The Victorian State Government’s Building Amendment (Cladding Rectification) Bill 2019 passes Parliament.

On 12 November 2019 the Building Amendment (Cladding Rectification) Bill 2019 passed State Parliament and the Building Amendment (Cladding Rectification) Act 2019 (new Act) has now received Royal Assent.

The new Act enacts the State Government’s consumer focused ‘rescue package’ in relation to the funding of ‘cladding rectification work’[1] associated with ‘non-compliant or non-conforming external wall cladding products’.[2]

The new Act will ‘give the Government the ability to pursue dodgy building practitioners on behalf of owners of apartments covered in combustible cladding’.[3]

The new Act does so by amending the Building Act 1993 to:

1. 1. confer further functions on the Victorian Building Authority in relation to cladding rectification work;
   2. provide (continuing) financial assistance for building work associated with cladding rectification work;
   3. provide for the subrogation of the Crown to ‘step in’ to the rights and remedies of an owner/payee who has received financial assistance;
   4. establish a new account in the Victorian Building Authority Fund; and
   5. fund the rectification cladding works by imposing an additional levy on building permits in certain circumstances.  The levy will not apply to buildings in regional Victoria.  The levy for projects over $1.5 million is substantial at 0.82 cents in every dollar of the cost of the building work for which the permit is required.

The State Government’s rectification program is expected to cost $600 million and take 5 years to complete.

The new Act’s substantive operative provisions insert in to the Building Act 1993 new sections 137F ‘Subrogation’ and 137G ‘Repayment of Financial Assistance’.  Key aspects of these provisions include:

1. 1. the Crown’s rights of step in/subrogation to the owner/payee.  The Crown is subrogated ‘to all the rights and remedies of the payee against any person’ in relation to the installation of non-compliant cladding. In practice, this means that the Crown will ‘stand in the shoes’ of the owner who has received funding for rectification works in order for the Crown to bring recovery proceedings against the builder and other industry participants to recoup amounts paid.  This step in right also applies retrospectively, that is, to payments made for this purpose prior to the commencement of the new Act;
   2. the Crown’s step in rights can be exercised in the Crown’s own name or in the name of the payee/owner.  Further, if the Crown’s rights are exercised in the name of the payee/owner, the Crown indemnifies the payee/owner against any adverse costs order in the recovery proceedings.  This provision appears to be directed at ‘unpalatable’ outcomes in previous State Government rescue packages where owners were exposed to unfavourable costs outcomes, for example, the domestic warranty insurance rescue package following the collapse of the HIH/FAI Insurance group; and
   3. importantly, the ability to pursue the officers of a company personally (as well as the company) which, under the new Act, are each jointly and severally liable.  In other words, company directors and other company officers are (potentially) personally exposed and cannot hide behind the corporate veil.  However, this is subject to a ‘no knowledge defence’ where the burden of proof is on the company officer to demonstrate that he or she had no knowledge or did not consent to the act or omission giving rise to the wrongdoing.

Notwithstanding the clear and timely assistance provided by the State Government rescue package in facilitating the rectification of the many affected buildings, issues will no doubt arise.  These will likely include:

1. 1. logistical issues in what one assumes will be a near deluge of recovery proceedings.  These include the strain on the resources of VCAT (in relation to domestic buildings) and the Courts.  Whilst VCAT is the usual forum for domestic building disputes Courts have competent jurisdiction to hear domestic building disputes and this may become more common.[4]  Further ‘resourcing’ issues might apply to, for example, the availability of relevant industry experts including fire engineers;
   2. issues of the application of the apportionment legislation will no doubt feature heavily in any recovery proceedings.  The Crown will take the risk of any primary defendant joining other defendants in an attempt to defray that primary defendant’s liability under the apportionment regime and with it the risk of non-recovery; and
   3. the rescue package is confined to the rectification of non-compliant cladding.  An owner may have incurred other losses not covered by the rescue package.  These might include increased insurance premiums and claims based on ‘builder’s blight’ for the diminution in value of the building in the eyes of the market.  Such issues could impact the ‘mechanics’ in which proceedings are brought and pursued.  For example, an owner’s claim might comprise a blend of recovery proceedings (in the name of the Crown or the owner) and the owner’s other losses.  This might require costs sharing arrangements to be negotiated and agreed.  Further, if all of the available claims are not brought in a consolidated proceeding issues based on the doctrines of preclusion (such as an Anshun estoppel) might subsequently arise.

[1] Defined to mean: ‘(a) building work in connection with, or otherwise related to, a product or material that is, or could be, a non-compliant or non-conforming external wall cladding product; or (b) work of a type specified in a notice under section 185I of the Local Government Act 1989′.

[2] Defined to mean: ‘(a) an external wall cladding product that does not comply with the requirements of this Act and the regulations; or (b) an external wall cladding product that is installed or used in, or applied to, a building in a manner that does not comply with the requirements of this Act and the Regulations; or (c) a high risk external wall cladding product that is used in contravention of a declaration under section 192B applying to that product’.

[3] https://www.premier.vic.gov.au/standing-up-for-combustible-cladding-owners-in-victoria/

[4] Subject to a party (typically the defendant) invoking the operation of the stay provision in s 57 of the Domestic Building Contracts Act 1995.

Authored by:

Daniel Middleton, Partner

Andrew Archer, Special Counsel