Ministry of Education says it is entitled to sue as product damages property and risks school users’ health.

Carter Holt Harvey's cladding sheets and systems used in 880 school buildings were "inherently defective" and the Ministry of Education is entitled to sue the building products maker, the Court of Appeal has heard.

In the second day of a three-day hearing, the ministry's counsel, Jim Farmer, QC, told Justices Tony Randerson, Lynton Stevens and Mark Cooper that the product liability claim against Carter Holt was a preventive measure to recoup the costs posed by the faulty cladding.

Whether the cladding met industry norms and standards at the time or if Carter Holt's contracts with merchants and building contractors limited its liability were a matter of debate, and would be decided by the evidence at trial.

"Our claim is that the cladding is inherently defective, regardless of whether or not it complies with regulatory requirements and we say that its use in construction of schools causes damage to the plaintiff's property and is a risk to the health of children and teachers," Farmer said.

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The ministry and school boards of trustees had a duty to the occupants of their buildings, and if they discovered a potential problem that could cause damage to other property or pose a risk to the health of those occupants, "they are entitled to look to pursue who caused the problem and recover the economic cost", he said.

Carter Holt is appealing against a High Court ruling that turned down its application to strike out the hearing on the grounds that it did not have a duty of care because the cladding was only one component of the buildings, and if the ministry wanted greater protection it could have negotiated to do so.

David Goddard, QC, counsel for Carter Holt, yesterday told the court a very special reason would be needed to allow the ministry's action to proceed as no damage or injury had materialised.

If the courts found Carter Holt held a duty to provide protection for potential damage or injury, "that would be a very important ruling" and could have a significant bearing on any settlement, Goddard said.

Farmer said Goddard was relying on old case law that was superseded by a Privy Council decision 20 years ago that allowed New Zealand common law to develop based on local conditions in the property market and building sector.

In April 2013, the Education Ministry launched a $1.5 billion action against cladding manufacturers Carter Holt, James Hardie Industries and CSR to recoup the costs involved in a remediation programme for 800 buildings across 300 schools.

It has since reached confidential settlements with James Hardie and CSR, though Goddard said there were some cross-claims against those parties as at least 73 school buildings used a mixture of cladding products.

The ministry this year revised its estimate for the total cost of fixing leaky schools to $1.1 billion to $1.3 billion, and said it was still in negotiations with Carter Holt to achieve a potential settlement.

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At November 2014, the ministry's remediation recovery programme covered 1792 buildings, of which 343 were active, 1346 were discontinued, 91 had settlements in place and 12 were on hold. A further 57 buildings have settlements agreed in principle.