Damages For Defective Works

By David Opperman and Geoff Hansen

A court will usually award damages for defective building works based on the cost of rectifying the defects complained of. However, the question of damages for building defects can be more complicated where:

• the owner does not intend to rectify the defects, or

• the owner sells the building without carrying out the works.

The New South Wales Supreme Court recently considered whether an owner of a building was entitled to recover the costs of rectifying defective work in a situation where the building had been sold, the rectification work had not been performed and the defects had little or no effect on the value of the building.

SAS Trustee Corporation (SAS) entered into contracts with a number of companies for the design and construction of a glazed pavilion, which was to connect two high rise towers. Disputes arose regarding alleged defects in the waterproofing, glazing, paving and pergola steelworks.

SAS issued proceedings on 13 June 1997, making claims against a number of the companies who were involved with the project. In 1998, SAS sold the building for about $170 million. The sale price was reduced by $2,352,741 on account of SAS' estimate of the cost of rectifying the defects. The sale was not an arms length transaction and SAS in fact ended up having a 50 per cent interest in the trust administered by the purchaser.

In October 2001 the Court appointed a consulting engineer to act as a referee and prepare a report on the issues in dispute. The referee delivered his report in April 2003, prompting a dispute about the extent to which the report should be adopted by the court.

One of the referee's findings was that there was no diminution in the value of the property resulting from the defects (ie the sale price reflected full value, whether or not the defects were rectified). This finding was not challenged. In fact, the referee ultimately agreed with SAS that the correct measure of damages was the cost of rectification of the works.

The issue was whether SAS should be entitled to damages based on an estimate of the cost of the rectification works in circumstances where it had sold the building and had not and would not carry out the rectification works. The architect argued that the property had been sold and there was no obligation on SAS to undertake the rectification works. Further, as there had been no diminution in value, the architect submitted that SAS had not suffered any damage as a result of the defects.

Master Macready referred to the well known decision of the High Court in Bellgrove's case, which is authority for the proposition that the measure of damages for defective works is generally the cost of rectifying the defects to make the work conform to the contract. However, this is subject to the rectification work being:

• necessary to produce conformity, and

• a reasonable course to adopt.

In Bellgrove's case, the High Court gave an example of an unreasonable rectification demand. The Court considered a hypothetical situation in which the internal walls of a building were constructed with new bricks and not second hand bricks, as provided for in the contract. In such a case, demolition and re-erection using second hand bricks would be considered unreasonable.

On the facts of the present case, the Master did not consider rectification to be unreasonable, as it would not require destroying a significant part of the pavilion, nor jeopardise the structural integrity of the building or entail great expense.

The Master also concluded that the sale of the building did not affect the right of SAS to take action for loss of the value of the works.

Accordingly, the Court ordered that the costs of rectifying the defects were recoverable.

The Master followed Bellgrove's case and applied the reasonableness qualification by primarily considering the impact of the rectification works on the building. While recognising that the subsequent sale could be relevant, there were no objective facts surrounding the sale which impacted on the reasonableness of the claim for damages. However, in a case where the building had been sold and the rectification work not performed, it could be argued that ordering damages based on rectification costs is unreasonable. Some cases in this area have recognised that there could be a tension between an owner gaining a windfall, as against a contractor escaping responsibility for a clear breach or defect. In balancing the competing positions, the Master in this case may ultimately have been persuaded by the fact that the defects were relatively clear, were located in the public entrance to the building and impacted on its enjoyment in a real way. The case underscores the importance of carefully assessing specific fact circumstances in considering entitlements arising from defects.

This article provides a summary only of the subject matter covered, without the assumption of a duty of care by Freehills or Freehills Carter Smith Beadle. The summary is not intended to be nor should it be relied upon as a substitute for legal or other professional advice