Stone v Chappel
[2017] SASCFC 72
•22 June 2017
SUPREME COURT OF SOUTH AUSTRALIA
(Full Court)
STONE v CHAPPEL
[2017] SASCFC 72
Judgment of The Full Court
(The Honourable Chief Justice Kourakis, The Honourable Justice Doyle and The Honourable Justice Hinton)
22 June 2017
APPEAL AND NEW TRIAL - APPEAL - GENERAL PRINCIPLES
CONTRACTS - GENERAL CONTRACTUAL PRINCIPLES - DISCHARGE, BREACH AND DEFENCES TO ACTION FOR BREACH
TRADE AND COMMERCE - COMPETITION, FAIR TRADING AND CONSUMER PROTECTION LEGISLATION - CONSUMER PROTECTION - MISLEADING OR DECEPTIVE CONDUCT OR FALSE REPRESENTATIONS
DAMAGES - MEASURE AND REMOTENESS OF DAMAGES IN ACTIONS FOR BREACH OF CONTRACT
The appellants (plaintiffs) contracted with the respondents (defendants) to construct the shell and framework of an apartment in a retirement village in Leabrook. The respondents built and operated the retirement village.
The parties entered into a Residents Agreement on or about 22 December 2009 by which the plaintiffs acquired a licence to occupy apartment 107. Under the terms of the contract the defendants were to construct only the shell and framework of the apartment. The plaintiffs were to fit out the apartment at their own cost. The plaintiffs paid the sum of $1,853,254 for their apartment.
The plaintiffs alleged that the defendants breached the contract by not constructing the shell and framework in accordance with plans forming part of the contract. In particular, the plaintiffs alleged that the contract provided for a ceiling height of 2700 mm, and that the apartment was not built in accordance to this. The plaintiffs also alleged that the defendants made representations to the effect that the ceiling would be this height, and thus engaged in misleading conduct.
The trial judge held that the contract did contain a term to the effect alleged, and that it was breached in that the ceiling height was on average 48 mm less than the required height of 2700 mm.
The plaintiffs sought damages reflecting the cost to rectify this defect, which they quantified in the amount of $331,188. The trial judge rejected the claim for damages assessed in this way for three reasons. First, the plaintiffs had elected not to seek rectification damages. Secondly, the ceiling as constructed was substantially in accordance with the contract. Thirdly, it would be unreasonable to carry out the rectification work contemplated. The trial judge instead awarded the plaintiffs damages to reflect the loss of amenity suffered by them on account of the departure from the contractual specification as to the ceiling height, which he assessed in the amount of $30,000.
As to the case alleging misleading conduct by the defendants in relation to the ceiling height, the trial judge held that the plaintiffs had not proven that the defendants made any representation as to ceiling height relied upon by the plaintiffs. Accordingly, that aspect of the claim failed.
In addition to the claim in relation to the ceiling height, the trial judge awarded the plaintiffs contractual damages reflecting the cost to rectify two other breaches of contract (in relation to the door frames and window seals), less an amount referable to the cost of some variations. The trial judge awarded a sum to reflect the refund of a fire inspection fee paid by the plaintiffs, and also awarded the plaintiffs sums reflecting interest on (or damages for the loss of use of) the payments of $500,000 and $480,000 made by the plaintiffs to the defendants in respect of the apartment, on the basis the plaintiffs made those payments prematurely.
The total sum awarded by way of damages to the plaintiffs was $81,046.68.
On appeal, the plaintiffs challenge the trial judge’s refusal to award contractual damages assessed by reference to the costs of rectifying the ceiling height, and the trial judge’s failure to find misleading conduct in respect of the ceiling height.
In their cross appeal, the defendants challenge the trial judge’s awards of damages of $30,000 on account of the plaintiffs’ loss of amenity, contending that only nominal damages should have been awarded; of $30,676.85 and $5,535.39 for loss of use of the sums of $500,000 and $480,000 paid by the plaintiffs upon the basis that neither payment was made prematurely, and contending additionally in respect of the $480,000 payment that it was in fact made late such that there should have been a set off in the defendants’ favour on account of interest payable to them of $33,486.90; and of $19,942.45 on account of the defective doorframes.
