Key takeaways

In a building defects claim, there is no ‘positive obligation’ on an Owners Corporation to provide a builder/developer the opportunity to rectify claimed defects. As part of a builder’s ‘failure to mitigate’ defence to reduce or disregard the claimed loss, the onus always remains with the defendant to prove a plaintiff’s failure to mitigate and the onus does not ‘shift’ from the defendant to the plaintiff to prove that its conduct, e.g. not permitting a builder to rectify defects due to a loss of confidence, was reasonable in the circumstances. It is for a builder to prove that an Owners Corporation acted unreasonably in not allowing it to carry out rectification works.

Introduction

Owners Corporation did not permit the builder to rectify defects. It is not incumbent on the OC to prove why it didn’t permit the builder to rectify, it is for the builder to prove that the decision was unreasonable as part of its failure to mitigate the loss defence.

Background to the dispute

Ceerose Pty Ltd (‘first appellant) and the developer: Prisand Investments Pty Ltd (‘second appellant’) were in a building contract for the construction of residential apartments. Construction of the apartments completed in 2014 and building defects led to proceedings commencing. Despite settlement discussions, an agreement on the terms of settlement could not be reached.

The OC’s technology and construction list statement alleged that there was defective works by the builder, breaches of the Home Building Act (‘HBA’) s18B statutory warranties. The builder and developer’s list response admitted certain defects but stated they had always ben ready, willing and able to rectify the defective works but the OC had not permitted them to carry out the repair of defects, and the builder and appellants claimed this was a failure by the OC to mitigate the damage.

Procedural history

This appeal concerns a builder: Ceerose Pty Ltd (‘first appellant), a developer: Prisand Investments Pty Ltd (‘second appellant’) and an Owners Corporation (‘respondent’). The Owners Corporation (‘OC’) commenced proceedings in the NSW Civil and Administrative Tribunal (‘NCAT’) which were then transferred to the Supreme Court of New South Wales. The case was referred to a referee for inquiry and a report on the liability and rectification scope of works (‘Liability Report’).

Primary Decision  

The OC sought judgment for the quantum in the Liability Report, however the builder and developer objected to parts of the report and sought a declaration the OC “failed to mitigate its loss, reasonably or otherwise, such that any avoidable loss cannot be recovered”. The primary judge adopted the Liability Report and gave judgment in favour of the OC for $1.95 million excluding GST.

Onus of Proof Ground

A key dispute was with respect to which party bore the onus of proving the failure to mitigate.

The OC submitted that the builder/developer has the legal and evidentiary onus to prove that the OC had ‘failed to mitigate its loss’ and the OC was not required to prove it acted unreasonably. The builder/developer submitted that after the builder established that the OC refused it access for defect rectification, the builder’s onus of proving a failure to mitigate was discharged and that the onus of proof shifts from the builder/developer to the OC to prove it acted reasonably in refusing access to the builder to rectify the defects.

The primary judge upheld the referee’s position and did not find that the referee erred in finding that if the OC refused access, the onus of proof does not shift from the builder to the OC to prove that the refusal of access was reasonable.

Grounds of Appeal

The builder and the developer appealed the decision, raising the following issues:

1. The primary issue was the primary judge erred in failing to find that the referee had denied the appellants procedural fairness. This related to “determining several issues of fact … by reliance on hearsay evidence contrary to the earlier rulings on evidence previously made by the Referee”. This was part of the evidence that went towards the appellant claiming that the OC had failed to mitigate its loss.
2. The primary judge erred in failing to find that the referee misapplied mitigation of loss principles, namely a failure to not accept the that the Owners Corporation had a ‘positive obligation’ to afford the builder a reasonable opportunity to rectify alleged defects and that opportunity was not given.
3. The primary judge erred in failing to find the referee had applied an incorrect, superseded version of an Australian Standard on a bathroom drainage issue.
4. The primary judge erred in not rejecting the part of the referee’s report which took into account certain invoices.

Onus of Proof and procedural fairness

On appeal, the onus of proof and procedural fairness ground were argued together by the appellants. The appellants argued that once it had established it was ready, willing and able to carry out rectification but it was denied the opportunity to rectify, the onus shifted to the OC to prove its refusal was reasonable because of a loss of confidence. This included an argument that the OC had to positively establish grounds on which a reasonable person would reject the builder’s offer to rectify.

The procedural fairness issue was raised as a result of the referee not admitting certain evidence, which the appellants said went to the issue of the OC’s asserted loss of confidence in the builder as well as the OC’s failure to call direct evidence from members of its strata committee. The primary judge held that the referee was not bound by the rules of evidence.

Court of Appeal’s findings

Failure to mitigate loss

Section 18BA (1) of the Home Building Act provides that:

Breach of a statutory warranty implied in a contract constitutes a breach of the contract and accordingly –

• a party to the contract who suffers loss arising from the breach has a duty to mitigate their loss, and
• The onus of establishing a failure to mitigate loss is on the party alleging the failure.

The Court of Appeal addressed the common law principles with mitigating loss: whilst a plaintiff bears the duty of establishing loss, the onus is on a defendant to prove facts going to a claim that the plaintiff failed to mitigate that loss. The appellants and respondent proceeded with the common law principles of mitigation.

It was noted that there is no invariable requirement that the owner provide the builder with the opportunity to rectify defects. It is for a defendant to prove that the plaintiff’s conduct, which included a failure to provide an opportunity to rectify is unreasonable in the circumstances, such that some or all of the claimed loss resulting from a breach of contract should be disregarded.

The Court of Appeal found that:

1. The Owners Corporation did not have a “positive obligation” to provide the builder with an opportunity to rectify the defects.
2. If the defendant establishes that the plaintiff didn’t provide it with an opportunity to rectify the defects, the ‘onus of proof’ does not shift from the defendant to plaintiff, where the plaintiff then bears the onus of proof that it mitigated its loss.
3. The builder bore the onus of proof that the Owners Corporation had acted unreasonably in denying access to the builder to rectify defects.

Denial of procedural fairness

No procedural unfairness was established by the appellants in their claim that the referee failed to rely on evidence from the OC about its loss of confidence in the builder. This ground stemmed from the appellant’s argument that the OC had a positive onus to show that it had not acted unreasonably. Therefore, the appellant’s position was that without that evidence being admitted by the referee, this would undermine the referee’s ability to determine that the OC had acted unreasonably.

Claimed error on version of application of Australian Standards

The appellants argued that to properly assess the reasonable costs of rectification, the standards in force at the time it is carried out. The Court of Appeal found it was not necessary to determine that point. The referee found the later version of the Australian Standard inapplicable and found it imposed conditions that would be difficult to achieve in practice. The Court found that the referee’s decision did not depend on the conclusion that the later version of the standards was legally irrelevant.

Claimed error on invoices

The appellants claim the primary judge erred by not rejecting a part of the referee’s report that allowed costs based on invoices. The appellant’s argument included that these invoices were rendered after the litigation commenced and were to be characterised by costs of litigation, not damages and they did not form part of the Scott Schedule. The Court of Appeal upheld the primary judge’s conclusions that: (1) invoices rendered after litigation starts, does not mean they cannot be claimed as damages; and (2) the OC’s claim for the invoices was made well in advance and the appellants were aware of these amounts, even if they weren’t in the Scott Schedule.

Decision

The Court dismissed the appeal and the respondent/builder were ordered to pay the OC’s costs.