CASE NOTE
Owners Corporation 1 Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd (ACN 130 534 244) and Anor [2023] VCC 1473 (24 August 2023)
County Court of Victoria
Judge McNamara
In Owners Corporation 1 Plan No PS 707553K and Ors v Shangri-La Construction Pty Ltd (ACN 130 534 244) and Anor [2023] VCC 1473 (24 August 2023), County Court of Victoria (Judge McNamara) was considering (for the first time) the State of Victoria’s subrogation right where an Owners Corporation claimed against a building company in respect of defective (combustible) cladding. In particular, the County Court was considering the liability of directors of such a building company and the “lack of knowledge or consent” defence.
Section 137F of the Building Act 1993 (Vic) (commencing on 19 November 2020) provides, so far as relevant, as follows:
“137F Subrogation
(1) This section applies if, after the commencement of section 54 of
the Cladding Safety Victoria Act 2020, Cladding Safety Victoria
pays an amount to an owner of a building (the payee) by way of a
grant of financial assistance in relation to cladding rectification
work on the building.
(2) When the financial assistance is paid to the payee, the Crown is
subrogated to all the rights and remedies of the payee against
any person in relation to the installation or use of any non
compliant or non-conforming external wall cladding product, or
other building work, that required the cladding rectification work to
be undertaken.
(3) If a right or remedy to which the Crown is subrogated under this
section is exercisable against an entity that is not an individual, it
is enforceable jointly and severally against the entity and the
people who were its officers at the time the act or omission that
gave rise to the right or remedy occurred.
(4) If it is proved that an act or omission by an entity occurred without
the knowledge or consent of an officer of the entity, a right or
remedy is not enforceable as provided by subsection (3) against
the officer in relation to the act or omission.
(5) The Crown may exercise its rights and remedies under this
section in its own name or in the name of the payee.
(6) If the Crown brings proceedings under this section in the name of
the payee, the Crown must indemnify the payee against any costs
awarded against the payee in the proceedings.
(7) If, in exercising its rights and remedies under this section, the
Crown recovers more money than the amount of financial
assistance paid to the payee, the Crown must pay the difference
to the payee after deducting costs incurred to recover the money.
(8) The payment of an amount referred to in subsection (1) in relation
to cladding rectification work does not affect any right or remedy
of the Crown by virtue of subsection (2) to recover from a person
in relation to the installation or use of any non compliant or nonconforming
external wall cladding product, or other building work,
that required the cladding rectification work to be undertaken.
(9) A reference in this section to the rights of a payee includes any
right the payee may have under section 86 of the Sentencing Act
1991.
(9A) Despite the amendment of this section by section 54 of the
Cladding Safety Victoria Act 2020, any right of subrogation
conferred on the Crown under this section as in force immediately
before its amendment continues to have effect.
(10) In this section—
officer—
(a) in relation to an entity that is a corporation—means an
officer of the corporation within the meaning of section 9
of the Corporations Act; or
(b) in relation to an entity that is neither an individual nor a
corporation—means an officer of the entity within the
meaning of section 9 of the Corporations Act.”
The key facts:
- On 24 November 2014, a fire broke out at the Lacrosse building, a 21 storey apartment tower in Caulfield, Victoria. The fire was largely due to the external (combustible) cladding..
- The Lacrosse building in Caulfield, Victoria, was constructed with Expanded Polystyrene Panels (EPS). (At the time that the Lacrosse building was designed, the Building Commissioned, since re-created as the VBA, did not preclude the use of EPS cladding systems. The current VBA Fact Sheet now records that, from 1 February 2021, the Minister of Planning has prohibited the use of EPS as external wall cladding note for this type of building.)
- The Design and Construct Contract was entered into around 13 December 2013. The design decision to use RMAX Orange Board, a brand of EPS cladding material, was made around June 2014. The occupancy permit was issued by the building surveyor on 8 September 2015.
