Supreme Court New South Wales

• Medium Neutral Citation: The Owners - Strata Plan No 76674 v Di Blasio Constructions Pty Ltd [2014] NSWSC 1067
• Hearing dates: 28 and 29 July 2014
• Decision date: 11 August 2014
• Before: Ball J

Decision

Judgment for the plaintiff in the sum of $481,405.61

• Catchwords: BUILDING AND CONSTRUCTION - breach of statutory warranties in the Home Building Act 1989 (NSW), s 18B - reasonableness of owner's conduct after breach by builder - duty to mitigate - where builder refused to rectify defects - where owner lost confidence in builder - whether owner reasonable in rejecting later offer by builder to rectify defects - availability of damages for cost of rectification work
• Legislation Cited: Building Code of Australia; Home Building Act 1989 (NSW), s 18B
• Cases Cited: Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613; Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302; (2010) 26 BCL 335; Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653; Cassidy v Engwirda Construction Co (No 2) [1968] Qd R 159; Cassidy v Engwirda Construction Co (No 2) [1968] QWN 47 (HC); (1968) 42 ALJR 168; Eribo v Odinaiya [2010] EWHC 301 (TCC); Hasell v Bagot, Shakes & Lewis Ltd [1911] HCA 62(1911) 13 CLR 374; Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313; Radford v de Froberville [1978] 1 All ER 33; [1977] 1 WLR 1262; TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd [1963] HCA 57; (1963) 180 CLR 130; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130
• Texts Cited: A Chambers, Hudson's Building and Engineering Contracts, (12th ed, 2010, Sweet & Maxwell); J Bailey, Construction Law, (Vol II, 2011, Informa Law); J Carter, E Peden and GJ Tolhurst, Contract Law in Australia, (5th ed, 2007, LexisNexis)
• Category: Principal judgment
• Parties: The Owners - Strata Plan No 76674 (Plaintiff); Di Blasio Constructions Pty Ltd (ACN 082 737 559) (Defendant)
• Representation: Counsel: D Hand (Plaintiff); M Pesman SC (Defendant); Solicitors: Makinson D'Apice (Plaintiff); Jane Crittenden (Defendant)
• File Number(s): 2012/119976
• Publication restriction: Nil

Judgment

Introduction

1 In these proceedings, the plaintiff (the Owners Corporation), which is the owners corporation in respect of a strata development consisting of a three storey building comprising 9 residential units and an underground carpark and storage area in Dalley Street, Queenscliff, sues the builder of the building, Di Blasio Constructions Pty Ltd (the Builder), for breaches of the warranties implied by s 18B of the Home Building Act 1989 (NSW) (the Act).

2 The Builder filed a cross-claim against a subcontractor who was responsible for installing the roof of the building. However, that cross-claim was settled on the first day of the hearing.

3 It is not disputed that the construction of the building involved "residential building work" within the meaning of the Act and that there were defects in that work with the result that the Builder was in breach of the statutory warranties implied by s 18B. The defects fall into three categories. First, there are defects in the roof and guttering. Second, there is a particular fire safety defect. Third, there are a number of other defects, the most significant of which concern waterproofing of bathrooms and exterior planter boxes. It is now agreed that the trade costs of rectifying the fire safety defect is $12,144. The Owners Corporation and the Builder each obtained expert reports concerning the scope of the work required to rectify the other defects (apart from the roof), and they appointed an expert quantity surveyor, Mr Madden, to cost that work. Although the experts agreed on much of the work that needed to be done, there were some differences. According to Mr Madden, the trade costs associated with the work that the Owners Corporation's expert said needed to be done are $179,343, and the trade costs of the work that the Builder's expert said needed to be done are $123,406. On the first day of the hearing, the Owners Corporation and the Builder sensibly agreed to split the difference between the two estimates and agreed that the trade costs of the work are $151,375. The Owners Corporation's expert, Mr Mo'ane of Integrated Building Consultancy Norwest, also estimated that the costs of rectifying defects with the roof and guttering were $116,108.65.

4 Two issues remain. First, the Builder takes issue with some of the preliminaries and on costs allowed for by Mr Madden, and it submits that there has been some duplication between preliminaries allowed for in respect of the roofing work and preliminaries allowed for in respect of other work. It also claims that other components allowed for in the estimate of the costs of rectifying defects with the roof are excessive.

