Key Takeaways

1. Whilst the prima facie measure of damages is the cost of bringing the work into conformity with the contract, there is no one way to assess damages. Damages may be assessed by the cost of reinstatement, the diminution in value, or another method with the overriding goal of compensation.
2. When deciding to award damages as to cost of bringing works to conformity with the contract, the works undertaken must be necessary, and the course of action must be a reasonable one.
3. The party required to provide compensation for damages bears an evidential onus of establishing that some alternative and cheaper method of rectification would produce the same practical outcome.

Background

85 Princess Pty Ltd (the appellant) acquired the Crown lease of land with two large warehouses (the property) from Fleming Investments Pty Ltd (the respondent) in 2021. Cracks began to appear in the concrete slab on which the two warehouses had been built.

In 2022, the appellant commenced proceedings for breach of certain warranties in the sale contract claiming over $5 million as the cost of replacing the concrete slab reflecting the substantial demolition and reinstatement works required.

Primary Decision

The primary judge rejected 85 Princess’s claim, holding that the replacement of the slab was not “a rational or reasonable commercial response” and that an appropriate response was to “repair the cracks that now exist as required and then to implement a program to monitor for any new cracks and to have them repaired in a timely way”. Therefore, the primary judge decided that 85 Princess was only entitled to recover nominal damages.

85 Princess appealed this decision.

The Appeal

On appeal, the appellant advanced the following:

• The primary judge erred in concluding that it was unreasonable in the circumstances for it to seek damages calculated by reference to the costs of achieving compliance with the contractual warranties that the primary judge found to have been breached, and
• The primary judge erred in concluding that a reasonable alternative to achieving compliance with the contractual warranties was to repair the existing cracks and to implement a program to monitor for any new cracks and repair them in a timely manner.

The Court of Appeal noted the rule in Bellgrove v Eldridge (1954) 90 CLR 613; [1954] HCA 36 (Bellgrove), which provides that damages should be assessed by ascertaining the amount required to rectify the defects. However, the qualification to the rule is that the work undertaken must be necessary to produce conformity and must also be a reasonable course to adopt. Bellgrove also provides that where the proposed course of action is not reasonable, then the appropriate measure of loss is the diminution in value produced by the departure from the plans and specifications or by the defective workmanship or materials.

However, the Court importantly outlined that the methods of assessing damages identified in Bellgrove are not the only available methods. Port Stephens Shire Council v Tellamist Pty Ltd [2004] NSWCA 353 provided that “rules and principles as the common law has developed to assess the damages of an injured party are not inflexible, and must always be applied with the overriding goal of compensation”.

Applying this, the Court concluded that one way in which defendant could seek to establish that reinstatement was unreasonable is by leading evidence that an alternate and cheaper method of rectification would produce the same practical outcome, where damages are assessed by reference to the costs of that rectification method.  Building Insurers’ Guarantee Corporation v Owners – Strata Plan No 57504 [2010] NSWCA 23 shows that unless the court can be satisfied that the method of rectification is as effective as reinstatement, damages will not be awarded on that basis.

Ultimately, the Court upheld the primary judge’s decision, being that (i) it was not the appellants intention to reinstate the pavement, (ii) the slab did not suffer from a structural defect requiring its replacement, (iii) a prudent owner would not replace the slab, and (iv) the alternative method was likely to be as effective as reinstatement.