In the decision of Owners Corporation 1 Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd (ACN 130 534 244) and Anor (Revision 1) [2023] VCC 1473 the County Court of Victoria (Court) held that section 137F of the Building Act 1993 (Vic) (Building Act) imposed liability upon the director of a building company for installing combustible cladding (expanded polystyrene cladding (EPS)), irrespective of its knowledge of EPS’s combustible nature at the time.

Background

Shangri-La Construction Pty Ltd (Contractor) entered into a contract for the design and construction of an apartment complex in Caulfield (the Project) on or around 13 December 2013. Under building permit dated 10 December 2014 and advice from the relevant fire engineer, the Contractor installed a brand of EPS cladding, called ‘RMAX Orange Board’, for the external wall cladding of the Project. The Project was subsequently audited and it was recommended that the cladding be removed. The lot owners commenced proceedings against the Contractor and the State of Victoria was joined as an applicant on 15 December 2022. However, proceedings were stayed against the Contractor as it entered into liquidation in early 2023.

Section 137F of the Building Act entitles the State of Victoria to hold a director of a building company liable for installing non-compliant cladding. The State of Victoria sought to enforce the rights of the owner of the Project pursuant to section 137F of the Building Act and hold the director of the Contractor, personally liable for the breach of section 8 of the Domestic Building Contracts Act 1995 (Vic) (DBC Act). The basis of this claim was that the director had knowledge of or consented to the installation of the non-compliant cladding.

The director admitted that the cladding was combustible. However, they argued that they were not aware that EPS cladding was combustible at the time of installation and that as the matter was beyond their expertise, they were entitled to rely upon the expertise of the fire engineer and building surveyor to confirm that the cladding material was compliant.

Decision

The Court found that the report produced by the fire engineer, which endorsed the usage of EPS cladding failed to adequately consider the combustibility of the cladding and therefore its suitability for installation on the Project. Similarly, the Court further held that the building permit did not meet the relevant performance requirements of the Building Code of Australia. In light of this finding, the Court held that the building permit should never have been issued and therefore treated it as though it was never issued.

Regarding the Contractor’s liability for installing combustible cladding, the Court held that constructing a building which does not meet the performance requirements under the Building Code of Australia is enough for a builder to be found in breach of the implied warranties under section 8 of the DBC Act.

Regarding the director’s liability, the Court held that the director could be held personally liable for the Contractor’s breach of the implied warranties on the basis that the director was aware that EPS cladding was installed as external wall cladding material, irrespective of whether they knew the EPS was combustible cladding material.

Conclusion

Directors of building companies may be held personally liable for the installation of non-compliant cladding in a project, even if the contract was executed by the building company. If there are doubts surrounding the conformity of a specified or installed material, legal advice should be sought as soon as possible.