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Opinion: Opal tower – a catalyst for change or merely a crack in the concrete?

Opinion by Hamish Geddes

What happened (if you weren’t aware)

For developer Australia Avenue (Ecove) and Icon Constructions (Icon), Christmas was certainly not a welcome end to what was one of the busiest years in the Australian construction industry. On 24 December 2018, what appeared to be a large crack in the internal plasterboard lining revealed itself on level 10 of the Opal Tower building.

On what is typically one of the quietest news days of the year (usually dominated by how busy the shops are), the media was delivered a sensational story. In combination with issues around combustible cladding[1] and the changing skyline that was beginning to be transformed by new buildings following 3 years of booming residential construction, the media and political parties had a pedestal for launching their campaigns (particularly as this is an election year and development, and with the NSW Governments handling of developments a hot topic).

Opposition leader Michael Daley held a press conference in front of the tower announcing a plan (speculatively named ‘Better Building Package;’[2]), that would allow the government to mandate who the certifiers would be for construction throughout NSW. Mr Daley promised more resources and appeared to squarely blame the current building’s woes on “dodgy certifiers”[3].

This did nothing to dampen the concern and media hysteria on the subject.

The Blame Game

Certifiers were (understandably) none too pleased about being thrown under the proverbial bus for the issues caused in this building (which may be far less significant than the media would let you believe – ie. it doesn’t appear collapse is imminent[4]).

For those of us that deal with these issues day in day out – certifiers, architects, superintendents, experts, engineers, the public, builders and developers all engaged in identifying and rectifying a defect in a building, this hardly seemed like a matter that should engage the global media cycle.

It should be noted that the engagement of almost all parties in this matter appears to have been well coordinated and those tasked with identifying, planning and undertaking the rectification appear to have undertaken their task with diligence and efficiency.

Initially, the developer and builder appeared to be constructively working together. This now appears to not be the case, with recent comments by the developer indicating that they are laying all the blame squarely at the builder, and openly demanding answers[5].

Interestingly, the entire background to the relationship between the builder and developer is patent as the construction works were the subject of an adjudication that was appealed[6]and subsequently appealed[7]. What those decisions identify is that:

1.      The construction works were undertaken under a design and construct contract (D& C);

2.      That contract was heavily amended;

3.      There were numerous variations under the contract; and

4.      There was a dispute as to the variations and backcharges.

While there is no suggestion that the variations contributed to the issues now identified, it does highlight a common issue with a design and construct project.

Design and construct contracts can be very usable and appropriate contracts to be utilised in construction works. However, those parties that are subject to the design element of a contract are often not the party that undertakes or engages the design element, and is merely required to build in accordance with plans approved by the developer or principal and takes on all design liability.  There are usually third party designers (architects and engineers) either engaged through the builder or novated across to the builder by the developer on or around the execution of the D & C contract.

This means poorly designed or considered D & C contracts often cause issues throughout the build, and sometimes this manifests with defects.

On numerous occasions we have encountered issues with this form of contracting and it manifests itself on works from large civil contracts, to small home building renovations. Designers, engineers, surveyors and other professionals being engaged by the developer or principal but the builder or subcontractor executing a contract that means all design risk is transferred to them, often with limited control or capacity to assess the design or its buildability. This also becomes a considerable issue where the principal or developer is able to instruct the designers directly and the contractor or builder is required to consider the changes and implement the same and claim for variations.

While we do not have specific knowledge of the Opal Tower contract, negotiations, construction issues and the dispute, these issues often follow the same path – parties incorrectly identifying project risk and how it should be properly allocated.

What now for Opal Tower parties?

Builder – Icon has been proactive in this matter in undertaking the works required with due expediency. This is a good example of what contractors should aim to do when defects are identified.  Contractors should get in and attend to defects identified as soon as possible and, where appropriate, make arrangements with owners to ensure they’re not left in the lurch.

Developer – Developers are jointly and severally liable for defects under s18C of the Home Building Act 1989 (NSW), so it’s likely any claim will be directed at the developer as well as the builder. The developer may claim it rests with the builder, noting the likely contractual arrangement under the D & C contract. If the developer is a special purpose vehicle created for the purpose of the Opal Tower development, there is also a real chance of liquidation should there be protracted proceedings.

Owners – the building will likely be completely rectified and passed fine for occupation, however, as a result of the ongoing media speculation, owners will be faced with a prospect of having a property that is unable to be tenanted or sold. I would not be surprised to see proceedings commenced claiming for both defects and a diminution of value to the property. Class actions have been touted in the media, but the usual process for a claim is through the owners corporation against the builder and developer. A class action by lot owners against a builder and developer is largely untested and may be difficult in the context of the Multiplex decision by the High Court[8].

Takeaway

1.     Contractors and subcontractors must be aware of the contractual risk being bargained for;

2.     Parties should actively engage with each other to resolve defects, including design defects;

3.     Consumers should be confident that respectable builders and developers continue to engage independent professional certifiers to deliver buildings in a good and workmanlike manner.

Acting on numerous occasions for builders and contractors trapped by the contractual design risk, this issue highlighted the importance of knowing what you are bargaining for and appropriately costing that risk or not agreeing to accept the risk at all.

[1] https://www.planning.nsw.gov.au/Policy-and-Legislation/Buildings/Combustible-cladding

[2] https://www.smh.com.au/national/nsw/chasing-20-seconds-of-fame-blame-game-over-opal-tower-20181230-p50ouk.html

[3] https://www.theguardian.com/australia-news/2018/dec/30/sydney-opal-tower-crackdown-on-certifiers-announced-as-three-residents-refuse-to-go

[4] https://www.heraldsun.com.au/news/national/sydneys-opal-tower-evacuated-over-collapse-concerns/video/3b75842b8012edd087de4f6e89f61300

[5] https://www.news.com.au/finance/business/other-industries/opal-tower-residents-told-it-could-be-weeks-before-theyre-back-in/news-story/34f9dea5cce424daa34f94866bf57dc9

[6] https://www.caselaw.nsw.gov.au/decision/5bc82169e4b0b9ab40210667

[7] https://www.caselaw.nsw.gov.au/decision/5c1ac8a8e4b0b9ab402127ee

[8] Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2014] HCA 366

Disclaimer: This publication by Morrissey Law & Advisory is for general information and commentary only and should not be considered or relied upon as legal advice. Formal legal advice should be sought in relation to any matters or transactions that may arise in relation with communication.