In building disputes, the question of how to appropriately measure damages is often a point of contention. The courts have considered this issue in this context and have generally found that damages are to be measured by either the diminution in value or the cost of the ‘reasonable and necessary’ expenditure to rectify the defective work, plus any consequential losses. More typically the courts have applied the latter, but it will depend on the circumstances of each case. Below is a snapshot of some cases that have considered the issue of measuring damages.
The ‘ruling principle’ and the ‘reasonable and necessary’ test
As early as 1848, the English Courts established that the ‘ruling principle’ for assessing damages for a breach of contract was that the innocent party should be placed, so far as money can do, in the same situation as if the contract had been performed (Robinson v Harman (1848) 1 Exch 850).
The decision of Bellgrove v Eldridge (1954) 90 CLR 613 (Bellgrove), examined the appropriate measure for determining damages in the context of defective building works. In Bellgrove, it was held that the cost of rectification was the appropriate measure of damages to restore the plaintiff to the position he or she would have been in had the building contract been performed. In Bellgrove, the Court reasoned that since the contract entitled the respondent to have a building erected upon her land in accordance with the contract’s terms, the applicant’s failure to perform his obligation under the contract led to the respondent suffering loss that could only be measured by ascertaining the cost of rectification. However, the Court qualified this by stating that the work undertaken to rectify the premises must be both necessary to restore the premises to the state that was contracted for and must be reasonable, in order for the cost of rectification principle to apply. Hence, from this case arose the principle of the ‘necessary and reasonable’ test.
The notion of ‘reasonableness’ was put to the test in the case of Ruxley Electronics & Construction v Forsyth  3 All ER 268, whereby the builder had installed a swimming pool which should have had a deep end of 7 foot 6 inches, but upon completion of construction was only 6 foot 9 inches. The only way to remedy the defect was to rebuild the pool. In this case the Owner, Forsyth, refused to pay the final payment on the basis that the pool was defective. The court needed to consider the question of ‘reasonableness’ in this case, as to whether the costs of rebuilding the swimming pool would be out of proportion with the benefit that would be obtained by the Owner. The court held that the cost of rebuilding could not be awarded as damages (as the cost of rebuilding was wholly disproportionate with the benefit), so the correct measure of damages would be the difference in the value of the pool, which the Court found to be a nominal amount of damage for the general inconvenience.
What about incidental loss?
In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd  HCA 8 the Court, in this instance, held that the requirement of reasonableness would generally be satisfied except ‘only…[in] fairly exceptional circumstances’. In this case, Tabcorp Holdings argued that since there had been no significant loss to the value of the building in its entirety, then Bowen Investments should only be awarded nominal damages to reflect its actual losses. However, in this Court the High Court found that damages based on diminution of value of the building in its entirety would undermine the nature of the contractual covenants and would be insufficient. Therefore, in this case the diminution in value damages will not restore Bowen Investments to the same situation had the contract been performed correctly, and accordingly, the Full Federal Court upheld the trial judge’s decision that Tabcorp’s conduct was a ‘contumelious disregard’ for Bowen Investment’s rights but increased the damages from $34,820 (as awarded by the trial judge) to $1.28m to take into consideration not on the cost of restoring the foyer to its original condition but also other incidental loss/compensation which included the loss of rent for the time the restoration was taking place. This was ultimately upheld by the appeal decision of the High Court.
The case of Willshee v Westcourt Ltd  WASCA 87 considered the issue whereby there was a breach of contract due to the builder using an inferior quality limestone in the external cladding of the house. Due to the limestone’s inferior quality, the exterior of the house began to deteriorate, however this did not affect the structural integrity of the house. The court needed to consider the appropriate measure of damages, whether rectification costs should be awarded, or whether only damages for the diminution in the value of the house should be awarded. The court followed the High Court’s decision of Tabcorp v Bowen and found that the test of ‘unreasonableness’ would only be satisfied if evidence was available that established Mr Willshee was relying on a ‘technical breach of contract to secure an uncovenanted profit’. No such evidence was presented in this case so the court awarded Mr Willshee the amount of money that was required to put him in the position he would have been had his house been constructed using limestone of high quality, being the cost of replacing the limestone.
In Tranquility Pools & Spas Pty Limited v Huntsman Chemical Co Pty Limited  NSWSC 75, the court had to consider whether pool owners were entitled to replacement of their defective pools, or some lesser rectification method. The court accepted the earlier principles of the decisions in Wilshee v Westcourt and, in particular, that the test of ‘unreasonableness’ is only to be satisfied in ‘fairly exceptional circumstances’ in Tabcorp Holdings v Bowen Investments. However, the court also referred to Wheeler & Anor v Ecroplot Pty Ltd  NSWCA 61, in which the court followed Tabcorp but also stated that there was no such ‘radical disproportion’ nor other factor which would lead it to conclude that awarding rectification costs was unreasonable. Accordingly, in Tranquility the court stated that what was reasonable could only be determined in light of the particular facts and on the facts before it, the court held that replacement of the pools was the only practicable (although expensive) way to appropriately compensate the pool owners.
Should damages be awarded where rectification is a doubtful remedy?
In the case of Metricon Homes v Softley  VSCA 60, the Court of Appeal also needed to consider the issue of damages in light of the proposed remedy not giving an absolute rectification and therefore the question was whether the Owners should be awarded damages based on a doubtful remedy. The court referred to the decision of Kirby v Coote  QCA 61 in which Keane JA found that even though there was a potential remedy there was still a slight risk of instability to the house, then the Owner should not be awarded a doubtful remedy. Accordingly, the Court of Appeal in Softley found that it was inappropriate to leave the Owner’s home at the risk of future distress in the structure by a doubtful remedy.
Does replacement include the whole area or just the defective portion?
A further question in building cases to measure damages is what if all the works are not defective, should the cost of remediation include the replacement of works which is greater than the defective portion. This arose in the case of Walker Group Constructions Pty Ltd v Tzaneros  NSWCA 27, whereby Bathurst CJ needed to consider the question of damages for defective work where the defective design did not affect all of the pavings (as not all the paving was likely to crack, but merely a portion of the paving). Bathurst CJ found that over time, more and more of it would need to be replaced and therefore ‘it does not appear to be unreasonable to replace the whole pavement in order to remedy the defective design which affected the whole pavement. The fact that certain panels may not in fact crack does not alter the position.
Does the builder have the right to rectify to minimise damages?
In the recent decision of Bedrock Construction and Development Pty Ltd v Crea  SADC 124, the Court considered whether the builder had a right to carry out rectification work and whether the owner is required to allow the builder to minimise the damages it must pay by rectifying defects (except where it has given the builder the opportunity and the builder has refused to repair the defects). In this case it was found that the Owners had provided the Builder with the opportunity to rectify, and due to the Builder’s failure to do so, the Owner had lost confidence in Bedrock’s ability and it was found to be acceptable to refuse the Builder the ability to fix the defects.
The appropriate measure of compensation in building disputes is largely determined on the specific circumstances, so it is always best to get individual advice if you find yourself in this unfortunate position. Please contact us if you’d like more information on this topic.