Who Pays the Piper Calls the Tune: Building Certification and the Perils of Conflict of Interest
By Justin Cotton, Partner and Head of Practitioner Advocacy at Lovegrove Solicitors
In a 2004 decision in NSW concerning accredited certifiers, Justice O’Connor at the Administrative Decisions Tribunal stated: “…while there can be no doubt that a certifier must be ‘objective’ and ‘impartial’, it is perhaps not possible for the certifier to be free of ‘any conflict of interest’. There is a conflict of interest inherent in the scheme…”
The reason for this conclusion is simply this. There will always be at least a potential risk that whoever ‘pays the piper’ can at least suggest the tune. As the ADT observed, the potential conflict arises because the developer pays the accredited certifier performing the private certification function.
It would be an error to consider this somehow exculpates a certifier or building surveyor from allowing the line to blur between a consultancy role and their regulatory, public focussed function. Justice O’Connor went on to say: “This is a necessary conflict given the nature of the scheme, and, as we have indicated earlier, is not one that would be seen by a reasonable member of the public as problematic.”
Tantalising though it could be, the temptation to yield to the private interests of a developer is a little like the golden apple swaying in the boughs of a tree, wherein a building certifier can be lured off the path of probity and integrity.
In the 2004 NSW decision concerned, the accredited certifier had nothing to gain by any of his acts or omissions and indeed did little other than what many of his peers would have done, in a busy certification office. Effectively, the ADT was concerned with perceived bias, not actual bias being demonstrated. While recognising that no harm emanated from the conduct, the concern was to uphold public, community confidence in the ‘public official’ role of an impartial regulatory service.
Given that in NSW, accredited certifiers come within the definition of ‘public authority’ in legislation such as the Ombudsman Act 1974, and that certification (including mandatory building inspections and issuing certificates/approvals) is a regulatory function intended to uphold building standards for the community, then the NSW public is the ‘real client’ for the private certifier. Motives of a developer or builder in getting the structure out of the ground as swiftly and cheaply as possible are often not aligned to the public imperative of building regulation that serves the community good.
So what was the conduct investigated in the 2004 decision of Director General, Department of Infrastructure, Planning & Natural Resources v Stapleton (No 2) [2004] NSWADT 70? Mr Stapleton had been appointed as the Principal Certifying Authority (“PCA”) for a site involving a single dwelling. While several of the charges against him were dismissed, he was found guilty of unsatisfactory professional conduct for:
(i) signing the application for a Construction Certificate (“CC”) for the development and then issuing the Construction Certificate applied for; and
(ii) not issuing the final Occupation Certificate for the development even though he was the PCA (and only the PCA can approve the Occupation Certificate).
In NSW, unlike for example Victoria, there was a detailed formula in the relevant Act (the EP&A Act 1979) as to what constitutes a conflict of interest for certifiers, including for example:
- being involved in design (eg drafting plans and specifications);
- being involved in doing the building work;
- having a pecuniary (financial) interest in the project;
- if he or she is also the applicant for the certificate or related to the applicant for the certificate.
Given that the certifier (PCA) and/or his firm:
- signed the application for the CC as agent for the developer/builder and then approved the CC; and
- was involved in a consultancy role for the development including the preparation of a Statement of Environmental Effects and an Energy Efficiency Scorecard;
there was therefore a contractual arrangement between the Developer and the Certifier that could “reasonably be seen to give rise to a conflict between the accredited certifier’s duties as an accredited certifier and the accredited certifier’s interests under the arrangement” as described in section 109ZG(2)(c) of the Act.
As the ADT found: “At the heart of the case is concern on the part of the Director General that accredited certifiers should have an ‘arms length’ relationship with an applicant for a statutory certificate, and in particular should not be involved in the process of preparing the various applications to consent authorities…”
Subsequently this was found by the Tribunal to be ‘unsatisfactory professional conduct’ based on the definition prescribed in section 109R of the EP&A Act 1979. This definition involved various subsections including but not limited to:
- exercising functions in a partial manner;
- wilfully disregarding relevant matters;
- failing to comply with the code of conduct, a prescribed Act or breaching the EP&A Act 1979;
- exercising functions that fall short of the standard of competence, diligence and integrity that a member of the public is entitled to expect of a reasonably competent accredited certifier.