The defendants also rely upon a notice of contention in which they contend that the misleading conduct claim ought to have been rejected on the alternative or additional basis that the evidence did not establish a basis for recovering the loss claimed.
Held per Doyle J (with Kourakis CJ (in part) and Hinton J agreeing):
1. The plaintiffs were not precluded by the common law doctrine of election from seeking rectification damages (at [190]).
2. The plaintiffs’ claim for rectification damages was governed by the general rule in Bellgrove v Eldridge (at [268]).
3. The rectification costs claimed by the plaintiffs were unreasonableness and thus fell within the qualification to the general rule in Bellgrove v Eldridge, disentitling the plaintiffs from recovering contractual damages on this basis (at [75], [289], [453]).
4. No error has been established in the trial judge’s award of $30,000 for damages by way of loss of amenity (at [94], [299]).
5. The defendants represented that the ceiling height would be 2700mm (at [318]).
6. This representation was not misleading in that the defendants had a reasonable basis for making this representation (at [345]).
7. The plaintiffs have not established that the loss claimed was caused by the misleading conduct complained of (at [366], [380]) (contra per Kourakis CJ at [77]-[84]).
8. The plaintiffs' claim of misleading conduct has not been made out.
9. The plaintiffs did not pay the amounts of $500,000 and $480,000 prematurely so as to entitle them to an award of interest or damages for loss of use of those monies (at [410]).
10. The defendants are entitled to an award of interest for the late payment of the second instalment of the contract price (at [412]).
11. The plaintiffs are entitled to awards of damages for the door frames, window seals and fire inspection fee, less an amount referable to variations (at [390], [416]).
12. The plaintiffs’ appeal is dismissed.
13. The defendants’ cross-appeal is allowed in part.
Fair Trading Act 1987 (SA) s 45, s 56, s 84, referred to.
Bellgrove v Eldridge (1954) 90 CLR 613, applied.
Brewarrina Shire Council v Beckhaus Civil Pty Ltd [2006] NSWCA 361; Burke v Lunn [1976] VR 268; Copping v ANZ McCaughan Ltd (1997) 67 SASR 525; D Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10; De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28; Cordon Investments Pty Ltd v Lesdor Properties Pty Ltd [2012] NSWCA 184; Henville v Walker (2001) 206 CLR 459; Jacobs & Youngs v Kent (1921) 129 NE 889; Kenny & Good Pty Ltd v MGICA (1992) Ltd (1999) 199 CLR 413; Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344; Scott Carver Pty Ltd v SAS Trustee Corporation [2005] NSWCA 462; Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; UI International Pty Ltd v Interworks Architects Pty Ltd [2008] 2 Qd R 158; Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253; Wheeler v Ecroplot Pty Ltd [2010] NSWCA 61; Willshee v Westcourt Ltd [2009] WASCA 87, discussed.
