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LegalSeptember 07, 2022

Who pays to fix the combustible cladding?

This was the question considered by the New South Wales Court of Appeal in Rialto Sports Pty Ltd v Cancer Care Associates Pty Ltd & Ors (2022) Aust Contract Reports ¶90-508, [2022] NSWCA 146.

This was the question considered by the New South Wales Court of Appeal in Rialto Sports Pty Ltd v Cancer Care Associates Pty Ltd & Ors. The dispute arose principally from the cost of removing and replacing potentially lethal cladding applied to the exterior of a recently completed commercial strata development. The plaintiff lot owners had bought “off the plan” from the vendor/developer before the building work was complete. While the builder (and its insurer) would have been the obvious defendant to bear the cost of $1.3 million to remedy the defect, the lot owners had no recourse because the building company was already in liquidation before the proceedings commenced. Instead, 4 of the individual lot owners each sued the vendor for breach of its covenant of good workmanship and materials in the special conditions of the contract of sale with each of them. While the vendor was permitted to sub-contract the actual building work, the Court of Appeal held that the vendor remained liable in contract for breach of its warranty to the lot owners for work carried out by the builder. The owners’ corporation was not a party.

In defence, the vendor argued that the covenant of good workmanship and materials was merely a “best endeavours” obligation to achieve a particular result. Further, the vendor argued that its obligations merged with the contract upon completion of the sale and did not survive beyond that time. The Court of Appeal rejected both arguments. Since the lots were sold “off the plan”, the merger argument failed because the defect could not be known or investigated before completion of the sale, which occurred before the building work was complete. More fundamentally, a best endeavours obligation is a different and lower standard of contractual performance that failed to discharge the vendor’s obligation of good workmanship and materials in the special conditions of the contract of sale.

Contrary to the vendor’s argument that the lot owners had no legal interest in the common property to pursue the matter, the Court of Appeal held that each lot owner had an equitable proprietary interest in the common property as tenants in common with the other lot owners. This meant that the lot owners were in a legal position to sue the vendor for defects in the common property and that each lot owner had suffered damage to the extent of its proportionate share of the total remediation costs.

Source: Rialto Sports Pty Ltd v Cancer Care Associates Pty Ltd and Others (2022) Aust Contract Reports ¶90-508, [2022] NSWCA 146, 10 August 2022.

Keith Lupton
Content Management Analyst, Wolters Kluwer Health
Keith has extensive legal experience in contracting and advising upon intellectual property, entertainment law, production and investment in all media, secured financing, competition law, licensing agreements, distribution agreements, sales agency agreements, employment, corporate governance, and general commercial.
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