[+] Cladding Crisis Unlikely to Spill Over, But Litigation Looms


Australian property developers are unperturbed by a recent escalation of the cladding crisis in the UK, but a wave of litigation looms as confusion remains over responsibility for the costs of remediating Australian buildings.

UK Housing Secretary Michael Gove began roundtable discussions with the development industry after an incendiary performance in Parliament earlier this month and an open letter targeting the sector.

The move comes as the five-year anniversary of the June 2017 Grenfell Tower fire looms, with flammable cladding still remaining a serious concern in both the UK and Australia.

Gove’s demands include a £4-billion fund voluntarily contributed by property developers, alongside a promise that no apartment owner in a building more than 11 metres will bear any costs for rectification.

If the sector does not meet his March deadline Gove has threatened to take “any steps necessary”, including “restricting access to government funding and future procurements, the use of planning powers, the pursuit of companies through the courts”, and the introduction of legislation to achieve his aims.

Industry representatives in Australia are unconcerned that jurisdictions here might follow Gove’s hard-line approach.

Ken Morrison, chief executive of the Property Council of Australia, told The Urban Developer that “Australia’s already well advanced in cladding rectification, and our building standards are a lot tougher than the UK’s”.

“In Australia we have the National Construction Code which sets rigorous building standards across the country. These are far more mature than those in the UK, and certainly the combination of failures that occurred in the Grenfell tragedy don’t exist in Australia,” Morrison says.

“We need to remember that most of the cladding products we are now concerned about were not illegal work. They were installed in accordance with building standards in force at the time.”

Multiple legal experts told The Urban Developer that UK building codes and specifications are patchwork compared to Australia’s, which has allowed more room for sub-standard projects to be erected in the UK, and created a messier and slower legal environment at the other end.

▲ As the anniversary of the Grenfell disaster looms, the UK's cladding crisis remains far from resolved.

Philip Bambagiotti, a barrister specialising in construction law who practices in both the UK and Australia, says that cladding-focused approaches resemble a Band-Aid fix to a symptom, rather than a wholesale legislative solution to a systemic problem in design and construction.

“We are seeing in the UK similar types of problems to those we have in Australia, and we are also seeing similar types of responses,” Bambagiotti told The Urban Developer.

“The challenge will be for the community to give an honest self-assessment of the quality of its regulation so that the underlying problems in relevant legislation are addressed. If they are addressed, then we have a fighting chance of reaching long-lasting, structural solutions.

“The various remedial steps haven’t demonstrated logical, cohesive commitment to addressing underlying problems.

“The danger is that the community can be led to believe that problems that disappear are problems that are solved. This may lead to greater problems in the long run.”

Costs will continue to mount, liability unclear

Cladding is far from a settled issue in Australia, with NSW’s Project Remediate expected to run until 2024, and Victoria’s scheme until 2025.

Despite funding schemes in place, commentators say the total costs of rectifying and remediating buildings with unsafe cladding are still hazy, but likely to be significant and likely to continue to rise.

Philip Atkin, special counsel in the insurance team at Colin Biggers & Paisley, said that more than 3000 buildings have been assessed as non-compliant to date.

“We have seen estimates for rectifying non-compliant cladding across Australia of more than $6 billion,” he says.

“However, no one can be certain about the true cost given that investigations are ongoing. Meaning that we simply do not know how many affected buildings are out there, and material and labour shortages in the building industry are causing steep increases in rectification costs.”

Dr Trivess Moore, senior lecturer at RMIT, has projected costs of up to $5 billion just for apartment buildings in Victoria, where Cladding Safety Victoria has a $600-million fund available for remediation work. He agrees that labour and other factors will contribute to that figure rising.

“If anything, [estimates] are probably a little on the conservative side,” Moore says.

“Given that there’s not a huge amount of people who can do this rectification work, and there’s a whole range of experts who need to be involved.”

▲ Australia’s building codes may be far ahead of the UK’s, but issues remain around the cladding crisis.

Moore’s ongoing research has also found significant hidden or indirect costs associated with cladding rectification, including insurance and legal fees, which are not adequately covered by government funding or regulation.

Some categories of buildings may also require rectification, but fall outside the scope of funding schemes, leaving property owners liable for the entirety of the costs.

New agencies and regulatory frameworks have been established to provide guidance on cladding remediation, however, uncertainty remains over who will foot the final bill, and whether costs can be pursued post-remediation.

Moore says that building industry regulations provide inadequate protection for consumers from any bad-faith actors.

“We still have an industry which will shirk responsibility, companies are still able to phoenix and get out of their requirements to address these issues. There’s still a number of loopholes there,” Moore says.

Dr Matthew Bell, associate professor at the University of Melbourne, who has expertise in construction law, says that the current debates show that achieving a fair and workable distribution of defect rectification costs is more challenging after the fact.

“There are going to be unhappy people, and there are going to be people who are less unhappy. Nobody is going to be completely happy, because we’re already deep in the problem already,” Bell told The Urban Developer.

“Developers, builders and other industry parties often just don’t have enough margin, or insurance, to be able to come back and actually fix these things, so they will resist liability through legal action.

“So, there’s no perfect solution. Focus needs to be on prevention rather than cure when it comes to regulating construction quality.”

More litigation likely—and soon

Legal experts agree that litigation is a likely recourse for many stakeholders seeking to recoup costs of rectification.

“Litigation, or the threat of litigation, is one of the main drivers of cost recovery,” Atkin says.

▲ Cost associated with remediation works are among the elements of the crisis that remain hazy.

“Whether that is litigation brought by building owners, by builders against downstream targets like project consultants and suppliers or by state cladding rectification authorities like Cladding Safety Victoria under its rights of subrogation.”

The potential claimants and targets of lawsuits are wide-ranging, according to Atkin.

In NSW, the Design and Building Professionals Act 2020 has introduced a statutory duty of care for building professionals towards residential owners. It allows building owners to pursue claims without relying on contracts or warranties.

In Victoria, apartment owners can access Cladding Safety Victoria funding for remediation, and then pass on the rights to pursue costs to the government.

“The liability picture varies markedly across the country,” Atkin says.

“Owners can bring claims against builders and sometimes other building professionals. In NSW they can also bring claims against developers. A cladding product class action is already on foot against a key manufacturer.”

“Despite how long the cladding crisis has been going, however, relatively few cases have proceeded to judgment and liability in the case of each building will turn on its own facts.”

A strong precedent exists in the 2019 judgement to the Lacrosse fire case, which apportioned 25 per cent per cent liability to the architect, 39 per cent per cent to the fire engineer, 33 per cent per cent to the surveyor, and 3 per cent per cent to a smoker who unintentionally ignited the fire.

A 2021 appeal judgement made slight modifications to the allocation of liability, but upheld the earlier finding that the builder held no liability.

John O’Kane, a partner in the property and projects team at Hall & Wilcox, says that “the Lacrosse case pretty much sets out the way most cladding cases will run”.

However, the extent of remediation is “determined on a case-by-case basis, and most builders do not accept liability”.

“I think litigation will start picking up because a lot of the buildings with cladding are running into their statutory limitation of liability period. Litigation is not something that can be put off indefinitely,” O’Kane says.

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Article originally posted at: https://www.theurbandeveloper.com/articles/cladding-crisis-unlikely-to-spill-over-but-litigation-looms