Jurisdiction - Australia
Construction & Real Estate
Ashurst
Australia – Damages For Defective Works – Can You Have Your Cake And Eat It Too?

14 November, 2012

 

In brief

 

  • The normal measure of loss and damage for defective building work is the cost of the rectification works. This rule is subject to the qualification that the works undertaken to rectify the defects must be necessary and in the circumstances the reasonable course to adopt.
  • The qualification to the normal rule was recently looked at by the New South Wales Court of Appeal in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd where the Court considered the relevance of the plaintiff’s intention not to carry out the rectification work to the measure of loss and damage to be awarded.

 

The ruling principle used to calculate the quantum of damages for breach of contract is to put the innocent party in the same position, so far as money can do it, as if the contract had been performed. This ruling principle, in a building context, leads to the measure of contractual damages for defective building work being, prima facie, the cost of rectification, subject to the qualification that the works undertaken to produce conformity must be necessary and in the circumstances the reasonable course to adopt.

 

The High Court, in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 (“Tabcorp“), reaffirmed this principle and held that the diminution in value measure of damages will only apply where the innocent party is “merely using a technical breach to secure an uncovenanted profit”. This statement and the circumstances in which the qualification to the prima facie measure of damages for defective building work will apply remains a highly contentious area of the law.

 

Tabcorp was a leasing case in which the tenant (“Tabcorp“), in breach of a covenant not to make alterations to the premises without the consent of the landlord (“Bowen Investments“), demolished the foyer of the commercial premises which it occupied in Melbourne under the lease. The foyer had been constructed with particular care and interest by Bowen Investments, however, Tabcorp took the view that the foyer required a total redesign in order to project its image as a progressive and technologically advanced business and did so, without the consent of Bowen Investments. Bowen Investments sought damages calculated as the cost of reinstatement of the foyer to its original condition plus loss of rental during the period of reinstatement. Tabcorp contended that diminution in value was the appropriate measure which it submitted would result in nominal damages being awarded.

 

It was accepted in Tabcorp that Bowen Investments intended to reinstate the foyer. Accordingly the intention of the innocent party to carry out the rectification work received little attention in the judgment. The subjective intention of the innocent party does, however, create difficulties in the application of the ruling principle. The situation where a plaintiff can keep and use the technically defective, but practically useful, work and at the same time, retain the whole of the damages award for the cost of rectification would appear to conflict with the object of an award of damages because such an award would stray from being compensatory to becoming punitive.

 

In the seminal decision of the High Court in Bellgrove v Eldridge (1954) 90 CLR 613 the Court said that the fact that a party might not carry out the rectification work was quite immaterial. This was not the position in the subsequent English decision ofRuxley Electronics & Construction Ltd v Forsyth [1996] AC 344 (“Ruxley“), in which Mr Forsyth claimed damages against a builder for constructing a swimming pool contractually required to be 7 feet 6 inches at the deep end in circumstances where the pool, as constructed, was only 6 feet 9 inches deep. In Ruxley, their Lordships expressed the view that Mr Forsyth had acquired a perfectly serviceable swimming pool. Further, that were he to receive the cost of building a new one and retaining the existing one, he would not have recovered compensation for loss but a very substantial gratuitous benefit, something which damages are not intended to provide.

 

Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd

 

An issue recently before the New South Wales Court of Appeal in Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184 concerned the relevance of the likelihood that the rectification work would be carried out to the assessment of damages for defective building work.

 

Lesdor Properties Pty Ltd (“Lesdor“) was the owner of premises in Miranda, New South Wales (“the premises“) and Cordon Investments Pty Ltd (“Cordon“) was a commercial builder. The parties entered into a joint venture agreement to develop the premises. Disputes arose between the parties and Lesdor purported to terminate the agreement. Cordon asserted that this amounted to repudiation and each party claimed damages against the other. Lesdor claimed damages against Cordon for defective, incomplete and inconsistent works.

 

The findings of the primary judge

 

The primary judge, McDougall J, summarised the authorities on damages for defective works (including Tabcorp) in two propositions. First, that the measure of damages recoverable by a building owner for breach of a building contract is the difference between the contract price of the work contracted for and the cost of making the work conform to the contract together with recoverable consequential loss. Second, that this principle is subject to the qualification that the works undertaken to produce conformity must be necessary and, in the circumstances, the reasonable course to adopt, that question being a question of fact in every case. Consistently with Tabcorp, he concluded that the test of unreasonableness would be satisfied only in fairly exceptional circumstances. Importantly, the primary judge stated that if rectification work would never be undertaken, there was no loss. He also stated that if supervening events meant that the innocent party to the contract cannot carry out rectification then it cannot be found that the rectification work is reasonable to achieve the contractual objective.

