Here’s a (preliminary) question - can the State of Victoria subrogate the rights and remedies of the individual lot owners on cladding claims?
In issue
The County Court of Victoria has referred a special case to the Court of Appeal for its opinion on the proper construction of section 137F of the Building Act 1993 (Vic) (Building Act) and the extent to which the State of Victoria (State) is entitled to the subrogation of all the rights and remedies of the individual lot owners, as distinct from the owners corporation, in relation to cladding rectification work.
The background
LU Simon Builders Pty Ltd (LU Simon) was the builder of the Atlantis Towers (Building). The Building is a mixed residential, hotel and commercial building constructed in Spencer Street, Melbourne and consists of 205 lots, some of which are owned by individual lot owners and some of them are common property owned by the relevant Owners Corporation (OC). The exterior of Building was clad with aluminium composite panels.
In June 2020, the Department of Transport and Planning, on behalf of the State, entered into a funding agreement with the OC to provide funding to rectify the cladding on the Building (Agreement). The rectification work was successfully completed.
The County Court proceeding
The State has issued proceedings in the County Court of Victoria against LU Simon (and its directors) for breaches of implied warranties incorporated into the building contract pursuant to the Domestic Building Contracts Act 1995 (Vic). Relevantly, the State alleges that it has been subrogated under section 137F of the Building Act to exercise the rights and remedies of the OC ‘and the individual lot owners’.
In response, LU Simon alleges that in circumstances where the State made payments for the cladding rectification work to the OC in its own right and no payments were made to the individual lot owners in any capacity, any subrogated right that the State may have against LU Simon is limited to any liability it might have in respect of the common property owned by the OC, and not in respect of any property owned by the individual lot owners.
The different approaches adopted by both the State and LU Simon turn on the proper construction of section 137F of the Building Act and on the proper legal characterisation of the basis upon which the State made payment to the OC.
In the course of the proceeding, the Court conducted a Judicial Resolution Conference (JRC). During the course of that JRC, her Honour Judge Burchall considered that the uncertainty surrounding the proper construction of the State’s right to subrogation under section 137F of the Building Act was an impediment to further progressing settlement discussions.
Following the JRC, the Court made orders setting down the subrogation question for preliminary determination. Relevantly, the questions were formulated as follows:
Question 1: On its proper construction, does s 137F(1) of the Building Act 1993 (Vic) require the Victorian Building Authority or Cladding Safety Victoria (as the case may be) to make a payment to the owner of a lot of a building in order for the State to be validly subrogated to the rights and remedies of that lot owner against any person in relation to the installation or use of any non-compliant or non-conforming external wall cladding product, or other building work, that required the cladding rectification work to be undertaken?
Question 2: If the answer to Question 1 is ‘yes’:
- was the first payment recorded in Schedule A to the State of Victoria's amended statement of claim dated 15 September 2023 made to the owners' corporation:
- for and on its own behalf;
- for and on behalf of the lot owners; or
- for an behalf of both the owners' corporation and the lot owners?
- on the proper construction of section 137F, is the State subrogated to all the rights and remedies of the individual lot owners against LU Simon in relation to the installation or use of any non-compliant or non-conforming external wall cladding product, or other building work, that required the cladding rectification work to be undertaken to parts of the building comprising lots owned by individual lot owners in circumstances where the grant of financial assistance by the Authority was paid to the owners' corporation established under the Owners Corporation Act 2006 (Vic) in the capacity found in the answer to Question 2(a)?”
Given the significant importance of the preliminary question, the State subsequently issued an application for an order referring a special case for the opinion of the Court of Appeal pursuant to section 76 of the County Court Act 1958 (Vic) (County Court Act).
Referral to the Court of Appeal
Having considered it “just and convenient” and “reasonable”, the Court determined to refer this special case to the Court of Appeal under section 76 of the County Court Act, stating questions of law for the opinion of the Court of Appeal. Those questions of law reserved for the opinion of the Court of Appeal are identical to those set out above.
Implications for you
The Court of Appeal’s decision will have significant ramifications for the State’s ability to seek to recover the full amount paid to remediate non-compliant cladding, which as at December 2023 was approximately $400 million, assuming that the State’s funding agreements have been drafted in similar terms.
This in turn is likely to impact on the State’s broader appetite or standing to bring such claims given its relative inaction in this space to date, and possibly lead to further delays in the event that the Court of Appeal’s decision goes against the State, resulting in a further appeal or legislative amendments could follow the Court of Appeal’s decision.
State of Victoria v L.U. Simon Builders Pty Ltd and Ors (Ruling) [2024] VCC 1075