Abigroup Contractors Pty Ltd v Sydney Catchment Authority (No 3) (2006) 67 NSWLR 341; Accounting Systems 2000 (Developments) Pty Ltd v CCH Australia Ltd (1993) 42 FCR 470; Agricultural and Rural Finance Pty Ltd v Gardiner (2008) 238 CLR 570 ; Sargent v ASL Developments Ltd (1974) 131 CLR 634; Campbell v Backoffice Investments Pty Ltd (2009) 238 CLR 304; Director of War Service Homes v Harris [1968] Qd R 275; Electricity Generation Corporation v Woodside Energy Ltd (2014) 251 CLR 640; Farley v Skinner [2002] 2 AC 732; Futuretronics International Pty Ltd v Gadzhis [1992] 2 VR 217; Gates v City Mutual Life Assurance Society Ltd (1986) 160 CLR 1; Henville v Walker (2001) 206 CLR 459; House v The King (1936) 55 CLR 499; HTW Valuers (Central Qld) Pty Ltd v Astonland Pty Ltd (2004) 217 CLR 640; I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109; Kizbeau Pty Ltd v WG & B Pty Ltd (1995) 184 CLR 281; Marks v GIO Australia Holdings Ltd (1998) 196 CLR 494; Mount Bruce Mining Pty Ltd v Wright Prospecting Pty Ltd (2015) 256 CLR 104; Pan Pharmaceuticals Ltd v Australian Naturalcare Products Pty Ltd (2008) 165 FCR 230; Radford v De Froberville [1977] 1 WLR 1262; Robinson v Harman (1848) 1 Ex 850; Roger & Keene v Clarendon Homes NSW Pty Ltd [2010] NSWCTTT 267; Rosenberg v Percival (2001) 205 CLR 434; Sargent v ASL Developments Ltd (1974) 131 CLR 634; Unique Building Pty Ltd v Brown [2010] SASC 106; Wardley Australia Ltd v Western Australia (1992) 175 CLR 514; Warren v Coombes (1979) 142 CLR 531, considered.
STONE v CHAPPEL
[2017] SASCFC 72Full Court: Kourakis CJ, Doyle and Hinton JJ
KOURAKIS CJ: I gratefully adopt the recitation of the relevant facts in the judgment of Doyle J.
The primary measure of damages in the case of defective building work was stated by Dixon CJ, Webb and Taylor JJ in Bellgrove v Eldridge[1] (‘Bellgrove’) to be ‘the amount required to rectify the defects complained of and so give to [the plaintiff] the equivalent of a building on [the plaintiff’s] land which is substantially in accordance with the contract’. The Court rejected diminution in building value as the generally applicable measure. The holding in Bellgrove maintains the distinction between the assessment of damages in contract and in tort in defective building work cases.
[1] (1954) 90 CLR 613 at 617.
The Court held that the building owner is entitled to the ‘reasonable costs’ of the rectification work ‘necessary to produce conformity’ with the contract. The rule was qualified in that rectification must be a ‘reasonable course to adopt’:[2]
The qualification, however, to which this rule is subject is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt. No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of second-hand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks. In such circumstances the work of demolition and re-erection would be quite unreasonable or it would, to use a term current in the United States, constitute ‘economic waste’. (See Restatement of the Law of Contracts, (1932) par. 346). We prefer, however, to think that the building owner’s right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions Restatement of the Law of Contracts (1932) par. 346). We prefer, however, to think that the building owner’s right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions ‘necessary’ and ‘reasonable’, for the expression ‘economic waste’ appears to us to go too far and would deny to a building owner the right to demolish a structure which, though satisfactory as a structure of a particular type, is quite different in character from that called for by the contract. Many examples may, of course, be given of remedial work, which though necessary to produce conformity would not constitute a reasonable method of dealing with the situation and in such cases the true measure of the building owner’s loss will be the diminution in value, if any, produced by the departure from the plans and specifications or by the defective workmanship or materials.
As to what remedial work is both ‘necessary’ and ‘reasonable’ in any particular case is a question of fact. But the question whether demolition and re-erection is a reasonable method of remedying defects does not arise when defective foundations seriously threaten the stability of a house and when the threat can be removed only by such a course. …
[2] (1954) 90 CLR 613 at 618-619.
I make the following observations about those passages.
First, the statement of the rule in Bellgrove was given in the case of a building intended for personal occupation. The Court expressly distinguished cases of marketable commodities for which diminution in value was the appropriate measure.[3]
[3] (1954) 90 CLR 613 at 617.
Secondly, the rejection of the concept of economic waste as a determinative criterion necessarily implies that rectification damages may be awarded even if rectification would require the total or partial demolition of a functional building.
Thirdly, the passage does not identify when a structure, albeit satisfactory for some purposes, is ‘different in character’ to the building contracted for. Nonetheless, the new bricks example suggests that only relatively minor differences would displace the general rule of awarding rectification costs.