5 Secondly, and more significantly, the Builder says that the Owners Corporation has failed to mitigate its loss by engaging the Builder to perform the necessary rectification work. It says that it offered to enter into a building contract to perform that work for $1, that the Owners Corporation has acted unreasonably by refusing that offer and that, in circumstances where the Builder was ready, willing and able to enter into that contract, the proceedings should be dismissed. Alternatively, the Builder submits that the Owners Corporation should recover no more than the amount it would have cost the Builder to perform the rectification work.

Factual background

6 The building was built between about January 2005 and February 2006. The strata plan was registered on 1 March 2006, and the final occupation certificate was issued on 2 March 2006.

7 Following occupation, a number of problems developed with the building, mostly relating to ingress of water through the roof and windows and problems with the waterproofing in some bathrooms and planter boxes. It appears that some direct complaints were made to the Builder by members of the Owners Corporation, and at least one attempt was made to fix leaks in the roof and the ensuite bathroom in Unit 3.

8 The problems persisted, and, in about July 2008, the Owners Corporation engaged an expert, Mr Evans, to prepare a technical report concerning the defects in the building. That report was provided to the Owners Corporation on or about 29 July 2008. It identified a number of defects. In particular, Mr Evans expressed the opinion that there was a systemic failure in the way the bathrooms in each of the units had been constructed. In addition, Mr Evans concluded that the waterproof membrane that had been installed in the external planter boxes was inappropriate and that the box gutters had not been correctly constructed. He also identified a number of other defects.

9 In or about August 2008, the Owners Corporation engaged a solicitor, Ms Broome, to act for it in relation to the defects. Ms Broome rang Mr Sam Di Blasio (Mr Di Blasio), one of the directors of the Builder, on 8 September 2008 concerning the defects, and, on 10 September 2008, Ms Broome sent to the Builder a copy of the report the Owners Corporation had obtained from Mr Evans. She said in her covering letter that she had been retained by the Owners Corporation "to ensure that there is a disciplined and organised approach to the repair of defects in [the] building". She also said that further defects had come to light since Mr Evans had prepared his report, including "leaks through the slab emanating somewhere from Unit 1 into the storage rooms and parking basement below". She said that she had been instructed to ask Mr Evans to prepare a further report on the new defects and to devise a scope of works for the repair of all defects.

10 On 16 October 2008, there was a meeting on site between Mr Di Blasio and Mr Evans during which Mr Evans took Mr Di Blasio through the defects. It appears that, at that meeting, Mr Evans asked Mr Di Blasio to provide a program of works to remediate the defects that had been identified. They met again on site on 20 November 2008, and, following that meeting, Mr Evans wrote to Mr Di Blasio on 22 November 2008. The letter records "our general agreement that you will formally respond in writing to my technical report and when the building defects are agreed between us you will provide a programme of works that fits with the appropriate timing of the occupants". The letter went on to say:

As you are aware a number of showers have started failing by allowing water to escape and damage other building elements such as walls, paintwork, carpet and timber flooring. Additional showers will no doubt follow due to the lack of compliance with the required waterproofing. Therefore all 18 wet areas will be required to be dealt with in your programme of remediation.

The letter also dealt with rectification of the planter boxes.

11 On 19 November 2008, Mr Evans sent an email to Mr Di Blasio saying that it had been over three months since he had had Mr Evans' report and over one month since he had attended the property to assess defects. Mr Evans said that, unless Mr Di Blasio was able to meet the commitments he made regarding "an appropriate response to my report", the matter would be dealt with "by reference to the available legal processes without any further notice to you".

12 Mr Di Blasio replied to that email the following day. He said that he would attend to a number of the repairs raised in Mr Evans' report. They included repairs to the ensuite bathroom in Unit 1 and the main bathrooms in Units 2 and 3. The email also said:

As per the remaining bathrooms I didn't believe it is necessary to interfere with showers if not leaking.

13 Ms Broome heard nothing further from the Builder, and, on 18 December 2008, she sent a follow up letter. The letter concluded with the following paragraph:

Should the owners corporation not hear from you within fourteen (14) days from the date of this letter providing answers to all of the defects raised in the report, which would result in a repair of those defects in a proper and workmanlike manner to the satisfaction of Paul Evans (acting reasonably), then the owners corporation will take whatever action it deems appropriate without further notice.

