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How and When Damages are Assessed

In Victoria, the Domestic Building Contracts Act 1995 (VIC) (‘DBCA’) regulates the contents of domestic building contracts by implying into every domestic building contract to which it applies certain terms as regards consumer warranties.

These are known as the statutory warranties.  Section 8 of the DBCA contains the implied warranties in domestic building contracts and provides that such warranties “run with the building”.

This means that subsequent owners can avail themselves of the consumer warranties as if they were a party to the contract themselves (s9 of the Act).

The implied consumer warranties under the DBCA are as follows: –

The following warranties about the work to be carried out under a domestic building contract are part of every domestic building contract—

• the builder warrants that the work will be carried out in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract;
• the builder warrants that all materials to be supplied by the builder for use in the work will be good and suitable for the purpose for which they are used and that, unless otherwise stated in the contract, those materials will be new;
• the builder warrants that the work will be carried out in accordance with, and will comply with, all laws and legal requirements including, without limiting the generality of this warranty, the Building Act 1993 and the regulations made under that Act;
• the builder warrants that the work will be carried out with reasonable care and skill and will be completed by the date (or within the period) specified by the contract;
• the builder warrants that if the work consists of the erection or construction of a home, or is work intended to renovate, alter, extend, improve or repair a home to a stage suitable for occupation, the home will be suitable for occupation at the time the work is completed;
• if the contract states the particular purpose for which the work is required, or the result which the building owner wishes the work to achieve, so as to show that the building owner relies on the builder’s skill and judgement, the builder warrants that the work and any material used in carrying out the work will be reasonably fit for that purpose or will be of such a nature and quality that they might reasonably be expected to achieve that result.

It follows that the statutory warranties under the DBCA provide a number of grounds under which a consumer (being an owner or a subsequent owner) can sue for breach of a contractual warranty.

If a successful claim is made out, damages will usually be awarded to compensate for the costs of rectifying the breach, usually being defective building work.

The statutory warranty at subsection (d) also includes a warranty that the works will be completed by the date or within the period specified by the contract, so this can cover both liquidated (or unliquidated) damages for delay.

The right for an owner to sue for damages arises both under the building contract (for breach of contract) or by means of a statutory right to damages (for breach of the statutory warranties in the DBCA).

In this regard, the building contract mirrors the domestic building legislation in terms of the consumer warranties.

There are similar implied statutory warranties in residential building contracts in New South Wales, being the similar statutory warranties in the Home Building Act 1989.

The right to sue for damages runs with the land, so that the owner for the time being of the land can sue for a breach of the statutory warranties, even though they were not a party to the original building contract (s 9 of the DBCA).

The Builder or the Owner can also sue for damages for fundamental breach of contract if the other party unlawfully terminates (or repudiates) the building contract.

For instance, if an Owner was to end the contract with the Builder with a verbal statement that the Builder is not to return to site.

This would be a repudiation of the contract, by unlawfully ending it without serving an initial notice to remedy breach and allowing the requisite timeframe to correct a default.   The second and final notice of termination should only be served after this contract procedure is followed.

The legal definition of “repudiation” of contract, is where one party evinces an intention to no longer be bound by the terms of a contract, or to be bound by a contract only on fundamentally different terms.

If either party repudiates the contract, the other party can sue for damages to be put back in the same position they would have been in if the other party had not fundamentally breached or repudiated the contract.

In the case of the Builder, if the Owner has repudiated the Contract then this could include payment on a ‘quantum meruit’ for the value of works performed and not yet paid for.

This includes works for a partially completed payment stage, based on an assessment of the value of works completed to the date of the ‘termination’ of the Contract.

The Builder could also seek damages that compensate for lost profit on the balance of the works left in the Contract, that the Builder did not get to complete.  This could be damages for “loss of a chance” (see below).

In the case of an Owner, if the Builder repudiates the Contract or abandons the works, the Owner can seek damages for the cost of having other contractors rectify and complete the works.

For defect rectification and completing works, generally it will be more expensive (due to ‘risk’) to have a new builder rectify and complete the original Builder’s works.