- On 14 June 2017, the Grenfell 24 storey social housing block, due to external combustible cladding, resulted in 72 deaths.
- In 2020, the Victorian government, following the report of a Victorian Cladding Taskforce, introduced amendments into the Building Act 1993 (Vic), creating the Cladding Scheme, which came into operation on 19 November 2020).
- In 2019, the Owners Corporation commenced an action in VCAT against the Builder. In 2022, the State of Victoria was joined as an Applicant, and the director of the Builder was joined as a respondent. In addition, the VCAT action was struck out and referred to the County Court. When the action came on for hearing in the County Court, the only active parties were the State of Victoria (claiming pursuant to Section 137F) and the director. (The Builder was in liquidation.)
- The claim was made pursuant to the Domestic Building Contracts Act 1995 (Vic) Section 8 statutory warranties, on the grounds that the cladding was not non-combustible as required by the Building Code of Australia.
- The Builder’s director claimed, among other things, that he did not know that RMAX Orange Board was a non-compliant cladding board, accordingly, on a proper interpretation of Section 137(4)
His Honour said:
105 The evidence established, and it was not in dispute, that the use of RMAX
Orange Board – a form of EPS – was known to Mr Naqebullah, since he was in
charge of Shangri-La’s building operations. He knew that this material was being
employed, and he consented to it. Dr Wolff contended that the ss(4) defence
was available to Mr Naqebullah if he could be shown to have been ignorant of
what now seems to be known and accepted by everyone: namely, that the
“Alternative Solution” authorised or purportedly authorised by the building permit
for Stage 2 in its original or varied form, and approved in the fire engineering
briefs and report, did not achieve the performance requirements under the
Building Code of Australia 2010. Likewise, it was Mr Naqebullah’s case that, not
being aware of the unsuitability of EPS or external wall cladding, he was
unaware that the material used by Shangri-La under his direction was not
suitable material for external cladding, and that an apartment house clad by this
combustible cladding was not suitable for its purpose.
106 The State contended, and I did not understand Dr Wolff to deny, that the form of
ss(4), and, one may think, the fact that matters of knowledge and consent are
peculiarly within Mr Naqebullah’s knowledge and not within the knowledge of the
plaintiff owners or the State, meant that the burden of proof on this issue rested
with Mr Naqebullah.
107 Mr Naqebullah’s written and oral evidence was to the effect that he was at
relevant times in 2014 and 2015 ignorant that there was any problem with the
use of EPS, and he had his company employ it in construction because it was
“green-lighted” by the relevant building surveyor and by the fire engineer. He
said he was also influenced by what transpired at the design meeting in June
2014 where, as noted above, the discussion between the attendees was as to
the proper brand of EPS to use, and the consensus was that the product RMAX
Orange, the product which was in fact fitted, was the one to use. He said he was
also influenced by an email from the fire engineer indicating the suitability of
RMAX Orange by email dated 9 April 2014, albeit with respect to a different
development at 58 Queens Parade, Fitzroy (CB 5051).
108 Whilst a number of comments were made by Ms Crafti and Mr Chaile, and a
number of attacks in cross-examination were mounted as to these matters, it was
not squarely put to Mr Naqebullah that he was lying in so far as he had given
such evidence; nor could it be said that this evidence was other than probative
as to his level of knowledge at material times. In those circumstances, I accept
Mr Naqebullah’s evidence that he was unaware that EPS or RMAX Orange was
problematic or inappropriate in its use as external cladding on the building at
Hawthorn Road, and that he became aware as to this problematic nature only in
2016 or 2017.
109 The question then becomes whether the knowledge which Mr Naqebullah clearly
did possess, that EPS was being used as external cladding on the building at
Hawthorn Road, is sufficient to negative the defence he claims under ss(4) of
s137F without further proof that he knew that EPS was problematic and noncompliant
in that use.
….