The demand for a response within 14 days was given notwithstanding Ms Broome said at the end of her letter that her office would be closed between 19 December 2008 and 19 January 2009.

14 Mr Di Blasio rang Ms Broome on 22 December 2008 and by chance was able to catch her in the office. In that telephone conversation, Ms Broome told Mr Di Blasio that it was acceptable that he deal with Mr Evans on practical issues concerning the repair works, but that Mr Evans had not been satisfied with any of the verbal proposals made to him by Mr Di Blasio concerning those works. She further advised Mr Di Blasio that, if the Builder were to undertake all the work required by Mr Evans' report dated 29 July 2008 to Mr Evans' satisfaction, then the Owners Corporation would be satisfied with that outcome.

15 On 14 January 2009, Mr Di Blasio sent Mr Evans an email in which he said that he would be back at work on 19 January 2009 "and will organize repair of the three bathrooms". The reference to the three bathrooms was no doubt a reference to the three bathrooms identified in Mr Di Blasio's email dated 20 November 2008. It is unclear what type of repair Mr Di Blasio had in mind. At some stage, he had proposed to Mr Evans that the repairs could be made by coating the tiles with a waterproof coating. Mr Evans had told Mr Di Blasio that that solution was unacceptable and inconsistent with the Building Code of Australia. Mr Evans' position was that it was necessary for the Builder to repair all bathrooms rather than those that currently exhibited leaks. Mr Di Blasio's position was that the leaks should be repaired if and when they arose.

16 On 23 January 2009, Ms Broome wrote to the Builder stating that Mr Di Blasio's telephone call to her and email to Mr Evans was not a satisfactory substitute for a response to her letter dated 18 December 2008. She sought that response by 30 January 2009. She also asked Mr Di Blasio to cease attempting to contact individual strata owners directly.

17 On 30 January 2009, Shaw Reynolds Bowen & Gerathy, who had been retained to act for the Builder, wrote to Ms Broome. They said that their client was "loathe to provide a program of works" because of the unreliability of subcontractors. They also said that the Builder was only prepared to deal with "those matters that are identified as being currently in need of repair (4 bathrooms) and will not agree to deal with '... all 18 wet areas' on the basis that 'if it aren't broke why fix it'". The reference to "4 bathrooms" was presumably an error. The letter also said that the whole of the bathrooms did not need to be ripped out and that the Builder "can solve the problem by removing the shower area".

18 Ms Broome replied to that letter on 3 February 2009 stating that a program of works was a "perfectly reasonable request" and asked that one be provided before work commenced. In cross-examination, Mr Di Blasio agreed with that proposition.

19 On 9 February 2009, Shaw Reynolds Bowen & Gerathy responded. In that response, they said that, so far as the Builder was concerned, the following problems needed attention:

1. 3 bathrooms require remediation to prevent water leakage

2. A planter box needs work to prevent water leakage

3. Rendered brick column needs investigation and repair

4. 2 units with settlement cracks should be repaired in direct consultation with the affected owners

5. Roof repair. Our client is unsure if this has been done

20 On 18 March 2009, Ms Broome sent a letter to Vero Insurance Ltd, the insurer who provided insurance in accordance with s 92 of the Act, drawing its attention to further defects that had recently come to the Owners Corporation's attention, and, on 17 April 2009, Ms Broome sent to Shaw Reynolds Bowen & Gerathy a scope of works that had been prepared by Mr Evans following a further visit he made to the site on 25 February 2009. The general requirements of the scope of works were described as follows:

Waterproofing the lower level parking area

Replacing the failed waterproof membranes to nominated planters

Remediating failed cavity flashings at entry

Replacing failed box [gutter] sections

Replacing failed bathroom waterproof membranes

Repairs to cracked and drummy render

Various sundry items

21 Shaw Reynolds Bowen & Gerathy responded to that letter on 29 April 2009. They made a number of comments on the scope of works. It was clear from the response that the Builder was only prepared to repair bathrooms where there was evidence of some failure in the membrane or a leak. The letter suggested that it would be beneficial if the Builder met with Mr Evans on site to discuss "what works need to be undertaken, what works our client is prepared to undertake and the appropriate method and/or standard of rectification". Absent a meeting, the letter suggested that it was appropriate to involve the Department of Fair Trading.

