Court finds director personally liable for combustible cladding costs
On 24 August 2023, the County Court handed down its decision in Owners Corporation I Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd (ACN 130 534 244) and Anor [2023] VCC 1473.
This is the first successful compensation claim by the State of Victoria directly against a director of a building company for the rectification costs incurred in removing combustible cladding under the amendments to the Building Act 1993 (Cth).
Building Act 1993 (Vic) amendments
In 2019, the Victorian Government established Cladding Safey Victoria (CSV) as a commitment to oversee the removal of combustible cladding from apartment buildings and publicly owned buildings in Victoria.
Subsequently, a number of amendments were made to the Building Act 1993 (Vic) (Act) and reflected in section 137F of the Act such that:
where CSV pays for cladding rectification work from 19 November 2020, the Crown is subrogated all the rights and remedies the owner has against any person in relation to the installation or use of any non-compliant or non-conforming cladding; and
the Crown can enforce these rights against an officer of an entity who, at the time the cladding was installed, had either knowledge of the cladding used, or provided consent for its use.
Background
In 2015, Shangri-La Construction Pty Ltd (Shangri-La), completed the construction of an apartment complex in Hawthorn.
All consultants involved in the project, including the appointed fire engineer, agreed that it would be sufficient and compliant to install the expanded polystyrene (EPS) product, known as RMAX Orange Board (RMAX) on the building. The building surveyor subsequently issued a building permit in December 2014.
Post construction and following the Lacrosse and Grenfell fires, it was largely accepted by the industry that EPS was non-compliant and combustible.
In 2019, the owners corporation commenced proceedings in VCAT against Shangri-La for various defects and non-compliant cladding. However, Shangri-La went into liquidation and the claims against it were stayed.
The active parties in this proceeding were the State of Victoria and the director of Shangri-La, Mr Naqebullah.
Court’s findings
The State of Victoria sought orders that Mr Naqebullah, as an officer of Shangri-La, be made personally responsible for the rectification costs incurred by CSV.
Under section 137F of the Act, a defence to an enforcement action can be established if it is proven that an act or omission by an entity occurred without the knowledge or consent of an officer of the entity.
At the hearing:
Mr Naqebullah argued that he lacked knowledge that the RMAX product used was non-compliant and that the issues were beyond his knowledge and expertise, and he should therefore not be liable.
The court accepted Mr Naqebullah’s evidence that he was unaware that EPS was inappropriate to be used as external cladding, and only became aware of its problematic nature in 2016 or 2017.
In interpreting section 137F of the Act, the Court adopted a strict approach and considered the absence of further proof that Mr Naqebullah knew that EPS was problematic and non-compliant is not sufficient to negate that he had knowledge of EPS being used as external cladding on the building.
Mr Naqebullah’s “knowledge”, namely that EPS was used, is sufficient to exclude him from the benefit of the defence.
Mr Neqebullah was ordered to personally pay $1.2 million to the State in compensation.
Implications
Subject to any appeal, the outcome of this case may result in the State further pursuing directors and officers of building companies for compensation for expenses incurred by CSV in rectifying combustible cladding.
Key takeaways
If an officer of a building company possesses knowledge or consents to the cladding product used in a project (regardless of whether they knew the product is non-compliant)they may be found to be personally liable if the State enforces its rights against them.
Alicia Hill
Principal
T: +61 3 9611 0180 | M: +61 484 313 865
E: ahill@sladen.com.au
Ben Wyatt
Principal Lawyer
T: +61 3 9611 0115 | M: +61 409 173 928
E: bwyatt@sladen.com.au
Kelvin Tay
Senior Associate
T: +61 3 9611 0148 | M: +61 413 557 157
E: ktay@sladen.com.au
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