Developer foots the bill for broke builder’s work?

24 October 2022

Who should pay when a builder goes broke? This decision provides clarity on contractual obligations for owner-developers when they hire sub-contractors to complete building works for ‘off the plan’ properties.

In issue

  • In Rialto Sports Pty Ltd v Cancer Care Associates Pty Ltd and Ors [2022] NSWCA 146, the Court was required to consider whether a developer could be liable to individual lot owners in relation to the use of non-compliant combustible cladding, where the sub-contracted builder who constructed the works was in liquidation, and the developer was obligated by a special condition to construct the works in a 'proper and workmanlike’ manner.

The background

Rialto Sports Pty Ltd (Rialto) developed a four-storey commercial strata building (Works) at the Kingsway, Miranda, (Property) and sold a number of ‘off the plan’ lots prior to completion of the Works. The Works were constructed using combustible aluminium cladding, and also had other defects. The purchasers of the lots (Lot Owners) were unable to pursue the builder because it had gone into liquidation. Consequently the Lot Owners brought an action against Rialto for breach of its obligation to construct and complete the building in a ‘proper and workmanlike manner’, as set out in special conditions of the contracts of sale.

The decision at trial

At trial, the Lot Owners’ claims against Rialto for damages for defects in the common property were quantified as $1,353,304. The trial judge in the District Court of NSW rejected six defences relied upon by Rialto. Rialto appealed the decision of the District Court to the Court of Appeal.

The issues on appeal

Relevantly, the six issues on appeal included whether the ‘proper and workmanlike’ special condition was only a ‘best endeavours’ obligation. On this point, Rialto submitted, the building contract only required that one ‘replicate substantially or fully replicate the plan, … so that what is in fact registered resembles very closely, if not exactly, what it is that they understand they are purchasing’.

Along with other issues, the Court also considered whether the special conditions merged on completion of the respective contracts for sale. Rialto also argued that individual unit holders did not have ownership of common property, so they did not have standing to bring a claim against Rialto in respect of defects to the façade of the common property.

The decision on appeal

The Court of Appeal allowed the appeal in part because the trial judge’s reasons were inadequate and failed to address several key issues.

Notwithstanding this the Court of Appeal:

  1. Rejected Rialto’s argument that the ‘proper and workmanlike’ special condition required only ‘best endeavours’, and held that the bar was higher than Rialto had submitted;
  2. Held that the fact that Rialto sub-contracted this work to a builder did not excuse Rialto from its good workmanship obligations to the Lot Owners;
  3. In respect of the merger argument, held that the parties intended that the special conditions in relation to good workmanship were to continue after completion; and
  4. Held that the Lot Owners had standing to bring a claim in respect of common property, given that they had an equitable interest in the common property, and had suffered loss which was reflected in the levy they each paid to the owner’s corporation to rectify the defects.

In the circumstances the Court of Appeal ultimately considered that the appropriate relief was for a reference out to a referee for inquiry and report under UCPR r 20.14, rather than remitter of undetermined issues to the District Court for a retrial.

Implications for you

This decision highlights that developers need to comply with all their obligations under a contract, and sub-contracting out work may not exempt developers from their obligations.

Rialto Sports Pty Ltd v Cancer Care Associates Pty Ltd; CCA Estates Pty Limited; Davjul Holdings Pty Limited; Armmam Pty Limited [2022] NSWCA 146

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