22 Mr Evans met with Mr Di Blasio, his brother, father and their engineer on site on 10 June 2009. Mr Evans reported on that meeting to Ms Broome in the following terms:

It was the usual emotional [tirade] from Di Blasio as I would not agree to his [shortcuts] and I insisted that they comply with the Scope of works and provide a programme and not carry out the work in a [piecemeal] manner. This only resulted in the usual verbal abuse and they stormed off.

23 Shaw Reynolds Bowen & Gerathy sent a further letter to Ms Broome on 24 June 2009. The letter outlined the work that the Builder was prepared to do. The letter repeated the Builder's position that it would only repair bathrooms where the membrane had failed or there were leaks. In relation to the box gutters, the letter said:

Our client has had a roofer undertake repair work to the box gutters referred to in paragraph 8.15 of Mr Evans' scope of work. Our client will inspect the property when completing other tasks agreed to, to confirm that the works have been completed correctly. We seek your advice as to whether your client maintains any outstanding issue with the gutters.

The letter concluded that if the parties could not reach agreement then they should "enter into mediation before the Department of Fair Trading".

24 That letter was discussed at a general meeting of the Owners Corporation held on 22 July 2009. Following that meeting, on 3 August 2009, Ms Broome replied to Shaw Reynolds Bowen & Gerathy's letter dated 24 June 2009. On the same day, she lodged a Home Building Act Complaint Form with the Office of Fair Trading. The Office of Fair Trading appointed Mr Bona Jovanovski as a compliance officer. Mr Jovanovski met with the Builder and Mr Evans on site some time following his appointment.

25 On 14 January 2010, Mr Jovanovski issued a rectification order. Among other things, the rectification order required the Builder to rectify shower leaks in the bathroom in Unit 1, the ensuite and main bathrooms in Unit 2 and the main bathrooms in Units 3, 4, 5, 6, 7, 8 and 9. The order required the work to be completed by 26 February 2010.

26 On 19 January 2010, Ms Broome wrote to Shaw Reynolds Bowen & Gerathy stating that the rectification order failed to deal with two additional items of repair. One was that previous repairs that had been undertaken to the box gutters had apparently caused a new leak to develop in Unit 7. The other was the door to Unit 8, which did not comply with fire safety requirements.

27 It appears that the Builder sought to obtain access by contacting the Owners Corporation or individual lot owners directly to undertake the repairs the subject of the rectification order. On 29 January 2010, Ms Broome wrote to Shaw Reynolds Bowen & Gerathy stating that the Builder was not to have any access until the Owners Corporation received a proper scope of works relating to the items of intended repair. The letter concluded:

While our client remains concerned that the items identified in the Rectification Order (already served upon your client) do not adequately cater for the number of defects affecting our client's building, your client can at least commence the process of repairing our client's building by preparing a proper scope of works that are at least identified in the Rectification Order.

Unless we receive a competent scope of works from your client with respect to the parameters identified above, to be received no later than Friday 26 February 2010, we will assume that the inappropriate conduct of your client is continuing and we will advise our client accordingly.

28 At about that time, the Builder appointed Ms Crittenden in place of Shaw Reynolds Bowen & Gerathy. Ms Crittenden responded to Ms Broome's letter dated 29 January 2010 on 5 February 2010. In that response, Ms Crittenden said that the rectification order was not sufficiently clear to permit the Builder to prepare a scope of rectification work. She said:

For example, the words "rectify leak to shower" give no indication of the cause of the leak or whether it is considered to be due to a failure of the membrane or of the shower frame.

Ms Crittenden said that she had written to Mr Jovanovski to seek clarification of his orders.

29 Mr Jovanovski was not prepared to provide any additional particulars of the work to be carried out. He did have a further discussion with Mr Di Blasio, and, following that discussion, Mr Di Blasio prepared a scope of works which Ms Crittenden sent to Ms Broome on 17 March 2010. It is apparent from that scope of works that the Builder did not accept that the membrane needed to be replaced in all the bathrooms. Rather, the solution in most cases was to remove the silicone around the frame of the shower and apply a new silicone sealant. In relation to the leaking roof, the work specified in the scope of works was "Seal all laps to roof box gutters where required and test gutters for leaks". That work was said to be already completed. The scope of works also stated that the Builder would need access to prepare a scope of works in relation to the leaking external planter boxes (Item 2) and moisture entry adjacent to the foyer wall (Item 3).

