By: Sarah Metcalfe

State of Victoria (Department of Transport and Planning) v L.U. Simon Builders Pty Ltd & Ors

At a glance

• In the subrogated recovery action brought by the State of Victoria against LU Simon and its directors in the County Court of Victoria (CI-23-03724) LU Simon argued that the State could not be subrogated to the rights of individual lot owners under s137F(2) in seeking to recover monies the State had spent on rectification works to individual lots, where lot owners were not “payees” and had not received any financial assistance for cladding rectification work to their respective lots.
• The cladding rectification works had been funded and paid by the VBA to the Atlantis Towers Owners Corporation, pursuant to a funding agreement between the VBA and the Owners Corporation.
• The Court of Appeal has rejected LU Simon’s interpretation of s 137F of Building Act 1993.
• The Court of Appeal decision confirms that s137F(1) encompasses a payment by the VBA or Cladding Safety Victoria of financial assistance to an owners corporation, where the non-compliant cladding which was replaced was owned by both Owners Corporations and individual lot owners.
• This paves the way for the State of Victoria to continue to commence subrogated recovery proceedings in the name of Owners Corporations against contractors, their officers, and those involved in the installation or use of non-compliant cladding, to recover in excess of $340 million in grant payments the VBA and Cladding Safety Victoria have made to owners corporations for the removal and replacement of non-compliant cladding in Victoria.

Background

In 2023, the State of Victoria commenced a subrogated recovery action in the County Court of Victoria, in the name of Owners Corporation No. 1 PS600940E, the Owners Corporation of the high rise Atlantis Towers Building at 284-300 Spencer Street, Melbourne (Atlantis Towers) against the builder of the Atlantis Building, LU Simon Builders Pty Ltd (LU Simon) and two of its directors. In that Proceeding the State seeks to recover funds it paid to the Owners Corporation (via a funding agreement between the Victorian Building Authority and the Owners Corporation) in the sum of approximately $3.4 million, for the removal and replacement of non-compliant combustible cladding on common property and individual lots. Whilst the proceeding was commenced by the State against LU Simon and 2 of its directors, LU Simon in turn joined other defendants to the proceeding who were involved in the design of the Atlantis Towers building and specification of the non-compliant combustible cladding.

In State of Victoria (Department of Transport and Planning) v L.U. Simon Builders Pty Ltd & Ors¹ the Court of Appeal determined ‘by special case’ questions referred to it by the County Court in the underlying proceeding, on the interpretation of s 137F of the Building Act 1993.

Pursuant to ss 137F(1) and (2) of the Building Act 1993 (in existence pre 1 December 2020), where the Authority 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, 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, that required the cladding rectification work to be undertaken. Pursuant to s137F(3) where a right or remedy is exercisable against an entity, it is enforceable 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.

In the case of Atlantis Towers, the Victorian Building Authority (Authority) entered into a Funding Agreement and paid monies to the Owners Corporation, to fund the removal and replacement of the non-compliant cladding on Atlantis Towers. Even though some of the cladding replaced on Atlantis Towers was owned by individual lot owners, monies were only paid by the Authority to the Owners Corporation. This is consistent with the approach that has been adopted by Cladding Safety Victoria (CSV) since it was established by Cladding Safety Victoria Act 2020 on 1 December 2020.

From its inception to 30 June 2024, the CSV has entered into funding agreements with 387 Owners Corporations for re-cladding works² notwithstanding many of these residential buildings were affected by subdivision, with external cladding forming part of the common property and individual lots. Some $341 million³ has been paid by CSV to Owners Corporations by way of grant payments over the period 2020 – 2024. To date, the State has only commenced a small number of subrogated recovery proceedings. Given the extent of the grants, the Court of Appeal decision is significant for the State and is expected to be a “green light” for further subrogated recovery actions being brought by the State in the name of Owners Corporations.

Decision

In the underlying County Court proceeding, LU Simon argued that the State could not be subrogated to the rights of individual lot owners under s137F(2) in seeking to recover monies the State had spent on rectification works to individual lots, where lot owners were not “payees” and had not received any financial assistance for cladding rectification work to their respective lots.⁴ By pleading this by way of defence, LU Simon sought to prevent the State recovering monies that had been paid to the Owners Corporation, for cladding rectification works to individual lots.

The Court of Appeal, in a unanimous judgment of their Honours Emerton P, Beach JA and Harris AJA held that in the case of a building where cladding rectification works affects both common property and individual lots, the condition (in s137F(1) as it existed in 2020) that the Authority ‘pays an amount to an owner of a building…by way of financial assistance in relation to cladding rectification work on the building’ is satisfied by a payment to owners of parts of a building, for work on all of those parts of the building or on the building as a whole.⁵ Their Honours held this was particularly the case given owners corporations are conferred with power under the Owners Corporation Act to take certain actions on behalf of their members, being owners of individual lots, which will be binding with respect to such lot owners.⁶

s137F(1) (as it was in 2020 prior to the amendment) encompassed a payment by the Authority of financial assistance to an owners corporation, on its behalf and on behalf of owners of lots in the building, for cladding rectification works on parts of the building owned by them. It follows that such a payment will result in the State being subrogated to the rights and remedies of the Owners Corporation and lot owners pursuant to s137F(2).⁷

Their Honours also observed that the changes to s137F(1) and (2) following the enactment of the Cladding Safety Victoria Act 2020 (Vic) which replaced⁸ references to the Authority to refer to Cladding Safety Victoria, in no way altered their interpretation of the sections.⁹ Section 137F as amended does not require requests for financial assistance to be made by individual lot owners.

Conclusion

The limitation period for cladding building actions has been extended twice and is presently (subject to certain requirements) 15 years from the date of issue of the Occupancy Permit.¹⁰

The Lacrosse fire took place on 25 November 2014. In the MFB Post Incident Analysis report published in April 2015, the MFB attributed the rapid fire spread on the lacrosse building to the external ACP cladding, Alucobest. Many insurance notifications for non-compliant cladding on buildings were made from 2015 onwards. However, the use of ACPs was widespread on high rise buildings in Victoria in the period 2008 – 2012. For most buildings for which the CSV has extended grants, the 15 year limitation period for cladding building actions will have either expired or will be close to expiring. The State of Victoria will therefore be under time pressure to commence subrogated recovery actions (or seek to enact legislation further extending the limitation period).

It is expected that the Court of Appeal decision will strengthen the State’s resolve to continue in its endeavours to recover grants it made to Owners Corporations to pay for the cost of removing and replacing non-compliant cladding. We have not seen the end of cladding related claims and litigation yet!

Get in touch

Our experienced construction team in Victoria is ready to provide tailored advice and help you navigate non-compliant cladding moving forward.

If you have any questions or would like advice, please reach out to Sarah Metcalfe, Andrew Brennan, or Nick Lux.