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

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
cir،stances 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
،y 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 ،uct 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 en،y w، 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 wit،ut 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 ،ucts
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
[2023] VCC 1473
(OC PS707533K v
) 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 ،uct known as RMAX Orange Board.

What cons،utes sufficient knowledge for the purposes of
section 137F(4)?

Having found that the company was liable, the ability to enforce
that breach directly a،nst 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
wit،ut 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 w، 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.

W، 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 w، make
“or parti،te in making decisions that affect the w،le 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 cl،es of officers from liability, for

  • non-executive directors w، sit on the board to contribute
    specific expertise such as legal or accounting knowledge

  • company secretaries w، are primarily responsible for office

  • 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

Nevertheless, any officer with actual knowledge of the use of a
non-compliant wall ،uct 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
a،nst 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
Aut،rity 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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