30 On 9 April 2010, Ms Broome wrote to Ms Crittenden in relation to the scope of works. Ms Broome alleged that the scope of works that had been prepared by the Builder was seriously deficient. In relation to Items 2 and 3, Ms Broome said "Please advise when that access is required and my client will arrange same". The letter concluded:

I look forward to dealing with you on this matter and hopefully between us we can resolve the differences between our respective clients.

31 The Builder apparently sent a fax directly to Ms Broome seeking access on 22 April 2010. On 11 April 2010, Ms Broome sent an email to Ms Crittenden saying that she had just received a fax seeking access, that she would seek instructions from her client "but in any event note that this letter agrees to access in respect of items 2 and 3 in the scope of works provided by your client".

32 On 13 April 2010, Ms Crittenden wrote to Ms Broome. The letter said in part:

My client did not fax a letter to your office seeking access to the property... on 22 April 2010. Would you please send me a copy of the letter you say was faxed to you by my client.

Thursday 22 April at 10 am is suitable to my client, Tremco Pty Limited and its nominated contractor to inspect the planter box referred to in item 2 of the scope of works. Item 3 can be done at the time my client attends to carry out the remainder of the items on the scope of works. Would you please let me know suitable dates for the remainder of the scope of works to be carried out.

The letter went on to ask for "details of all items on the scope which are said to be deficient, and provide particulars of how each item is said to be deficient".

33 It is unclear what then happened. There is no further correspondence between the parties until 3 March 2011. It is apparent that the Builder did not attend the site on 22 April 2010, and neither the Owners Corporation nor the Builder sought to follow up on the meeting, a time to repair the defects or Ms Crittenden's request for particulars of why the Owners Corporation maintained that the scope of works was inadequate.

34 At some stage, the Owners Corporation commissioned Integrated Building Consultancy Norwest to inspect the building and provide a detailed report concerning defects.

35 On 2 March 2011, Ms Broome asked Ms Crittenden whether she had instructions to accept service of a statement of claim on behalf of the Builder. Ms Crittenden replied on 3 March 2011 saying that she did, but that the proceedings were unnecessary because the Builder was "ready and willing to rectify any defects arising by reason of any breach of the statutory warranties in the Home Building Act 1989". She pointed out that, despite her request, the Builder had never received details of how the Builder's scope of works was deficient.

36 Ms Broome responded to that letter on the same day. She said that she expected to serve the defects reports obtained by the Owners Corporation the following day. The letter concluded:

If your client agrees to carry out all of the building works necessary to rectify all of the defects identified in those reports ... in accordance with the methodology for repair that is either recommended in those reports, or agreed by the parties, please let us know immediately.

37 It is unclear what happened then. On 11 February 2011, the Owners Corporation commenced these proceedings in the District Court. On or about 27 May 2011, Mr Di Blasio swore an affidavit in support of an application to transfer the proceedings to the Consumer, Trader and Tenancy Tribunal (the CTTT). In that affidavit, Mr Di Blasio said:

[The Builder] is ready and willing to carry out rectification work to the [property], but has been prevented from doing so by the Owners Corporation's refusal to provide [the Builder] with access to the property.

By that stage, the Owners Corporation had served expert reports from Mr Mo'ane.

38 The proceedings were transferred to the CTTT and then, on 26 March 2012, to this Court.

39 In an affidavit sworn on 11 March 2013, Mr Di Blasio gave the following evidence:

22. DBC [the Builder] is ready and willing to return to the property to rectify all defects at DBC's cost, in accordance with the defects identified agreed in a joint report prepared by Mr Moane and Ms Fitzgerald, and in accordance with any agreed rectification scope agreed by those experts. In the event of any disagreement in relation to the scope of works between Mr Moane and Ms Fitzgerald, DBC agrees to carry out the scope of works recommended by Mr Moane.

23. In respect of any roofing defects and fire safety defects which are not addressed in the reports by Mr Moane and Ms Fitzgerald, DBC is also willing to return to the property to rectify these defects.

