In the recent decision of The Owners – Strata Plan No 89074 v Ceerose Pty Ltd [2024] NSWSC 1494 (Ceerose), the Supreme Court of New South Wales analyses the ‘duty’ to mitigate by examining several factors that allegedly suggest the party suffering loss, by reason of defective works, acted unreasonably.
In this note, we look at the background and findings in Ceerose and identify the factors that the Court considered when assessing what was reasonable conduct by a building owner who was left to deal with defective works.
The duty to mitigate in situations of defective building works
In building contracts, it is generally accepted that an owner must give the builder a reasonable opportunity to rectify any defects in their works. This is widely accepted as an element of the duty to mitigate.[1] It provides the party in default with an opportunity to correct its contractual non-conformance at no cost to their counterpart, and at a relatively lower expense to the party in breach. The purpose of this ‘duty’ is to limit the loss recoverable by the owner and allows the builder to have a reasonable opportunity to take steps to minimise that same loss for which damages are claimed.
However, as confirmed in Ceerose, there is no positive obligation thrust upon an owner plaintiff to take such steps as to compel the builder to rectify the works, but rather a duty not to act unreasonably or otherwise hinder the builder’s reasonable attempts to reduce the loss.
The question of whether a plaintiff has acted unreasonably is a contextual one. Namely, what is reasonable for a person to do, in the particular circumstances, to mitigate the damages sustained.[2] Importantly, if there is to be an allegation that the plaintiff has failed to mitigate, the onus of proof is on the defendant to demonstrate that the plaintiffs conduct was unreasonable.[3]
Key takeaways
So, when do you know if an owner is acting unreasonably in a case of defective building works?
In Ceerose, the Court identified four factors that may assist in determining whether an owner has acted unreasonably when dealing with a builder, which if established, may result in an owner’s loss being reduced or lost altogether. Those four factors are:
- the extent and seriousness of the defects
- the quality of rectification works undertaken by the builder
- the nature of the builder’s engagement with the alleged defects and its proposed method of rectification
- the utility in continuing negotiations with the builder
Background to Ceerose
The proceedings concern a claim by the plaintiff of a 16-storey residential building for breach of the statutory warranties in section 18B of the Home Building Act 1989 (NSW). The defendants were the builder and the developer of that residential building.
The defects alleged by the plaintiff included inadequate falls to the bathroom and ensuite floors and inadequate rectification works performed to a lift shaft. The defendants denied that the defects existed but still sought the plaintiff’s consent to undertake rectification works on 95 items referred to in an expert report obtained by the parties, which proposed the methods of rectification.
The proceedings commenced in 2016, with the parties appearing in Court on 52 occasions. The proceedings were stood over on the first 17 occasions, at the request of both of the parties, to enable settlement discussions to progress.
Throughout 2018, the parties engaged in without prejudice correspondence to resolve the proceedings by the defendants rectifying agreed defects. By October 2018, a purported agreement had been reached for the defendants to attend to the rectification works.
However, the plaintiff’s strata committee meeting minutes from 26 November 2018 suggested otherwise, noting that the plaintiffs continued to lose faith in the defendants’ engagement due to their repeated delays in undertaking the rectification works. A year later, in November 2019, the plaintiffs denied the defendants access to the property to rectify the defects.
In July 2022, the Court ordered a referral for a report on liability and quantum. The defendants main attack on the adoption of referee’s report was in respect of the rejection of the defendants’ submission that the plaintiffs had failed to mitigate its loss. That submission was rejected, despite the referee finding that the plaintiff had refused the defendants’ access to carry out the rectification works.
The referee found that the plaintiff’s refusal to permit access to the defendants was reasonable in the circumstances because the plaintiff had lost confidence in the defendants’ ability to perform such works.
The Court upheld the referee’s conclusion. The Court had regard to the defendants’ prior history of inadequate repairs and its lack of engagement with the plaintiff’s appointed expert’s proposed method of rectification. These factors, along with the seriousness of the defects and the lack of progress in negotiations with the defendants, justified the plaintiff’s decision to engage alternate contractors on the basis that it lost confidence in the defendants.
Insights
Ceerose emphasises that a duty to mitigate is not a positive duty, but rather a duty not to act unreasonably. Whether an owner has acted unreasonably will depend on a review of events that took place from when the building works commenced, including the seriousness of the defects, any rectification works undertaken by the builder, the builder’s engagement, and any negotiations between the parties.
Albeit that they were not expressed to be exhaustive, the four factors identified in Ceerose are likely to form the basis for future parties to establish whether an owner has acted unreasonably in their dealings with a builder.
Owners SP 76674 v Di Blasio Constructions PL [2014] NSWSC 1067 at [44].
Payzu v Saunders [1919] 2 KB 518 at 589.
Cessnock City Council v 123 259 932 at [121].
