The decision in Vella v Ayshan [2008] NSWSC 84 delivered by White J, a single judge in the Equity Division of the New South Wales Court of Appeal, is a warning to vendors that any deficiency in the subject matter of a sale is a breach of an essential term of a contract that can entitle purchasers to rescind the contract.
The facts
The plaintiff purchasers (Mr Vella and another) and the defendant vendors (Mr Ayshan and others) entered into a contract for the sale of a townhouse which was to be constructed. There were two special conditions relating to the construction:
The purchasers noticed defects in the construction of the townhouse and in accordance with SC 16 notified the vendors. Despite assurances from the vendor that the defects had been rectified, the purchasers relied on SC 15 and refused to complete the purchase of the townhouse on the basis that the vendors had failed to cause the residence to be constructed in a proper and tradesmanlike manner and in accordance with the plans and specifications approved by Campbelltown City Council.
Was there a breach of SC 15 and did it permit the purchasers to rescind the contract?
The Court found that the vendors breached both limbs of SC 15 by failing to erect the townhouse in a proper and tradesmanlike manner and by failing to erect the townhouse in accordance with the plans approved by Council. However, the term "prior to completion the vendor shall in a proper and tradesmanlike manner" was not an essential term that required strict and literal performance. Therefore, the purchasers could not rely on this breach of SC 15 to rescind the contract. Conversely, the term "in accordance with the terms and specifications as approved by the Campbelltown City Council" was an essential term because it described the subject matter of the sale and as such, any substantial departure by the vendors from the agreed subject matter of the contract, permitted the purchasers to rescind and have their deposit returned.
Defects in construction – not in a proper and tradesmanlike manner
The vendors had failed to comply with several Australian building codes and standards, but relied on an occupation certificate to argue that despite the defects, the residence was fit for habitation. However, the Court determined that the obligation to erect a residence in a proper and tradesmanlike manner should not be interpreted to merely mean erecting a residence fit for habitation. As the defects were not trivial or isolated defects, but were departures from mandatory building standards, the vendors breached SC 15 by failing to cause the residence to be erected in a proper and tradesmanlike manner.
Departures from approved plans by the Council
The Court referred to the decision in Travinto Nominees Pty Ltd v Vlattas (1973) 129 CLR 1 where Menzies J said that, at common law, any difference, however trivial, between the land described in the contract and the land produced constituted a defect which entitled the purchaser to rescind.
In this case, the Court held that the term "in accordance with the terms and specifications as approved by the Campbelltown City Council" was an essential term because it described the subject matter of the sale. There were three departures from the approved plans by Council and although the departures were not detrimental, the purchasers had not approved them. More importantly, the departures were substantial: the landscaping was not completed, the kitchen bench was shortened and the laundry and toilet were combined so that a door was removed. As a result, the purchasers were permitted to rescind the contract and have their deposit returned.
Notably however, the Court determined that had no part of SC 15 been an essential term, the vendors could have sought specific performance and prevented the purchasers from rescinding the contract because the breaches did not deprive the purchasers of the substantial benefit of the residence and the defects could have been readily rectified.
Conclusion
Vendors should ensure that the land that they deliver to purchasers be substantially identical to the subject matter described in the contract of sale. If a building is to be constructed in accordance with plans and specifications attached to the contract, vendors must ensure they build in accordance with those plans and specifications. A failure to do so may provide purchasers with a valid basis for rescinding the contract.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
