Major Projects & Construction 5 Minute Fix 139: combustible cladding, special reference, hybrid arbitration agreements

When you wish (you hadn't installed combustible cladding) upon a Star

In The Star Entertainment Sydney Properties Pty Ltd v Buildcorp Group Pty Ltd trading as “Buildcorp Interiors” [2026] NSWSC 27, Justice Rees of the NSW Supreme Court considered a complex matrix of legal issues arising from the installation of combustible and non-compliant aluminium composite panel cladding (ACP) on three projects at the Star Casino in the mid-2010s.

For the first project, the plaintiff principal, Star, entered into an early contractor involvement (ECI) contract and subsequently a construct-only contract with the defendant builder, Buildcorp. The design was prepared by an architect engaged by Star. Clause 25(c) of the ECI contract and clause 3.4(b) of the construct-only contract provided that Buildcorp had "no design responsibility" in connection with, variously, the pre-construction services and project works.

Star sought damages after it had spent approximately $4 million replacing ACP on the buildings. Buildcorp in turn claimed against the architect (engaged by Star) and Buildcorp's cladding subcontractor, Ausrise. Star claimed $3.4 million for breach of contract, specifically the warranty given by Buildcorp that the works would comply with the Building Code of Australia. However, as a matter of contractual construction, the "no design responsibility" clauses meant Buildcorp was not liable for non-compliant cladding and this operated as a qualification on Buildcorp's warranties. That was so even though, under the ECI contract, Buildcorp had recommended to the architect that the ACP be used in the design.

Buildcorp also sought to offset its liability by claiming against the architect on the basis of an alleged duty of care owed by the architect to Buildcorp, pursuant to which, it was argued, the architect was duty-bound to reject Buildcorp's recommendation to use the ACP under the ECI contract. This claim was rejected for want of a duty of care. It was held that Buildcorp could have, and indeed did, protect itself (by negotiating the "no design responsibility" clause) and therefore was not vulnerable to the architect.

The claim relating to the second project was for $285,000 arising out of a design and construct contract with Buildcorp. While there was no equivalent "no design responsibility" clause as in the first project, the claim failed because the installation of the relevant ACP on the external façade complied with the BCA, having regard to the "attachment exception" in the Coe.

The third project claim was for breach of a minor works contract, which contained warranties relating to fitness for purpose and compliance with the BCA. The ACP was non-compliant with the BCA (which Buildcorp did not dispute) and so was in breach of that warranty. Buildcorp successfully invoked equivalent warranties given by its subcontractor Ausrise under the subcontract. Justice Rees also held that, because combustible ACP was contrary to the BCA, the works were not fit for purpose. Three quarters of Buildcorp's damages to Star of $285,000 were covered by Ausrise's insurer.

In the subsequent decision on costs (The Star Entertainment Sydney Properties Pty Ltd v Buildcorp Group Pty Ltd trading as Buildcorp Interiors (No 2) [2026] NSWSC 190), Justice Rees observed that the "proceedings were fairly disastrous" for Star, and stated that Star may have sued the wrong defendant, being Buildcorp rather than Star's architect. While costs followed the event, the relevant "event" was the builder's successful defence of most of the claims against it, notwithstanding that Star had recovered some amount of damages.

No procedural unfairness in damaged works special referee process

In Acciona Infrastructure Australia Pty Ltd v Zurich Insurance plc UK Branch [2026] NSWSC 185, the plaintiff builder (Acciona) sought payment under a contract works insurance policy, after an offramp embankment constructed as part of an upgrade to the Bruce Highway in Queensland was damaged by severe weather in 2015. Acciona claimed that the damage was because of heavy rain, while the insurer Zurich contended that relevant work was undertaken because of defective fill used in the embankment and a contractual direction to replace the works.

Justice Peden of the NSW Supreme Court referred the matter to special referee Richard Cheney SC, who was assisted by an expert quantity surveyor, before whom a four-day hearing was held. The referee found in Acciona's favour regarding damage suffered (being $2.1 million) and Acciona sought adoption of the relevant report. Zurich alleged a breach of procedural fairness by the referee on the grounds that the referee had:

• allowed an expert report from Acciona to be relied upon, in circumstances where Zurich had not sought a procedural extension to respond to that evidence (but could have done so); and

• not provided sufficient written reasons.

Justice Peden held that it was open to the referee to accept Acciona's expert report where there was no contradictory evidence led by Zurich. Accordingly, the referee's report was adopted by the Court.

SOPA wrap-up

A brief reminder that Victoria's security of payment reforms, enacted by the Building Legislation Amendment (Fairer Payments on Jobsites and Other Matters) Act 2025, are expected to come into force in coming months. The reforms remove the excluded amounts regime, abolish reference dates, create rights around the release of performance security and more.

We've previously covered the reforms when the bill was introduced, the power to void "unfair" time bars and potential impacts on the oil and gas industry.