Damages can include the cost of rectifying defects based on an expert building report that identifies the defects, sets out likely causation, method to repair and an estimated value of these repair works.

The damages for the Owner can also include the cost “over-run” of having a new builder complete the works.

For instance, if there is $80,000 left on the balance of the contract price, but it costs $120,000 to have the new builder complete the works, the damages for cost over-run would be $40,000.

On top of the cost over-run claim, the Owner can seek damages for the cost of rectifying the original Builder’s defects.

Method of Assessing Damages

Damages are assessed when one party to a contract asserts a right to damages, to put them back in the position they would have been in had the contract not been breached by the other party.

The assessment of the quantum of damages is a matter for the courts or a tribunal (eg the VCAT) based on the evidence before it.

In a building dispute, which will often involve arguments over defective works or the value of works (including possible variations), a party will generally rely on expert building reports to substantiate the damages claim.

For example, an expert building report or structural engineering report to identify defects in the works and incomplete items.

This can include an estimated costing of labour, materials, overheads etc to rectify and complete the works.

Alternatively, there can be a Quantity Surveyor Report that provides an estimate of the value of works completed to date, and the costs to complete works after a certain point in time.

The measure of damages is that the injured party should be put back in the same position they would have been ‘but for’ the breach of contract, or the breach of duty.

In the case of Bellgrove v Eldridge [1954] HCA 36 it was found that even if there is a breach, e.g., defective building works, the injured party (an Owner) is only entitled to compensation for the costs of what is “necessary and reasonable” to rectify the defective works.

Hence in a defective building case in Victoria, it was held that Owners were not entitled to rectification costs to demolish and re-build a home due to a faulty slab, when the VCAT preferred the evidence of the Builder’s engineering expert that underpinning and cosmetic repairs were sufficient.

The Owners’ engineering expert had argued that the cracked slab had to be demolished and re-done, and the Owners confined themselves to a claim for demolition and reconstruction, without any back up measure of damages.

Due to not having a secondary claim, the Owners did not receive damages for compensation when their “all or nothing” claim was rejected by the Tribunal.

Zammit v Home Construction & Design Pty Lt [2012] VCAT 320 (22 March 2012).

In this case it was agreed by the experts that the steel reinforcing mesh was positioned too low in the concrete raft slab.  However, the Owners’ expert opined that the only reasonable course was to demolish and rebuild the works.

The Owners brought a claim for $327,800 plus incidental costs such as alternative accommodation and removal of fixtures/fittings.

In the end, the Tribunal preferred the evidence of the Builder’s engineer that the cracks in the slab were either shrinkage or slump cracks, rather than hinge cracks of a structural danger, and the building movement had largely stabilised.

Therefore, regardless of the cause of action and that an entitlement to damages has been proven, the quantum of damages must still be decided.

The injured party will be confined to what is “necessary and reasonable” to put them back in the position they were in before the injury was caused.

Alternative Heads of Damages

Damages claims can also be founded on alternative causes of action, for example for a claim in tort such as “negligence”.

It is possible to argue that a contracting party such as a builder also owes a duty of care at common law to the other contracting party (the Owner). This is over and above the duties owed under the contract or under legislation.

If that duty of care is breached by a party and as a result the other party suffers an economic injury or loss, then a claim can be made in negligence.

There are necessary ingredients to establish that a duty of care exists in the first place.  This includes:

• A relationship of proximity between a party and the injured party
• Reliance placed on a party by the injured party
• Vulnerability of the injured party if the other party breaches the duty
• Foreseeability of loss if the duty of care is breached – ie was it reasonably foreseeable to the party owing the duty that loss would flow to the injured party if the duty is breached?

It is not uncommon, when preparing Points of Claim in VCAT for an Owner in a building defect case, to plead both:

• breach of contract and statutory warranties; and
• a back-up claim of negligence based on defective building works.

The issue is with a suit against a building practitioner that, unlike some other contracting parties or building practitioners who may owe a duty of care, domestic owners are owed warranties implied by statute, and commercial classes of buildings fall out of the scope of these protections.

