Introduction
In 2010 and 2012, the developer entered into building contracts with the builder (Ceerose) to construct a 16-storey building with 19 apartments, one commercial lot and five levels of basement car parking in Elizabeth Street, Sydney.
In 2013, the strata plan was registered. A final occupation certificate was issued in 2014. In 2016, the owner commenced proceedings in the New South Wales Civil and Administrative Tribunal (NCAT) which were later transferred to the Supreme Court of NSW.
Facts
In 2019, the plaintiff (the owner) filed a Summons and Technology and Construction List Statement, seeking damages for building defects. These defects consisted of inadequate falls to the bathroom and ensuite floors and rectification works performed to a lift shaft.
In their Technology and Construction List Response, the defendants (the builder and developer), denied the existence of defects, and furthermore, contended that the owner’s consent had been sought to undertake works to rectify any defects.
The owner refused to allow the builder to rectify the defects, therefore engaging a third party to perform the remedial works, subsequently incurring a larger cost. As a result, the defendants contended that if the owners had permitted the builder to address the defects, it would not have incurred the claimed losses.
Issue
The major issue in contention is whether the owner acted reasonably or failed to mitigate its loss by refusing to allow the builder to carry out remedial works.
The Supreme Court’s Decision
The Court referred to the prior decision in Owners SP 76674 v Di Blasio Constructions Pty Ltd [2014] NSWSC 1067 which held:
“In the case of building contracts, it is also generally accepted that the owner must give the builder a reasonable opportunity to rectify any defects. … the owner is required to give the builder an opportunity to minimise the damages it must pay by rectifying the defects, except where its refusal to give the builder that opportunity is reasonable”
The Court clarified that there is no positive duty on mitigate loss but rather a duty not to act unreasonably. This was recently considered by the High Court stating:
“loss which is due to unreasonable or improvident actions of the plaintiff is generally disregarded by applications of the rules of mitigation of loss”.
Further, the Court noted the onus rests on the builder to prove the owner acted unreasonably.
The Court went on to identify four factors which would assist in determining whether an owner has acted unreasonably when dealing with the builder such that the owner’s loss may be disregarded:
(a) the extent and seriousness of the defects;
(b) the quality of any repairs effected by the builder;
(c) the builder’s engagement with the owner in respect of the suggested defects and proposed method of rectification; and
(d) the efficacy or perceived futility of continuing to negotiate with the builder.
In this instance the referee concluded that the owners did not act unreasonably in refusing to allow the defendants access to carry out rectifications as they had lost confidence in the defendants. The Court found no reason to disturb the finding of fact by the referee and adopted the referee’s report.
Orders
The Court made a judgment for the plaintiff in the amount of $1,952,984 and ordered the defendants to pay the plaintiff’s costs.
Key Takeaways
- For Owners Corporations: This decision highlights the importance of the duty to act reasonably. Owners must ensure that they are aware of whether it is reasonable to refuse builders access to rectify defective work in their attempt to mitigate loss.
- For Builders: This case serves as a reminder to ensure that if defects do arise in their work, builders must be proactive and maintain the trust of clients to ensure that they are not refused access to rectify the defective work and therefore liable for any further losses.