Awarding damages to a party in building disputes is a difficult task and the amount the aggrieved party is entitled to depends on multiple factors including:

  • The cost to rectify the defective work;
  • How reasonable it would be to do so in the circumstances;
  • Any costs incidental to the required rectifications;
  • Whether there is any loss of enjoyment or convenience of the building where there is not necessarily a loss in value.

This article explores these factors and what both builders and clients need to be mindful of when considering taking legal action to resolve a dispute.

Legal Position in Australia

The current legal approach to contractual disputes is to restore the innocent party to the position they would have been in had the party in breach completed the contract as agreed. In a building dispute, costs will usually be awarded to fix the defective work or remedy the breach so as to facilitate the completion of works as initially contracted.

The court also considers that the rectification works need to be necessary and reasonable in the circumstances. The scope of what is ‘unreasonable’ has narrowed over the years to focus more on situations where an innocent party is using what is likely to be a technical, contractual breach to gain unprecedented profit.

Further, the court also considers the innocent party’s intentions and will look at whether or not the innocent party intends to perform the rectification work as to whether or not awarding damages for it is reasonable in the circumstances. Evidently, these are primarily factual considerations, and so there have been many cases on what kind of works should require rectification, and subsequently what the innocent party should receive as damages.

What Do the Cases Say?

The UK case of Ruxley Electronics & Construction Ltd v Forsyth [1995] 3 All ER 268 considered when rectification works were unreasonable. In this case, Forsyth hired Ruxley to build a swimming pool at his house. The deep end of the swimming pool was to be 7 foot 6 inches, but once completed Forsyth discovered it was only 6 foot 9 inches. The swimming pool would have had to have been demolished and rebuilt to rectify the defect. Forsyth refused to pay Ruxley the final payment for the work on this basis and so Ruxley commenced legal action.

The Court held that in this case, the cost of rectifying the work was disproportionate to the benefit Forsyth received, so chose not to award damages to Ruxley for the cost of rectification. The Court then considered whether the value of the swimming pool had been reduced compared to if Ruxley had completed it correctly. The decision was that there was no substantial difference in value and awarded Forsyth, the innocent party, a low sum of damages for the general inconvenience caused by the defective swimming pool.

Continuing with the theme of swimming pools, the more recent case, Tranquility Pools & Spas Pty Limited v Huntsman Chemical Co Pty Limited [2011] NSWSC 75, also considered whether rectification was unreasonable under the circumstances. In this case, Tranquility manufactured swimming pools using a product Huntsman supplied. Tranquility alleged that the product Huntsman provided caused blistering and black spots in the swimming pools they manufactured and that the only recourse was to replace the swimming pools as they could not be fixed.

The Court held that the product did cause these defects and that the only practical remedy was to replace the swimming pools to compensate the owners of the pools Tranquility sold. Despite this being a very costly rectification, it was still reasonable in the circumstances.

Finally, the matter of Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 18 considered whether or not to award damages for rectification of a commercial property. Lesdor Properties Pty Ltd (Lesdor) owned premises in Miranda, New South Wales and Cordon Investments Pty Ltd (Cordon) was the commercial builder. A dispute arose between the parties, and ultimately both Lesdor and Cordon claimed damages against one another. 

The New South Wales Court of Appeal agreed with the trial judge and the Supreme Court and held that based on the facts, rectification was not going to take place. 

The trial judge determined from the evidence that since Lesdor no longer owned the defective property and indeed, was now owned by the owners corporation, Lesdor would never have undertaken the rectification work. There was also no evidence of any complaint or threat of litigation to Lesdor in regards to these defects. Lesdor, therefore, had no right to damages based on rectification.

The Court of Appeal decided this on the basis that there was no actual intention to carry out rectification works – the property had been transferred from Lesdor to the owners corporation with no issue, and there was no evidence that the defective work was affecting the use of the building. Awarding damages for rectification was therefore not necessary or reasonable in the circumstances.

Before Commencing Legal Action

As highlighted by the cases above, a determination for an award of damages for rectification depends predominantly on the specific facts of the situation in light of what is reasonable and necessary. Consider the two swimming pool cases where the Court awarded damages in one case and not the other based on the material facts. 

It can be difficult because of this to determine whether or not the innocent party will receive rectification damages or not. Before rolling the dice in court, it is advisable for property owners to take the following steps. 

Firstly, consider what the defects are and what steps you are required to take to notify the builder and provide them with an opportunity to fix the work. The contract may set out specific requirements for this, and the court may consider whether a party provided the opportunity or not. 

It is also imperative to ensure the builder is aware of the exact nature of the defect and what needs to be done to fix it. Similarly, consider the contract in detail and what actions give rise to a breach of contract. Clauses in the contract may state whether a breach arises if there is a failure to carry out or ‘complete’ the work to a particular standard. It may be all the difference in whether an action or omission amounts to a breach or not at a particular point in time.

As a builder, you want to make sure that you receive clear instructions from your client regarding the defects you need to rectify. Otherwise, the defect is likely to remain in place after your repairs. Also, ensure that the client gives you enough time to undertake the rectifications and that this is reasonable noting the amount of work you are required to do.

Importantly, both sides should take steps to avoid any unnecessary disputes and understand both parties’ rights and obligations under the contract. You can read more about this in our article about resolving disputes through ADR. 

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As you can see, claiming damages in a building dispute to rectify defects is a complex area of law that turns primarily on the facts. If you do encounter a dispute of this kind, you should speak with a building and construction lawyer about the strengths and weaknesses of your cases and what are your best options in seeking or defending rectification. Questions? Get in touch on 1300 544 755.

Bianca Reynolds

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