Both Woolcock Street Investments v CDG Pty Ltd and Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 confirmed that this silence by the parliament signalled that these parties were not vulnerable in circumstances where they had the opportunity to avail themselves of contractual protections.

This has been controversial and we have seen in NSW an expansive retrospective statutory duty of care in the Design and Building Practitioners Act 2020. It will be interesting to see whether Victoria follows a similar path.

Contrasting this, an Architect or Engineer involved in project design owe a duty of care to Owners to carry out their services with all due care and diligence and in a proper and workmanlike fashion, so that the services will be fit for purpose.

Likewise, a Building Surveyor owes a duty of care to the Owner and arguably the Builder to carry out certification services accurately and with all due care and skill.

This includes accurate assessment and approval of Building Permit plans, carrying out mandatory inspections with all due care and skill, and an accurate assessment and approval of the final inspection.

The assessment of the quantum of damages has a primary purpose of restoring the plaintiff to their original position had the wrong not occurred.

The damages awarded must be necessary and reasonable to appropriately compensate the injured party and must be within the scope of liability of the defendant.

Liquidated Damages and Penalty Clauses

An Owner has a right under most building contracts to claim liquidated damages for late completion from a Builder, in circumstances where the Builder has failed to bring the works to completion by the due date for completion.

Of course, this is subject to any extension to the date for completion that may be sought by the Builder in writing for delay reasons that are outside the Builder’s control or responsibility.

The most common basis for delay damages for an Owner is contractual, based on a liquidated damages claim that is fixed by the period of time over run multiplied by an LDs rate in the contract (eg $1500 per week).

The liquidated damages rate is set out in the schedule / appendix to the contract and if it is stated to be “nil” or “zero”, this means that liquidated damages are not payable.

In practice, if the LDs rate is left blank, many contracts then say the default rate at the lowest amount will then apply.

Domestic building contracts and many commercial contracts also allow for a Builder to claim delay costs at a set rate if the Builder is delayed in reaching completion by the actions of the Owner or the Owner’s separate consultants.

The rate for liquidated damages must be a fair and reasonable pre-estimate of the costs the Owner is likely to incur if the works are not completed on time / by the date for completion in the contract.

If not, the liquidated damages provision runs the risk of being regarded as a penalty and may be found to be unenforceable by the court / tribunal.

See the case of Dunlop Pneumatic Tyre Co Ltd v New Garage & Motor Co Ltd [1914] UKHL 1 (1 July 1914).  In this case the House of Lords decided that the relevant liquidated damages mechanism was a genuine pre-estimate and not in the nature of an unenforceable penalty.

The Court held that a clause may be held to be a penalty if the sum stipulated for is extravagant and unconscionable in amount in comparison with the greatest loss that could conceivably be proved to have followed from the breach.

An Owner / Principal may still be able to claim unliquidated damages for delay for late completion, if the contract does not provide for liquidated damages to be claimed based on a rate in the contract.

In the case of Adapt Constructions Pty Ltd v Whittaker [2015] ACTSC 188, the Supreme Court found that a construction contract based on a standard form that left blank the amount for liquidated damages, did not stop the Principal from recovering unliquidated damages at common law for the delay in finishing the works.

The Court found that an intention to exclude a right to unliquidated damages at common law must be expressed clearly in the contract.

The upshot of this case decision is that care needs to be taken in using standard form contracts.

It is not sufficient to simply leave the rate for liquidated damages in a standard form contract blank, or insert the amounts as “nil” or “zero”, in order to disqualify an Owner’s right to claim unliquidated damages at common law.

Of course, the claimant must still prove the quantum of damages payable, eg costs of alternative accommodation rental while works are completed late, interest / holding costs on a construction loan etc, for the period of the delay in completion.

Other Forms of Loss / Damage

[SLIDE 5] It should be noted that a duty of care at common law will not be implied against a Builder in favour of an Owner, if the Owner was able to protect their interests via some other means (eg contractual means).

In the case of Brookfield Multiplex Ltd v Owners Corporation Strata Plan 61288 [2013] HCA 36, the High Court confirmed that a Builder will not owe a common law duty of care to a subsequent purchaser of a commercial building.