113 Dr Wolff said that the subject matter of the “knowledge” or lack of knowledge
required for a consideration of the ss(4) defence was the relevant “act or
omission by an entity [viz Shangri-La]”. This, according to Dr Wolff, referred one
back to ss(2), identifying the act or omission which might impose liability on the
“entity”, in this case Shangri-La, as being “the installation or use of any noncompliant
or non-conforming external wall product … that required the cladding
rectification work to be undertaken”. He noted that the Act includes a definition
of cladding rectification work in s3 which is in the following terms:
“cladding rectification work means—
(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”.
114 Dr Wolff said that this definition incorporated within itself a requirement that the
relevant material [here EPS] be “non-compliant or non-conforming”.
115 In a broad sense, Dr Wolff’s expatiation on the statutory provisions is plainly
correct. It does not, however, provide an answer to the question posed. As
previously noted, EPS is “non-compliant or non-conforming”. The textual
analysis leaves unanswered the question whether knowing that what is
admittedly a non-compliant or non-conforming material to be used amounts to
sufficient knowledge to exclude the ss(4) defence, whether one knows that the
material is non-compliant or non-conforming or not.
116 I referred the parties to a decision of the High Court of Australia in Yorke v Lucas
(1985) 158 CLR 661 (“Yorke’s case”). This case concerned the cause of action
for misleading or deceptive conduct, which at that time was constituted by s52 of
the Trade Practices Act 1974. Section 75B of that Act extended liability from a
corporation which has engaged in misleading or deceptive conduct to persons
who had aided, abetted, counselled or procured the contravention; induced the
contravention, whether by threats, promises or otherwise; or had “been in any
way, directly or indirectly, knowingly concerned in, or party to, the contravention”.
These provisions are now to be found in the Australian Consumer Law. The
counterpart of s52 of the Trade Practices Act is s18 of the Code.
117 Earlier High Court authority had established that a corporation which represented
to another person something which was misleading or deceptive was to be
regarded as having contravened s52 without any proof that the corporation knew
or ought to have known that what it represented was misleading or deceptive.
That is, the primary liability attaching to the corporation was absolute, in the
same way as the liability attaching to Shangri-La here – subject to the statutory
stay of proceeding – was strict and absolute in accordance with the warranties
implied by s8 of the Domestic Building Contracts Act.
118 Mr Lucas, a director of the relevant corporation, was found at trial not to be liable
as someone knowingly concerned in his company’s contravention because,
according to the summary in the joint judgment in the High Court of Mason ACJ,
Wilson, Deane and Dawson JJ:
“he [Mr Lucas] was insufficiently aware of the relevant facts for him to be
involved in the contravention within the meaning of ss75B and 82 of the
Act.” ((1985) 158 CLR 661, 665)
119 An appeal to the Full Court of the Federal Court against the dismissal of the
claim against Lucas was unsuccessful, and the matter then proceeded to the
High Court. The High Court affirmed the decisions below. According to the joint
judgment:
“A contravention of s.52 involves conduct which is misleading or
deceptive or likely to mislead or deceive and the conduct relied upon in
this case consisted of the making of false representations. Whilst Lucas
was aware of the representations – indeed they were made by him – he
had no knowledge of their falsity and could not for that reason be said to
have intentionally participated in the contravention.” ((1985) 158 CLR
661, 667−8)
120 Their Honours said later in their judgment:
“There can be no question that a person cannot be knowingly concerned
in a contravention unless he has knowledge of the essential facts
constituting the contravention.” ((1985) 158 CLR 661, 670)
121 Brennan J said:
“When the conduct constituting the contravention [of s52] is the making of
a false representation, it is immaterial that the corporation did not know
that the representation was false when it was made. The essential facts
to be established in sheeting home liability to a corporation under s.52
include the making of the representation and the falsity of the
representation but not the corporation’s knowledge of the falsity.” ((1985)
158 CLR 661, 675−6)
122 His Honour said:
“The operation of s.75B(a) in conjunction with s.52 may be incongruous,
for s.52 throws a strict liability on a corporation, but s.75B(a) does not
extend liability for a s.52 contravention to a person who procures the
corporation to engage in contravening conduct if that person is honestly
ignorant of the circumstances that give that conduct a contravening
character.” ((1985) 158 CLR 661, 677)
123 As to persons being knowingly concerned in the contravention, his Honour said
that he could not read the words “knowingly concerned in” as being the
equivalent of “unknowingly concerned in”. (Ibid)
124 Dr Wolff said in the course of his closing submission that “there were 1137 cases
decided” mentioning Yorke v Lucas “as of yesterday”: viz, 16 August 2023. He
continued:
“I have not gone through all of them, but when you read them, you always
see a reluctance by the various judicial authorities to accept something
that didn’t have some factual basis.” (T663, L26−30)
