examining all circumstances and that party had knowledge of the duties of a private certifier.

Clearly, the Certifier acting in the “public interest” must involve dispassionately upholding compliance with building regulations (including the Building Code) and the Certifier acting in an impartial manner unswayed by private imperatives from the developer who pays the accounts.

Section 29(2) defines “private interest” and states that a Registered Certifier has a private interest with respect to certification work if the Registered Certifier is any of the following:

  • A person who is obtaining the benefit of the certification work;
  • A person who has a pecuniary interest in the development or building to which the certification relates;
  • A person who has supplied professional services (other than services that are certification work) in relation to the construction or design of the development or building to which the certification works relates;
  • A person who has supplied professional services (other than services that are certification work) for a development application for the development or building to which the certification work relates);
  • If the certification work is to be carried out in the area of a local Council other than on behalf of the local Council, a person who is a councillor or employee of the local Council;
  • A person who has a relationship (whether family, personal, employment or business) with a person referred to in any of the above criteria; and
  • Any person prescribed by the regulations.

The legislation does not clearly define what a “business relationship” actually is.  This begs the question of whether this means something more extensive than “employment relationship” as covered by “conflict of interest” in the earlier BP Act 2005.

Section 68 of the BP Act already prohibited having an employment relationship with someone else involved in the design or construction of the project.

However, in the B&DC Act 2018 the ambit of “employment relationship” has broadened, because the new provision does not narrow down or specify the scope of that relationship.  It has also introduced the term “business relationship”.

The plain and ordinary meaning of “business relationship” is much broader than “employment relationship” and encompasses “an association between individuals or companies entered into for commercial purposes and sometimes formalised with legal contracts or agreements.”

It is likely that the provision was included to prevent businesses in the design and construction or process of the development application from establishing relationships with certifiers or certification companies.

This could occur whether or not the two businesses were formally related by corporate structure or common directorship.

As with “business relationship”, there is also a prohibition on “family” or “personal” relationships.  In the previous BP Act, the term “family relationship” was outlined in section 68 and extended to “a spouse, de facto partner, sibling, parent or child”.

Because “family relationship” is not defined in the new Act, it could conceivably apply to extended family members rather than just immediate family.

Also, the term “personal relationship” would exclude relationships in the nature of friends, or romantic partners.  It would mean more than just mere acquaintances.

Limits on a certifier’s role

In a 2010 NSW case, the Administrative Decisions Tribunal (ADT) it was stated:

“We accept that it was, and remains, customary practice for certifiers to rely on credible, specialist certifications in specialist areas of building work”. (For instance, Geotech engineering or specialist electrical work).

The ADT also said, page 28: “In any case the certifier should always make an independent professional judgment as to the quality of specialist certificates.”

[For instance, check that the appropriate and current provisions of Australian Standards and the Building Code are referenced in the certificate].

Lewis v Threadwell [2004] VCAT 547

[139] “With respect to carrying out mandatory inspections and the issue of the Occupancy Permit, it is appropriate for an RBS to rely on the design practitioners  and the builder or owner/builder to ensure that the building is constructed in accordance with the BCA.”

“It is also reasonable and common practice to rely on Certificates of Compliance in order to issue an Occupancy Permit.”

In this case, the Tribunal also accepted the evidence of an expert building surveyor (Mr Du Chateau) that: “A Building Surveyor / Building Inspector is not engaged to design, construct, project manage, act as a site foreman, clerk of works, supervisor for any part, of any construction process.”

Design and Building Practitioners Act 2020

This Act imposes new duties on design and building practitioners, focussed in improving performance.  (The focus is on residential works, and in particular apartment buildings).

There is a duty of care imposed on parties carrying out construction work and designers, manufacturers and suppliers of building products, and supervisors and project managers of construction work.

The duty of care referred to above does not extend to Registered Certifiers.

The Principal Certifier must not issue an Occupation Certificate without receiving certain documents from the Builder at the OC application stage, including a statement that:

  • The building work complies with all applicable Regulations;
  • If non-compliant, the steps the Builder will take to ensure compliance;
  • Whether the Builder has performed works in accordance with each regulated design as prepared by a registered design practitioner;
  • Whether the Builder has obtained a design compliance declaration for each of the regulated designs;
  • Whether the Builder has obtained a principle compliance declaration from the principle design practitioner, in relation to the design compliance declaration.