The case involved the construction of a serviced apartment complex.  Latent defects were later discovered in the common property and the Owners Corporation sought to sue the Builder (Brookfield) in negligence.

The High Court held that no duty of care existed between the Owners Corporation / subsequent purchasers of apartments and the Builder.

The building contract between the Developer and the Builder contained detailed provisions relating to the risk of latent defects in Brookfield’s works and required Brookfield to carry out repairs.

The Court held that the new owners and the Owners Corporation were not vulnerable in a legal sense or reliant upon the Builder carrying out the works with due care and skill.  They had other contractual protections available (eg purchase contracts with the Vendor).

If the new owners also have the benefit of statutory warranties implied into a building contract, there is even less basis for a court to hold that a common law duty of care exists.

Measure of Loss

Expectation and reliance loss and restitution

Expectation loss may refer to consequential loss damages that can also be claimed in a building action.  For instance:

• A builder will have expected to complete a project to completion based on an agreed price and to obtain the relevant profit margin built into the contract price. If a contract is repudiated by an owner, the Builder can sue for lost profit on the balance of the contract works.
• In a building defect case, an owner can claim for the cost of rectifying a builder’s defects but also such consequential damages as the loss of rent (eg from tenants) and income during the rectification period, or the diminished value of the building.
• Possibly also, an owner can claim for lost revenue from the diminished sale price of a new building if the sale is delayed due to wrongful failure to complete on time.

Reliance Loss (Wasted Expenditure)

This is a rarer form of loss where it is presumed that the plaintiff would at least have recovered their expenses, if it is not considered practical to calculate the expectation loss, for example loss of profit.

Statutory Compensation could refer to a claim based on misrepresentation / misleading or deceptive conduct.  There would need to be a necessary ingredient of reliance on the part of the injured party to establish this.

Previously it has been well established that misrepresentation under the Trade Practices Act (Cth) can form the basis of a claim for damages.  This cause of action is now found in the Australian Consumer Law.

There is a prohibition against misleading or deceptive conduct, and it is also unlawful for a business (in trade or commerce) to make false or misleading claims about goods or services.

Section 29 (false or misleading representations about goods or services).

“(1) A person must not, in trade or commerce, in connection with the supply or possible supply of goods or services or in connection with the promotion by any means of the supply or use of goods or services:

• make a false or misleading representation that goods are of a particular standard, quality, value, grade, composition [etc]…”

Section 18(1):  A person must not, in trade or commerce, engage in conduct that is misleading or deceptive or is likely to mislead or deceive.

Section 236 of the Australian Consumer Law: if the plaintiff suffers loss or damage because of the conduct of another person, and the conduct contravened a provision of Chapter 2 or 3 of the ACL, the plaintiff may recover the amount of the loss or damage.

Restitution refers to gains-based recovery, whereby a court might order a party to give up any gains (held to be obtained wrongfully) to the claimant.

This is contrasted with the law of compensation, where a court orders a party to play the claimant for their losses incurred.

Quantum meruit is an equitable claim for restitution for the “unjust enrichment” of the defendant.  In a case involving termination of a contract, the unjust enrichment element is satisfied where work has been performed but a right to payment has not yet accrued.

The remedy of restitution is not compensatory, but is determined by reference to the benefit conferred.  Typically, the amount payable will be determined by reference to the agreed contract price.

Mann v Paterson Constructions Pty Ltd [2019] HCA 32.

The High Court held that:

• The right to seek compensation on a quantum meruit basis is no longer available where the contract provides for an accrued right of payment at the date of contract repudiation;
• Any quantum meruit claim cannot exceed that portion of the contract price referrable to the relevant services; and
• Non approved variations cannot be determined under a quantum meruit and should be assessed under section 38 of the DBCA in the normal way.

Damages for Disappointment, Distress or Psychological Injury, and for Loss of a Chance

These consequential damages are notoriously difficult to recover from a court or tribunal, and where they are it is usually a lump sum judgment for arbitrary amounts, such as $10,000.

The damages are based on mental stress, inconvenience or for such descriptions as “loss of use and enjoyment of a home”.