Therefore the Tribunal found the certifier was guilty of unsatisfactory professional conduct for failing to meet the standard of competence, diligence and integrity that a reasonable member of the public would expect, if that public person had a general appreciation of the function and role of accredited certifiers.
It was not necessary that actual bias or partiality be demonstrated to have manifested, or to show that the accredited certifier had stood to potentially gain from the act or omission. If there had been actual bias then that would have been caught by another specific subsection of s109R, and there was another subcategory in the section relating to ‘conflict of interest’ that related to pecuniary interests.
Justice O’Connor went on to observe: “The consequence of this emphasis on the risk of wrongdoing rather than on its actual realisation is that morally inoffensive conduct that has no adverse consequences in fact may be caught as a result of legislative proscription.”
While it had been argued on behalf of the certifier that the standard of one’s peers in the certification industry was relevant, the Tribunal disagreed with that approach, even though it had been applicable in various misconduct cases previously. This was because the notion of perceived conflict of interest was not akin to a technical breach, for example the failure to ensure that approved drawings conformed to the development approval, rather it related to integrity matters.
The Tribunal explained it as follows: “While it might be appropriate to have a standard connected to the expectations of one’s peers in good standing for matters of technical competence, the issue raised by this allegation goes to issues of integrity and probity in the practice of accredited certification.”
Although there was some evidence of the desirability on the part of customers that certification firms could operate a form of ‘one stop shop’ with a consultancy wing and then another wing of the same firm offering a regulatory certification service, the decision did not really explore the sort of ‘Chinese Walls’ that would serve to erase any perception of conflict of interest. There were two separate and distinct functions, being consultancy on the one hand, and certification on the other. Even if there was a practice elsewhere in the industry for a blurring of this line, that did not mean the standard required by the law had been met.
Finally, the conclusion was summed up by the Tribunal in the following way: “In the Tribunal’s view what is required by the conflict of interest standard is a separation of the consultancy role and the certification role sufficient to satisfy a reasonably-informed member of the general public that there is no likelihood that the accredited certification might be influenced by the performance of the consultancy role and might lack the necessary objectivity.”
In Victoria the appropriate standards that building surveyors are to meet are based on the Building Act 1993 and the Regulations appurtenant to that Act. Misconduct offences are currently investigated pursuant to ‘Inquiries’ and referred to an Inquiry hearing if necessary to the Building Practitioners Board (“BPB”). The writer’s firm has appeared for many builders and building surveyors before the BPB.
Whilst the relevant references are to “unprofessional conduct” (see section 179 of the Building Act) and failure to act “in a competent manner and to a professional standard” (refer to the Building Regulations, clause 1502), there is no elaborate specification setting out the components of these definitions. Arguably this makes it harder for practitioners to defend these charges, given the potentially broad scope of these rather general descriptions.
Unsurprisingly, in Victoria as in NSW it will constitute misconduct for a private building surveyor to act where there is a conflict of interest. This is because the public, regulatory nature of the building surveyor function is the same, and as there is potentially the same tension between that function and the interests of the developer or builder that has entered into the engagement.
However, given there is no prescribed definition of what constitutes conflict of interest to the extent there is in NSW, it is likely that a conflict of interest would be framed as “unprofessional conduct”, or potentially as a breach of clause 1502 of the Regulations.
Several years ago the writer appeared at a hearing of the BPB in regional Victoria on behalf of a private building surveyor (RBS) who had previously been a builder and had assisted with the construction of a staircase, before later issuing the final approval for the construction as the RBS. This was found to be a conflict of interest, even though the practitioner concerned had only been trying to do the right thing in regard to the owner by assisting with a design problem. The practitioner concerned was asked by the BPB to prepare a letter setting out his understanding of the conflict of interest problem and how best to avoid it.
In essence then, while there are disparities in the finer details of construction law across the State and territory jurisdictions in Australia, the nature of private building certification is essentially the same – therefore the key importance of avoiding conflict of interest is paramount in this industry across Australia. If in any doubt of your responsibilities or the risks in this area, you should seek prompt legal advice.
By Justin Cotton, Partner, Lovegrove Solicitors
ph 03 9600 1643
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© Lovegrove Solicitors 2014