Finally, it may be doubted that the example given of the contractual stipulation for second hand bricks is a true example of a breach of a contract at all. It may be that the stipulation or term, properly construed, is simply that the walls be made of bricks which need not be new bricks of first quality. Other cases in which rectification damages have not been allowed might also be seen as cases in which there was, on a proper construction of the term, no breach. For example, in the American case of Jacobs & Youngs v Kent,[4] a builder, through oversight, used pipes of a brand other than the stipulated brand, but which were in all other respects identical. Cardozo J rejected the claim for the cost of replacing the pipes, reasoning:[5]
In the circumstances of this case, we think the measure of the allowance is not the cost of replacement, which would be great, but the difference in value, which would be either nominal or nothing. … It is true that in most cases the cost of replacement is the measure (Spence v. Ham, supra). The owner is entitled to the money which will permit him to complete, unless the cost of completion is grossly and unfairly out of proportion to the good to be attained. When that is true, the measure is the difference in value.
[4] (1921) 230 NY 239; (1921) 129 NE 889.
[5] (1921) 230 NY 239 at 244.
On one view the contractual specification of the pipe brand in that contract was no more than a shorthand reference to the structural specifications of the pipes. The point I make is not so much to deny the premise of breach on which those cases proceed but to emphasise how minor a breach must be to preclude an award of rectification damage.
I agree for the reasons given by Doyle J, that Bellgrove does not hold that it is a precondition to rectification damages that there be no substantial performance. Substantial performance is related to the concept of a building of ‘different character’. Ultimately the degree of performance is a relevant, but not determinative, consideration in deciding whether or not to depart from the primary measure of damages.
The rule that rectification costs will generally be awarded (the primary rule) reflects the importance attached by the common law to contract as an instrument of economic exchange. The premise of the law of contract is that everyone is free to contract as they see fit in their self-interest. The law of contract authorises, subject to limited exceptions, the parties to voluntarily bind themselves to a special charter of rights and obligations to govern their economic relationship in addition to, or in derogation of, the general law. The common law of contract is a manifestation of the community consensus in free market economies that freedom of contract benefits the particular parties to the contract and the public by advancing economic growth generally. The measure of damages which places the injured party back in the same position, as if the consideration for which he or she had stipulated was performed, is necessary to fulfil the underlying objective of the law of contract. The position of the common law is succinctly expressed in the Latin expression pacta sunt severanada: contracts are to be kept.[6]
[6] Radford v De Froberville [1977] 1 WLR 1262 at 1270 (Oliver J).
That legal policy context serves to emphasise the exceptional course of departing from the primary rule. Awarding less than that which is necessary to secure the benefits of the contract to the injured party subverts the very concept of a contract by which parties determine and change their legal rights and obligations as between themselves. The premise of freedom of contract implies that the party who fails to deliver on his or her contractual promise benefited over and above the terms of the bargain. If the injured party is awarded something less than what is necessary to provide, in money terms, the stipulated benefit, the wrongdoer may be handed a windfall profit. In Scott Carver Pty Ltd v SAS Trustee Corporation,[7] Ipp J said:[8]
[120]In my view (and with respect to those who have expressed contrary views), the details of any contract that the proprietor might make for the sale of the building defectively constructed is collateral to the issue of the proprietor’s loss, or, as it used to be described, res inter alios acta.
[121]Were this not to be the rule, the builder in breach of contract would obtain a windfall, depending on coincidence (the proprietor’s whim in selling), that would not be deserved.
[7] [2005] NSWCA 462.
[8] [2005] NSWCA 462 at [120]-[121].
True it is that the cost of rectification after the event may be much more than the cost of providing the stipulated benefit at the time, but if wrongdoers were to think that, for that very reason, they will escape the full cost of providing the stipulated benefit, the efficacy of contractual instruments would be undermined. That deleterious effect extends beyond the consequences to the innocent party to the particular contract in question. In many circumstances a wrongdoer will have won the contract at the expense of another supplier in the market place who may well have stipulated a higher price precisely because he or she wished to ensure delivery of the contractual promise in full. Of course I am speaking generally and I do not suggest that in this case the respondents never intended to fulfil their contractual obligations.
