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Director ordered to pay $1.1 million in damages for company’s use of combustible cladding materials

31 October 2023

6 min read

#Construction, Infrastructure & Projects

Published by:

Madeline Kelly

Director ordered to pay $1.1 million in damages for company’s use of combustible cladding materials

The Victorian County Court has found a construction company liable for installing combustible cladding materials and under new powers available to the state, ordered the company’s director to pay the $1.1 million damages award. This occurred in circumstances where the director knew that the material had been installed but did not know that it was non-compliant with the Building Code of Australia (BCA).

Section 137F of the Building Act

Section 137F of the Building Act 1993 (Vic) was introduced in 2020 by the Cladding Safety Victoria Bill to allow the Crown to be subrogated to all the rights and remedies of a building owner as they relate to cladding rectification work. The section is enlivened if Cladding Safety Victoria (CSV), the body responsible for administering Victoria’s $600 million cladding rectification fund, provides a grant to an owner of a building for cladding rectification work. If a grant has been provided, the S­­tate is subrogated to all rights and remedies of the grant recipient in relation to the installation or use of a non-compliant external wall product or other building work that required the cladding rectification work to be undertaken.

Section 137F(3) extends the State’s enforcement rights to the officers of an entity who were in office at the time the relevant act or omission occurred. Under section 137F(4), it is a defence if the officer can prove that the relevant act or omission occurred without their knowledge or consent. The definition of officer is given the same broad meaning as that under section 9 of the Corporations Act 2001 (Cth). ­

The section was introduced to ensure that companies responsible for the installation of certain combustible wall-cladding products and their officers, could be held liable to the State for its cost to remove that cladding in a context where owners and owners corporations often lack adequate resources and governance to pursue action independently.

OC PS707533K v Shangri-La

Owners Corporation 1 Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd (ACN 130 534 244) and Anor [2023] VCC 1473 (OC PS707533K v Shangri-La) is the first decision on section 137F, and closely considered the meaning of ‘knowledge’ in the defence provided under section 137(4). The decision related to an apartment complex that was built in Caulfield by Shangri-La Construction (a defendant in this matter), purportedly in accordance with a building permit granted in December 2013.

The Court found that the company was in breach of several implied warranties under the Domestic Building Contracts Act 1995 due to its use of non-compliant combustible cladding materials, namely an EPS product known as RMAX Orange Board.

What constitutes sufficient knowledge for the purposes of section 137F(4)?

Having found that the company was liable, the ability to enforce that breach directly against its director Mr Naqebullah, was available under section 137F(3). Mr Naqebullah conceded that he was an officer at the time but sought to rely on the defence under section 137F(4), arguing that the relevant act or omission occurred without his knowledge or consent. Mr Naqebullah gave evidence that while he knew that the relevant materials were being installed, he did not know at that time that the material was combustible, or that such use was problematic or inappropriate.

The Court accepted his evidence but found that it was sufficient that Mr Naqebullah had knowledge that the combustible cladding was being employed and that as the individual responsible for Shangri-La’s building operations, he had consented to its use. The Court considered the purpose of the amending Act (the Cladding Safety Victoria Act 2020) which is to subject companies and their officers who use non-compliant cladding materials to liability. Therefore, it was held that Mr Naqebullah’s knowledge that the relevant cladding material was used on site was sufficient to exclude him from the benefit of the section 137F(4) defence.

Relevantly, the Court also held that the State’s subrogation rights could apply in relation to a breach which occurred prior to the introduction of section 137F, despite the legislation not expressly saying that it had a retrospective effect.

Who could be found liable?

Officers with responsibility for building operations of a construction company face a clear risk under section 137F. While this case related to the director of a building company, officers of design consultant companies also face a clear risk if the company is found liable for breaches in relation to the use of combustible cladding.

The Building Act adopts the broad definition of ‘officer’ under section 9 of the Corporations Act which includes company directors, secretaries and persons who make “or participate in making decisions that affect the whole or a substantial part of the business of the corporation”.

However, the decision itself observed that the knowledge and consent elements of the defence under section 137F(4) likely precludes a number of classes of officers from liability, for example:

  • non-executive directors who sit on the board to contribute specific expertise such as legal or accounting knowledge
  • company secretaries who are primarily responsible for office administration
  • executive directors or non-director executives involved in non-building aspects of a company’s operations
  • executive directors or senior executives tasked to manage or supervise projects which are not affected by the cladding issue.

Nevertheless, any officer with actual knowledge of the use of a non-compliant wall product on a building where CSV has funded rectification work is at risk, whether that officer knew the material was non-compliant.

Where to from here?

OC PS707533K v Shangri-La is the first decision which considered a subrogated action taken by the State of Victoria against an officer of a company under section 137F, post the 2020 amendments to the Building Act. With a successful test case under its belt, it is expected that such actions will become more common as the State seeks to recover some of the cost of its significant cladding rectification program.

Indeed the judgment included an extract of submissions by counsel for Mr Naqebullah that of the 2,657 sites that had been inspected for combustible cladding by the Victorian Building Authority as at February 2020, 616 sites were deemed as being of extreme or high risk. Of these sites, the number of relevant building professionals included 136 building surveyors, 369 builders and 76 fire engineers. How many of these individuals face recovery action under section 137F(3) remains to be seen.

The case clearly indicates that the State of Victoria is willing, motivated and equipped with the legislative tools to pursue building companies and their officers for the use of combustible cladding in residential projects.

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The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Madeline Kelly

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