24. DBC is ready and willing to enter into a contract with the plaintiff to carry out rectification work for $1.00, with DBC to obtain a policy of Home Owners Warranty insurance in relation to that rectification work. I am confident that DBC is able to obtain home owners warranty insurance and carry out the rectification work. I am willing to have the rectification work inspected and approved as reasonably required by an independent consultant of the plaintiff's choice.

40 Mr Mo'ane's report identified a substantial number of defects, including a substantial number that had not been identified by Mr Evans. His recommendation in relation to the repair of the roof was more extensive than Mr Evans. He recommended that the roof and guttering would need to be replaced. He also recommended that most of the bathrooms be repaired in the way proposed by Mr Evans. The Builder's expert accepted that recommendation. There is a dispute between the experts concerning what should be done with the leaking planter boxes, but again Mr Mo'ane's recommendation was consistent with the recommendation made by Mr Evans.

41 Although the Builder relies on what Mr Di Blasio said in his affidavit sworn on 27 May 2011, it relies principally on what was essentially an offer made by the Builder in Mr Di Blasio's affidavit sworn on 11 March 2013. It submits that the Owners Corporation failed to mitigate its loss by accepting that offer. Indeed, it complains that there is no evidence that the Owners Corporation even considered that offer and points out that the offer was never put to a general meeting of the Owner's Corporation. For those reasons, the Builder submits that the Owners Corporation should recover nothing, or no more than what it would cost the Builder to do the work that it is now agreed should be done.

Relevant legal principles

42 Generally speaking, a person who suffers loss as a consequence of a breach of contract is required to act reasonably in relation to that loss in order for the loss to be recoverable. An important aspect of this general principle is that the party who has suffered a loss is under a duty to mitigate its loss. Sometimes the use of the word "duty" in this context is criticised, since there is no requirement that the plaintiff act in a particular way and no requirement that the plaintiff minimise its loss: see, eg, J Carter, E Peden and GJ Tolhurst, Contract Law in Australia, (5th ed, 2007, LexisNexis) at [35-35]. Rather, the principle is that the plaintiff is not entitled to recover losses attributable to its own unreasonable conduct. As O'Connor J explained in Hasell v Bagot, Shakes & Lewis Ltd [1911] HCA 62; (1911) 13 CLR 374 at 388:

[O]ne of the principles on which damages are assessed [is] that a party to an agreement suffering injury from the other party's breach of its terms is bound to exercise reasonable care in mitigating the injurious consequences of the breach, and is not entitled to recover from the party in default any damage which the exercise of reasonable care on his part would have prevented from arising.

43 The duty to mitigate, however, is not the only example of the application of the general principle. Another is the principle that a plaintiff whose property is damaged or defective as a consequence of the defendant's breach is generally entitled to recover the costs of reinstating the property so that it corresponds to the contractual promise, except to the extent that it is unreasonable to insist on reinstatement: Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 at 618-9.

44 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. Often, of course, the building contract itself requires the owner to repair defects or sets out a procedure by which defects are to be made good: see, eg, Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302; (2010) 26 BCL 335. But, even if it does not, 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 or where the builder has repudiated the contract by refusing to conduct any repairs: see J Bailey, Construction Law, (Vol II, 2011, Informa Law) at [14.109]; Cassidy v Engwirda Construction Co (No 2) [1968] Qd R 159 (reversed on other grounds in Cassidy v Engwirda Construction Co (No 2) [1968] QWN 47 (HC); (1968) 42 ALJR 168). That obligation may be an aspect of the duty to mitigate, since it may be less expensive for the builder rather than a third party to rectify the defects, particularly if the builder is still on site. But the obligation is not simply an aspect of the duty to mitigate. The cost to the builder of undertaking the repairs is likely to be less than the amount that a third party would charge the owner for the same work. In that case, the owner is not mitigating its loss, but rather the builder's damages.

45 The question of what is reasonable depends on all the circumstances of the particular case. One relevant factor is what attempts the builder has made to repair the defects in the past and whether, in the light of the builder's conduct, the owner has reasonably lost confidence in the willingness and ability of the builder to do the work: see A Chambers, Hudson's Building and Engineering Contracts, (12th ed, 2010, Sweet & Maxwell) at [4-144]; Eribo v Odinaiya [2010] EWHC 301 (TCC) at [70].

