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.

By Justin Cotton, Director, Lovegrove & Cotton – Construction and Planning Lawyers

There is a common thread of questioning in construction law about the extent of the duty, if any, owed by a building certifier or building surveyor to subsequent owners of property after the building work is completed.  This is a line of inquiry running across the Australian States and Territories.

When a final approval for the building works is given by a certifying authority, what is the scope of the final approval document issued, in the form of an “Occupation Certificate” (or similar terminology)?  Is the function of the document merely to certify that the completed building is safe and fit for occupation, and how much is its purpose to warn about non-compliance with the Building Code and the Regulations?

Clearly when there are latent building defects that could be structural in nature, questions about fitness for occupation of the building in accordance with its intended purpose, and even health and safety, must come to the fore.  But against that, it has long been recognised that the certifying authority is not a clerk of works, site supervisor, or responsible for the quality of the design and building works (refer to the Lewis v Threadwell decision in Victoria).  Rather the function is of general oversight of holistic compliance with the building regulations, in regard to structural sufficiency and health and safety.

To a degree, in a 2017 decision the NSW Court of Appeal has ruled that the extent of what an Occupation Certificate is certifying is limited in scope, and more focussed on fitness for occupation on a health and safety level, rather than serving to give a certification that Building Code breaches do not exist.

In the case of Ku-ring-gai Council v Chan [2017] NSWCA 226 (7 September 2017) it was also found that the subsequent owners of a renovated home (a 2 level extension at the back of an existing house) did not have a sufficient degree of reliance on the Council diligently carrying out its role as the certifying authority such that the Council owed a duty of care to them.

In brief, this was because the new owners buying the property after the works were done, could have protected themselves in other ways (for example by contracting to have sums deducted for rectification works), they had the benefit of the builder warranty insurance for a fixed sum in regard to builder defects, and were also owed the statutory building warranties by the Owner Builder.

Consequently there was not a position of “vulnerability” for the new Owners when seen in the context of their relationship with the Council, in order to substantiate that a duty of care was owed to them by Council.

The relevant case concerned an Occupation Certificate issued by the Council as the Principal Certifying Authority (“PCA”) after the renovation and extension works had been completed.  The final Occupation Certificate certified that:

• Council has been appointed as the PCA under the EP&A Act 1979;
• A Development Consent is in force with respect to the building work;
• A Construction Certificate has been approved for the building work;
• The completed building is suitable for occupation and use.

In regard to the certification of suitability for occupation and use, that means suitability in accordance with the building’s classification (as to type of structure) under the Building Code, for example, a Class 1A dwelling house.

Less than 1 year later the home as renovated and extended was sold by the original Owner Builders (Mr and Mrs Acres) to new purchasers, being Ms Chan and Mr Cox.  Pursuant to the contract of sale there was a special condition that the purchasers acknowledged they were aware of the contents of the final Occupation Certificate, insurance certificate, building certificate and “this special condition”, and would not be entitled to any requisition or claim or entitled to rescind the contract in respect of the accuracy or contents of any of those documents.

By that special condition the new Owners basically agreed that they would seek no compensation against the vendors in regard to the accuracy or otherwise of the final Occupation Certificate.  While this was one relevant factor it would not of course over-ride any statutory warranties owed by the certifying authority, if there was found to be a breach of such warranties.

Nevertheless, the existence of the special condition served to illustrate that there were contractual rights and remedies available to assist the new purchasers as subsequent owners, in relation to protection against defective works.  However these protections most likely could best be availed against the Owner Builder, and not the Principal Certifying Authority.

For example, apart from any contractual rights under the sale contract, there were the statutory building warranties owed by the Owner Builder to Chan and Cox under the Home Building Act 1989 (NSW).  In addition, there was an insurance certificate for defective structural workmanship for a fixed period, that could be called up in certain circumstances (such as the Owner Builder’s insolvency or disappearance).

At Court, the claim by the new Owners against the Council as the PCA included that:

• As a result of failing to require the Owner Builder to produce adequate certification, the Council approved or certified works that had been carried out otherwise than in a proper and workmanlike manner, as described in building reports later obtained by the plaintiffs (the new Owners);
• Both in regard to not obtaining adequate certification and due to inadequate inspections, the Council breached its common law and statutory duties to the new Owners and issued a final Occupation Certificate. Had the final Occupation Certificate not been approved the home could not have been sold and the plaintiffs would not have suffered any loss.