I acknowledge that in this case there is a countervailing legal policy consideration. A rigid adherence to rectification damages will tend to increase the transaction costs in building cases because when contracting builders may make provision for the risk of relatively higher awards of damages.
The general observations I have made cannot be statements of a legal rule. They can only inform the application of the rule stated in Bellgrove and in particular the qualification to that rule. The ‘reasonable course’ qualification is necessarily open textured but it is important to observe that in Australia that qualification operates as an exception to the ordinary rule that rectification damages are awarded. In England the reasonableness criterion governs a threshold choice, in every case, as to the measure of damages which will be applied.
The decision in Ruxley Electronics & Construction Ltd v Forsyth[9] (‘Ruxley’) illustrates the significance of that distinction. The plaintiff in Ruxley, Mr Forsyth, contracted with the defendant Ruxley Electronics & Construction Ltd to build a pool at a maximum depth of six feet six inches. After completion of the pool, Mr Forsyth asked for the increase in the maximum depth to seven feet six inches, explaining that he was ‘a big man and would feel safer when diving and more comfortable with the greater depth of water’.
[9] (1996) 1 AC 344.
When the pool was finished it was only six foot nine inches deep. The trial Judge found that as a matter of fact the pool was safe for Mr Forsyth to dive into and refused rectification costs, awarding instead the sum of £2,500 as general damages. The term as to depth was agreed after the price for the pool had been fixed and without any variation to that price. Even though of no obvious legal significance, it is difficult not to think that that fact may have influenced the selection of general, instead of rectification, damages in that case. For the purposes of the award of general damages, the Judge accepted that Mr Forsyth did not feel safe and accordingly found that there was a lack of amenity brought about by the lesser depth of water. The Judge found that there was no difference in value of the pool or the home. The cost of rectification was between £5,000 and £10,000. The cost of removal of the pool and further excavation was £21,560. The Judge held that the cost of removal could only be justified if Mr Forsyth intended to carry out that work, and if such a course of action was a reasonable one. The Judge was not satisfied that Mr Forsyth intended to build a new pool. The Judge also found that the cost to do so was wholly disproportionate to the disadvantage of having a pool slightly shallower and, therefore, not a reasonable course to adopt.
Mr Forsyth appealed on the grounds that a substantial sum should have been awarded by way of special damages for the rectification work in rebuilding the pool and that the general damages of £2,500 were inadequate. In the Court of Appeal, Staughton LJ held that it was not a precondition to an award of rectification damages that a plaintiff have an intention to carry out the rectification work. Relying on the judgment of Oliver J in Radford v De Froberville,[10] Staughton LJ held that the importance of keeping a contract was the primary determinant of reasonableness. Staughton LJ observed that unless rectification costs were ordered ‘a builder of swimming pools need never perform his contract’ because he can always argue that ‘five feet in depth is enough for diving even if the purchaser has stipulated for six, seven or eight feet and pay no damages’.[11] Staughton LJ confined the element of reasonableness to the requirement to mitigate loss in the sense that it is unreasonable of a plaintiff to claim an expensive form of rectification if there is a cheaper alternative which would equally make good the breach. Staughton LJ rightly observed that it is not part of the concept of mitigation of loss to select a measure by which to assess damages which favours the defendant. Staughton LJ held that if there were no alternative course a plaintiff is entitled to the cost of repair or reinstatement even if that is very expensive. Accordingly, Staughton LJ held that an award of rectification costs was appropriate.
[10] (1977) 1 WLR 1262.
[11] Ruxley Electronics & Construction Ltd v Forsyth [1994] 1 WLR 650 at 659 (Staughton LJ).