46 It is for the defendant to prove that the plaintiff has acted unreasonably. It is not for the plaintiff to prove that it acted reasonably: TC Industrial Plant Pty Ltd v Robert's Queensland Pty Ltd [1963] HCA 57; (1963) 180 CLR 130 at 138; Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653 at 673 per Brennan J; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158 per Hope JA (with whom Priestley and Meagher JJA agreed); Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [187] per Giles JA (with whom Handley and Stein JJA agreed).

47 The obligation not to act unreasonably does not come to an end once court proceedings have commenced. But the existence of court proceedings is relevant to the content of the obligation. Once there is a dispute concerning whether a plaintiff has failed to mitigate its loss, or failed to act reasonably in some other respect, the plaintiff is entitled to have that question tested in court; and the mere fact that it does so is not itself evidence that it has failed to act reasonably. As Oliver J explained in Radford v de Froberville [1978] 1 All ER 33; [1977] 1 WLR 1262 at 1287E-F:

[O]nce proceedings have been commenced and are defended, I do not think that the defendant can complain that it is unreasonable for the plaintiff to delay carrying out the work for himself before the damages have been assessed, more particularly where his right to any damages at all is being contested, for he may never recoup the cost. If, therefore, the proceedings are conducted with due expedition, there seems to me to be no injustice if, by reason of the time that it takes for them to come to trial, the result of inflation is to increase the pecuniary amount of the defendant's ultimate liability...

48 In the present case, the claim is for breach of the warranties implied by the Act. However, it was not suggested by either party that different principles apply for that reason.

Did the Owners Corporation act unreasonably?

49 The Builder contends that the Owners Corporation acted unreasonably in two broad respects. First, it submits that the Owners Corporation acted unreasonably in not pursuing the discussions concerning the scope of the works to be undertaken by the Builder in April 2010. Second, it submits that the Owners Corporation acted unreasonably in not accepting the Builder's offer made in Mr Di Blasio's affidavit sworn on 11 March 2013.

50 I do not accept either of those submissions.

51 In my opinion, the defects that developed were significant. It appears that the Builder made some inadequate attempts to repair defects that were identified initially. As the defects continued to emerge, the Owners Corporation took the reasonable step of engaging an expert to identify the defects and took the reasonable position that the Builder should prepare a scope of works to remedy the defects that had been identified. In my opinion, the Builder's response was inadequate. It is plain from what happened subsequently that Mr Evans was correct when he identified significant problems with the way in which the bathrooms had been constructed and with the roof and guttering. Prior to 11 March 2013, the Builder never accepted the substance of Mr Evans' report. It took the position that it was entitled to wait until the defects with the bathrooms manifested themselves before it needed to do anything; and then the solution it proposed was inadequate. Mr Evans identified significant problems with part of the guttering, and, subsequently, a further leak in the roof emerged apparently following some initial remedial work. Again, it appears from the correspondence between the parties and their solicitors that the Builder did not accept what Mr Evans said and took no reasonable steps to investigate the problems with the roof and guttering. Instead, its position was that it understood that the problems had been rectified.

52 Mr Pesman SC, who appeared for the Builder, submitted that it was difficult for the Builder to prepare a scope of works because the Owners Corporation never gave it a comprehensive list of defects. Mr Evans' report identified a number of defects, but the Owners Corporation then sought to add to that list. However, the position was that the Owners Corporation reasonably engaged an expert. That expert identified a number of defects and how they should be rectified. The position taken by Mr Evans was not unreasonable. Indeed, the Builder, through its own expert, now accepts much of what Mr Evans said. It is clear from what happened that the Builder resisted repairing the defects in accordance with Mr Evans' recommendations; and it is plain that, up until 2013, it was not willing to prepare a scope of works that was consistent with Mr Evans' recommendations. The difficulty was not with the fact that the scope of works changed over time.

53 Ms Pesman sought to lay the blame for the fact that negotiations came to an end in April 2010 on the Owners Corporation because it did not confirm that access on 22 April 2010 was acceptable, it never provided particulars of why the Builder's scope of works was deficient and it never nominated a time when the Builder could attend to carry out rectification work. I do not accept that submission. In my opinion, Ms Broome might reasonably have concluded on the basis of the correspondence that access on 22 April 2010 for the purpose of inspecting the defect that appeared as item 2 on the Builder's scope of works had been agreed and that the Builder had simply failed to attend. In any event, it seems that the parties remained far apart. The scope of works proposed by the Builder did not contemplate that the membrane in each of the bathrooms needed to be replaced, despite the fact that that issue had first been raised by Mr Evans in 2009. In my opinion, the Owners Corporation could reasonably have concluded that agreement was never going to be reached with the Builder on that issue and that further discussion with the Builder was pointless.