These damages are only available where the mental distress is directly related to the physical inconvenience caused by the breach of contract.  At the very least medical evidence would be recommended to support a claim including a causal connection to the breach of contract.

As to loss of use and enjoyment of a new home, in this case an apartment, see the case of Leeda Projects Pty Ltd v Zeng [2020] VSCA 192.

The contract did not specify a date for completion and liquidated damages were stated as “nil”.   Zeng had purchased the 87^th floor of Eureka Tower for use as a private art gallery and occasional residence.

Zeng was awarded damages for “wasted costs” of $283,802 relating to Owners Corporation fees, rates and utilities during the period of delay in completing the works, when she was deprived of the chance to use and enjoy her apartment.

This is also an example of damages for “loss of a chance”.  Another instance of this could arguably be a Builder’s claim for the loss of profit if an Owner is held to have wrongfully terminated a contract part way through.

Matters Affecting Recovery of Damages

There are numerous elements affecting the quantum of damages claimable or even if liability exists initially on the claim.

Just because there has been a contractual breach or an instance of negligence, does not necessarily mean there is a causal connection with provable loss and damage.

The various factors include:

• Mitigation of loss: for instance, an owner is under a duty to take steps to lessen or ‘mitigate’ their losses, even if a building defect has been established. An owner should act diligently in repairing or stemming water leaks in a timely way, rather than delaying repairs until receiving compensation from a builder;
• Causation: there should be a proven direct connection between an event or error and the loss and damage claimed by a party.  This applies whether the claim is based on contractual breach or a duty of care claim.

The concept of an “intervening act” “novus actus interveniens”) has been found in some cases to prevent a successful negligence claim;

• Remoteness: it can be found that damages will not be payable, if the loss and damage sustained by an injured party arises too indirectly from the contractual or duty of care breach.  Or for example if other events were a contributing or primary cause of the loss.

For instance, in a breach of duty of care claim, if it was not reasonably foreseeable to the defendant that their action or omission would lead to loss and damage to the injured party.

• Termination remedies: if for example the contract contains a mechanism for allocating damages in the event of a contract default, or termination, then this will be the test and measure of any damages payable to a party.

Also, if a Builder is entitled to be paid on a quantum meruit if the contract is ended, this is the measure of their damages and it is an equitable remedy that is not subject to constraints of “remoteness” or “causation”.

Equitable Remedies

Equitable remedies have a different source of law to those previously discussed.  It is said that Equity intervenes to mollify the harshness of the common law.

Some equitable remedies include:

• Specific Performance (which compels the performance of a bargain or transaction);
• Positive and negative injunctions (which respectively compel and prohibit a person from doing a particular thing); and
• Equitable compensation (which can in some instances be awarded where common law damages are unavailable, or for equitable causes of action such as breach of fiduciary duty)
• Lord Cairns Act damages (which may be awarded in lieu of specific performance or an injunction – a very complex concept).
• Where a court has power to grant an injunction or order specific performance, the court may award damages to the injured party either in addition to or in substitution for the injunction or specific performance.

These forms of relief are usually only awarded where common law damages are considered insufficient or are unavailable. It is highly discretionary whether a Court awards equitable relief or not.

Commonly, the law treats matters regarding property and land as being of such importance and uniqueness to warrant the use of equitable remedies.

These include the likes of specific performance and injunctions, rather than compensation through mere damages awards.

 

This article is written for general information only and is not to be construed as a legal advice.

By Justin Cotton of Lovegrove & Cotton – Construction and Planning Lawyers

Lovegrove & Cotton Lawyers to the Building Industry

For thirty years, Lovegrove & Cotton have represented builders, building surveyors and building practitioners in Melbourne, Canberra, Sydney and Queensland.  Doyles Guide has ranked Kim Lovegrove as one of the leading construction lawyers in Australia. Justin Cotton, likewise, is a leading Australian construction lawyer and widely respected in the building fraternity. Lovegrove & Cotton can help practitioners resolve any type of building dispute and are preeminent in the area of building practitioner advocacy.  If you wish to engage the firm, feel free to contact us via our website or by emailing enquiries@lclawyers.com.au.