 

The primary judge noted that, on registration of the strata plan, the common property in the premises, in which some of the defective work and much of the incomplete and non-conforming work appeared, was no longer owned by Lesdor but by the relevant owners corporation. In those circumstances he concluded that the rectification work would never be undertaken, at least not by Lesdor. Further, that while Lesdor had a potential exposure to the owners corporation, there was no evidence of any complaint or any threat by that corporation to sue. Accordingly, he held that Lesdor had no right to damages based on the cost of rectification work within the common property.

 

Submissions of the parties

 

Lesdor submitted that the primary judge was in error in concluding that Lesdor was not entitled to damages measured by what it would cost to rectify the defective work on the common property. In support of this submission, Lesdor emphasised that while the owners corporation became the registered proprietor of the common property upon registration, as Lesdor owned all the lots, it controlled the decisions of that corporation and was in a position to influence the decisions of the owners corporation.

 

While Lesdor did not dispute that an absence of intention to carry out the rectification work may be relevant to the test of reasonableness, Lesdor submitted that the evidence did not establish that the rectification works could not or would not be carried out and because as a matter of common sense Lesdor and the owners corporation would wish rectification to be carried out to enhance the building.

 

Cordon submitted that the trial judge had found, as a fact, that the rectification work would not be undertaken and that finding was open on the evidence. Accordingly, Cordon submitted that there was no loss.

 

The findings of the Court of Appeal

 

Bathurst CJ (with whom Macfarlan and Meagher JJA agreed) concluded that the primary judge was justified in concluding that the rectification work would not be carried out. The evidence of the directors of Lesdor in relation to this issue was equivocal and his Honour noted that Lesdor had possession of the premises for more than four years prior to the hearing before the primary judge and none of the rectification work had been carried out at that time.

 

While his Honour acknowledged that Lesdor effectively controlled the owners corporation, there was no evidence that the owners corporation proposed to complete the work or make a demand on Lesdor to do so.

 

In deciding the question of reasonableness, his Honour relied upon the judgment of Giles J in Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253 (with whom McColl and Campbell JJA agreed) to the effect that:

 

  • the plaintiff’s intention to carry out the rectification work is relevant to the question of reasonableness;
  • the plaintiff’s intention to carry out the rectification work is not of significance in itself – a plaintiff may intend to carry out rectification work which is not necessary and reasonable or may not intend to carry out rectification work which is necessary and reasonable; 
  • the significance will lie in why the plaintiff intends to carry out the work or not carry out the work for the light it sheds on whether the rectification is necessary and reasonable.

 

So if supervening events mean that the rectification work cannot be carried out, it can hardly be found that the rectification work is reasonable in order to achieve the contractual objective. If the sale of the premises to a contented purchaser means that the plaintiff does not think, and the purchaser does not think, the rectification work needs to be carried out, it may well be found to be unreasonable to carry out the rectification work. In other words, an intention not to carry out the rectification work will not of itself make carrying out the work unreasonable, but it may be evidence of unreasonableness. In each case the question must be to look at the plaintiff’s reasons for carrying out, or not carrying out, the rectification work.

 

In the end, it was the combination of the lack of intention to carry out the rectification work, the transfer of the premises from Lesdor to the owners corporation and the absence of any evidence that the defects were affecting the use and occupation of the building or the common property which led to the conclusion that it would be unreasonable to carry out the work and that damages for the cost of rectification should therefore not be awarded.

 

Comment

 

To paraphrase Lord Lloyd in Ruxley, while courts are not normally concerned with what a plaintiff does with the damages, it does not follow that intention is not relevant to reasonableness, at least in those cases where the plaintiff does not intend to reinstate. In each such case where there is no intention to reinstate, the focus will turn to why the plaintiff does not intend to carry out the work for the light it sheds on whether the rectification is necessary and reasonable.

 

 

 

 

 

 

 

 

 

 

 

 

For further information, please contact:

 

Joseph Mulcahy, Partner, Ashurst

[email protected]

 

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