125 I have not read the 1,137 cases referred to by Dr Wolff.
….
137 The class of person who could be described as “officers” of the companies
involved in the construction of the buildings which required remediation is very
wide indeed. The Building Act “picks up” the definition of “officer” from the
Commonwealth Corporations Act. The concept of “officer” in that lengthy
definition specifically includes both company directors and secretaries as well as
persons who make “or participate in making decisions that affect the whole or a
substantial part of the business of the corporation”. It can therefore extend to
senior executives who do not hold positions on the board. We may consider that
in creating the defence established by ss(4) of s137F of the Building Act,
Parliament sought to immunise a number of obvious classes of “officers” from
liability. For instance:
(a) non-executive directors such as a building company’s solicitor or
accountant who sit on the board to bring their legal or accounting expertise
to the table;
(b) company secretaries who devote their time to office administration, keeping
or supervising accounts or accounting systems, payroll issues and so forth;
(c) executive directors or non-director executives involved in non-building
aspects of a company’s operations: for instance, a marketing manager or
someone devoted entirely to the raising of finance;
(d) executive directors or senior executives tasked to manage or supervise
particular projects which are not affected by the cladding issue.
138 There may be other obvious classes of officer whom Parliament intended to
exclude.
139 What remains when these obvious classes are excluded? The residuum, whom
on the face of it Parliament seemed to seek to subject to liability for the cladding
fiasco, would be directors and managers with building qualifications of one sort
or another, engaged in managing a building company’s building operation,
including in particular building projects where non-compliant cladding was used.
All of these “officers” could, one supposes, establish, as plausibly as Mr
Naqebullah has sought to do in this proceeding, that whilst they are and were
generally expert in building matters, they were not expert in fire engineering. The
market was using what are now seen as non-compliant combustible materials for
cladding (as testified by the figures quoted by Dr Wolff). They relied on the
expertise of fire engineers and relevant building surveyors. This line of defence
could generally be advanced, one would suppose, by the whole of this residual
class of persons, unless perhaps one or more of them was in fact a fire engineer
himself or herself.
140 The result of Dr Wolff’s proposed construction of the ss(4) defence is that officer
liability under s137F would be a mere brutum fulmen, which cannot be what
Parliament intended. A document described as “Specifications & Finishes
Schedule”, stamped by the relevant building surveyor as “APPROVED”, in the
“External” section referred at Line 1.3 to “Styro Foam Rendered” (CB 6918). On
the basis of the judgment of Flick J in Parker’s case and the considerations just
mentioned, I conclude that Mr Naqebullah’s “knowledge” of this cladding issue,
namely that RMAX was being used on the Hawthorn Road site, is sufficient to
exclude him from the benefit of the ss(4) defence. This construction of that
defence is the preferable one, because it advances the purposes of the Cladding
Safety Victoria Act 2020; whereas the construction advanced by Dr Wolff, for the
reasons explained, does not.
….
His Honour concluded that the Builder’s director “knowledge” of this cladding issue, namely that RMAX was being used on the Hawthorn Road site, is sufficient to exclude him from the benefit of the Section 137F(4) defence.