Arbitration wrap-up

Appeal on kompetenz-kompetenz principle dismissed

In Oil Basins Ltd v Esso Australia Resources Pty Ltd [2026] VSCA 6, the Victorian Court of Appeal dismissed an appeal from a decision of the Victorian Supreme Court, in which the Court had made orders under section 7 of the International Arbitration Act 1974 (Cth) to stay court proceedings in favour of international arbitration.

The case in the arbitration was a dispute over the amount of royalty payment to Oil Basins, which ultimately dated back to an agreement between Oil Basins and BHP in 1960, which BHP assigned to Woodside. From 1964, Esso was permitted to farm into the relevant oil fields. A settlement agreement (which provided for its terms to be interpreted and applied in accordance with the law of New York) was entered into in 1994, but in 2023 disputes arose over the treatment of GST in calculation of the royalty.

Three of the grounds of appeal related to section 7(2) of the Act: where matters are capable of settlement by arbitration, a court shall stay proceedings and refer parties to arbitration in respect of that matter. The first two grounds alleged that the trial judge was in error in holding that section 7(2) applies without the judge in fact having formed a view as to whether the matter was subject to the arbitration agreement. In essence, it was argued that the law of New York State meant that the dispute was not capable of settlement by arbitration. Like the Victorian Supreme Court below it, the Victorian Court of Appeal favoured a light-touch approach to the kompetenz-kompetenz principle – the trial judge was entitled to stay proceedings so that the arbitrator could determine whether the matters in dispute were subject to the arbitration agreement.

Round the twist: procedural gymnastics of hybrid arbitration clause upheld

In Downer Utilities Australia Pty Ltd v Murra Warra Asset Co Pty Ltd [2026] VSC 48, Justice Croft of the Victorian Supreme Court considered various issues arising under a "hybrid" arbitration agreement, where the rules of one arbitral institution are administered by another institution.

Murra Warra Asset Co (Squadron Energy) entered into an EPC contract with Downer and Senvion to build Stage 1 of the Murra Warra Wind Farm in northwest Victoria, which included 61 wind turbine generators. Senvion entered insolvency in Germany and a dispute arose.

The EPC contract included an arbitration agreement under which the Resolution Institute was to conduct the arbitration under the International Chamber of Commerce Arbitration Rules. Squadron commenced an arbitration with the Resolution Institute, while Downer commenced an arbitration with the ICC itself. Each party sought orders that the arbitration commenced by the other party was invalid.

Justice Croft undertook a detailed review of overseas authorities on hybrid arbitration agreements. Downer's position was that, because the ICC Arbitration Rules required certain matters to be undertaken by the ICC, the arbitration agreement cannot require those matters to be undertaken by the Resolution Institute. His Honour held however that the contractual drafting made it clear that the parties intended to have a hybrid agreement, with the arbitration to be conducted by the Resolution Institute using the ICC Arbitration Rules, notwithstanding the "procedural gymnastics" which apply in such a case.

The case is a reminder of courts' preference to give effect to the intention of the parties (objectively construed) notwithstanding practical difficulties in implementing what parties have agreed.

Builder's quantum meruit claim evaporates on appeal

In Singh v Ozzie Homes Building & Construction Pty Ltd [2026] VSCA 25, the Victorian Court of Appeal overturned the decision of the trial judge in finding that the builder of a residential project had achieved "lock-up stage" and was therefore entitled to the stage payment. The Court also overturned the earlier finding that the builder had validly terminated a contract for non-payment and was entitled to payment for the work on a quantum meruit.

Two homeowners entered into a contract with the respondent builder for the construction of a new house in Melbourne. After delays on the project, the builder demanded payment of the amount owing for reaching "lock-up stage" prescribed under the Domestic Building Contracts Act 1995 (Vic). The owners alleged that the stage had not been reached and withheld payment. At trial, the County Court of Victoria held that, notwithstanding the front door and garage doors had not been installed, plyboard had been installed in their place and so lock-up had been achieved.

The Court of Appeal held that the owners were entitled to refuse payment because the builder had not reached the milestone, nor was the builder entitled to suspend work for non-payment because no payment was owing pending achievement of the unfulfilled milestone. The builder's purported termination was held to be legally ineffective because, at the time, the builder had wrongfully suspended works and therefore it could not be said that the builder was ready, willing and able to perform if called upon to do so. As a result, instead the contract was held to have been mutually abandoned because, while neither party effectively rescinded it, the contract had been "discharged by inferred agreement of the parties".

The Court of Appeal also held that the builder was not entitled to claim on a quantum meruit. Prior to abandonment, the builder could still have finished the work and claimed payment. It was not prevented from doing so by the owners but rather only by its own wrongful suspension, and the owners were entitled to withhold payment in circumstances where the contracted for works were incomplete. Accordingly, the builder had not established that it would be unconscionable for the owners to retain the benefit of the unfinished work.