54 The only option available to the Owners Corporation in that case was to commence court proceedings. For that purpose, it obtained expert reports from Mr Mo'ane. Before commencing court proceedings, it served those reports on the Builder and gave the Builder an opportunity to indicate whether it was prepared to rectify the defects in accordance with those reports. The Builder was not willing to do so. It defended the proceedings on the basis that it was not liable to rectify the defects identified by the Owners Corporation's expert at least up until 11 March 2013. I do not think that it was unreasonable of the Owners Corporation not to accept the offer in Mr Di Blasio's affidavit at that time. In my opinion, the Owners Corporation could reasonably have taken the view that it no longer had confidence in the Builder and that it wanted someone else to undertake the rectification work.

Quantification of damages

55 The total amount claimed in respect of rectification work other than the roof is $398,878 calculated as follows:

Agreed trade costs (including fire work)	$163,519
Preliminaries	$136,950
Contractors margin at 10%	$30,047
Design and professional fees	$30,500
Owners corporation costs	$1,600
Contingency	$36,262
Total	$398,878

The costs for preliminaries includes an amount of $64,400 for staff and labour (including a project manager, a contract administrator, a foreman and labourers), $3,070 for site accommodation, $5,830 for power supply, $3,580 for communications and office equipment (including a computer at $1,500), $2,200 for small tools and a lockable tool chest and $4,700 for safety and first aid (including $3,000 for hard hats, visible vests and boots).

56 The total amount claimed in respect of the repairs to the roof is $116,108.65, calculated as follows:

Preliminaries	$37,734.00
Demolition, Carpenter and Roofer	$42,230.64
Builders overheads at 10%	$7,996.46
Builders Margin at 20%	$17,592.22
GST	$10,555.33
Total	$116,108.65

The preliminaries include site supervision of $7,200, scaffolding of $1,560 and insurance of $3,000.

57 Mr Pesman took issue with a number of items for preliminaries in respect of work other than work on the roof - in particular, with those that I have specifically identified. He also took issue with an allowance for contingencies. However, in the absence of any other evidence, I think that I should accept the evidence given by Mr Madden. None of the estimates he has made strike me as obviously unreasonable. I accept that it will be necessary for the builder to establish a site office, and the builder obviously has overheads for which no allowance has been made other than the items specifically allowed for by Mr Madden. Having regard to the amounts involved, Mr Madden's allowances do not appear to be unreasonable; and he has taken a reasonably conservative estimate of the builder's margin of 10 percent, so that his overall assessment appears to be reasonable.

58 In my opinion, it is appropriate to make an allowance for contingencies. Necessarily, Mr Madden has provided an estimate of the costs of completing the rectification work, and it does not strike me as unreasonable to allow for contingencies in making that estimate. If the Owners Corporation enters into a fixed price contract for the rectification work, the likelihood is that that price will include an amount for contingencies. If the Owners Corporation enters into a costs plus contract, it may recover a windfall if there are no contingencies. However, it also takes the risk that the allowance for contingencies will be insufficient.

59 On the other hand, in my opinion, there is likely to be duplication between Mr Madden's estimate and the estimate given by Mr Mo'ane in respect of the costs of rectifying the roof and gutters. In particular, there is no reason why site supervision cannot be provided by the same people, and allowances already appear to have been made for scaffolding and insurance. Similarly, having regard to the allowance made by Mr Madden for overheads, it does not strike me as reasonable to allow for builders overheads in respect of the work on the roof. Moreover, in my opinion, it would be more appropriate to allow 10 percent for the builders margin. On that basis, the allowance for the work on the roof should be as follows:

 

Preliminaries	$25,974.00
Demolition, Carpenter and Roofer	$42,230.64
Builders overheads at 10%	$0.00
Builders Margin at 10%	$6,820.46
GST	$7,502.51
Total	$82,527.61

60 It follows that there should be judgment for the plaintiff in the sum of $481,405.61.

61 I will hear the parties in relation to costs.

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Decision last updated: 11 August 2014