For its part, the Council did admit that the relevant Council inspector had failed to carry out the two critical stage inspections raised by the plaintiffs in a proper and workmanlike manner, with the result that the Council did not discover structural defects and then issued an Occupation Certificate when the renovated home was not fit for occupation and use.  Nevertheless, the Council denied that it owed any common law duty, or a statutory duty (under the EPA Act 1979) to the new Owners of the land.

In the lower Court the trial Judge found against the Council.  His Honour concluded in the primary judgment that:

“It follows that there was no basis for the Council, acting as PCA, to certify, as it did in the final occupation certificate, that the extension was fit for occupation and use as a dwelling house.  The evidence shows that it was plainly unfit for such occupation and use, because it was structurally defective, and because those structural defects presented and present a very real threat to personal safety and property.”

In this way the Judge in the lower Court found that the Council as the certifying authority did in fact owe a duty of care in its role as certifier and that duty was owed to the subsequent owners of the dwelling.  This was a duty to avoid economic loss to the new owners arising out of the defective building work, and did not relate to the risk of physical harm or injury to owners or occupiers of the new building.

In taking a contrary view about the existence or not of a duty of care, the Court of Appeal examined the nature of “vulnerability” as an essential ingredient to demonstrate a duty of care, and combined this with the statutory context in which an Occupation Certificate is approved in NSW.

In this sense “vulnerability” refers to the inability of a plaintiff to protect itself from the consequences of a defendant’s lack of reasonable care.  This was important because the absence of vulnerability can be a deciding factor against any duty of care being implied.

This was a case where both the Owner Builder and also the Council had been sued by the new Owners as co-defendants. With regard to the Council, the Court of Appeal found that the new Owners lacked sufficient vulnerability even though the Council may not have taken reasonable care in issuing the final approval.

As between the two parties (the new Owners on the one hand and the Council on the other), the Court concluded that there was no specific reliance and no assumption of responsibility, in order to create a duty to the new Owners to exercise reasonable care in the issue of the Occupation Certificate.

Furthermore, this conclusion was assisted by the limited statutory context for the issue of a final Occupation Certificate in NSW, and the Court of Appeal had this to say on that [at paragraph 88]:

“…the occupation certificate does not in terms or effect certify that the building work does not, or is not likely to, contain latent defects (whether structural or otherwise) or that the works comply with the relevant plans and specifications or the conditions of the development consent.  Nor is it directed to the economic incidents of property ownership, as distinct from the occupation and use of buildings by those entitled to do so or their invitees.  That subject matter is necessarily narrower than the subject matter of the statutory warranties, which indemnify against any non-compliance or inadequacy of the building work.”

Finally, it was also found by the Court that the Council as the certifying authority did not owe any duty of care to the previous Owner (the first defendant Owner Builder), in the absence of any specific duty to supervise the quality of his workmanship.  If the Council had not approved and issued the Occupation Certificate, the defects in his work would still have existed.

It should be noted that this case decision should be read in the light of the specific facts of the nature of the relationships between the parties, and in particular whether the ingredients of “vulnerability” were established in these circumstances, and the statutory context of Occupation Certificates in NSW.  Given that the trial judge had reached an opposite conclusion, it appears that the law is not precisely settled as to the extent of the duty owed by certifying authorities when issuing final approvals.

For more advice on matters pertaining to building regulation, dispute resolution, practitioner advocacy and front end assistance in construction, you should contact construction lawyers with expertise in the relevant field.

Lovegrove & Cotton Lawyers to the building industry

For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland. Doyles Guide ranks Kim Lovegrove as one of the leading construction lawyers in Australia. Justin Cotton, likewise, is a leading Australian construction lawyer and widely respected in the building fraternity as evidenced by his recent elevation to Chairperson of the HIA Industrial Relations and Legal Services Committee, and member of the Regional Executive Committee, for HIA Victorian Chapter. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy. If you wish to engage the firm, feel free to contact us via our website or by emailing enquiries@lclawyers.com.au.

Disclaimer

This article is not legal advice and discusses it’s topic in only general terms. Should you be in need of legal advice, please contact Lovegrove & Cotton Lawyers and our experienced lawyers will assist you based on the facts and circumstances of your case.