Mann LJ also held that an award of rectification costs was appropriate. Mann LJ relied on the ordinary rule governing damages for breach of contract that the award must, so far as money can do, place the plaintiff in the same situation as if the contract had been performed. Mann LJ continued:[12]
This very general principle is shadowed by another, which is that the damages should reflect a reasonable culmination of the relationship which has occurred between the parties. Thus damages will not reflect an unreasonable failure to mitigate loss. However here we are not concerned with any failure to mitigate but rather with disappointment at the unfulfilled bargain.
[12] Ruxley Electronics & Construction Ltd v Forsyth [1994] 1 WLR 650 at 660 (Mann LJ).
Mann LJ also relied on the statement of Oliver J in Radford v De Froberville but went on to observe:
There can be instances where the cost of rectifying a failed project is not reasonable, as, for example where no personal preference is served or where there is no preference and the value of the estate is undiminished.
Dillon LJ dissented, holding that reasonableness operated as a limit on damages even before the issue of migration arose, and affected the selection of the appropriate measure of damages.
On appeal to the House of Lords, Ruxley contended that reinstatement costs were only recoverable if there was an intention to reinstate and the cost was reasonable. Ruxley argued that if the plaintiff had no intention to rectify the works then it could not be said that the plaintiff had lost the cost of reinstatement. The unstated premise in that submission is that there is only a loss when a contractual benefit is not delivered if the innocent party intends to bear the cost of acquiring the same or similar contractual benefit from another. The premise is a false one. The loss when a contract is breached is the loss of the stipulated contractual benefit which may be called the performance interest. That contractual benefit has been lost as soon as the defaulting party fails to deliver it and irrespective of what the innocent party intends to do with his or her award.
Counsel for Forsyth contended that reasonableness did not control the measure of damages but was relevant only to mitigation of loss. In an all or nothing submission, Forsyth’s counsel contended that general damages in the sense of disappointment and loss of amenity could not be awarded.[13] Forsyth’s counsel contended that in building cases the builder contracts to produce a particular structure but accepted that contracts with a purely commercial purpose cannot be treated in the same way as contracts with a non-commercial objective. Counsel contended that the diminution in value method was inappropriate where the plaintiff, for sentimental, idiosyncratic or irrational reasons, wishes to have work done on his property which has no effect on the value.
[13] Counsel relied on Addis v Gramophone Company Limited (1909) AC 488.
The House of Lords unanimously allowed Ruxley’s appeal. Lord Bridge rejected Forsyth’s contention that the only two possible awards of damages were diminution in value or rectification costs. Lord Bridge held that an award based on rectification costs, when there was no diminution in value and no intention to rectify, would ‘fly in the face of common sense’.
On the other hand Lord Mustill recognised that if the builder were to escape liability at all, because there had not been a diminution in value and because the product generally seemed as good as that which had been promised, then the builders promise became largely illusory and the bargain would be ‘unbalanced’.
Lord Mustill held that there was a middle ground between awarding no damages in a case in which there is no diminution of value and exorbitant rectification costs. Lord Mustill held that the law recognises that on occasions ‘the value of the promise to the promisee exceeds the financial enhancement of his position which full performance will secure’. He referred to that difference as the ‘consumer surplus’.[14] On that approach a failure to deliver ‘lurid bathroom tiles’ might still sound in damages even if it might be said that in purely economic terms the builder had done the plaintiff a favour by not installing them. It was not made clear how the consumer surplus was to be valued for the purpose of damages particularly in a case like the example of the lurid tiles in which minds might differ on the evaluation of the loss of amenity.
[14] Consumer surplus was defined by Harris Ogus and Phillips in Contract Remedies and the Consumer Surplus (1979) 95 LQR 581 at 582 as the excess utility of subjective value obtained from a ‘good’ over and above the utility associated with the market price.
Lord Jauncey of Tullichettle accepted that it was a precondition for the award of rectification costs that the plaintiff intended to carry out the rectification. His Lordship also relied heavily on the fact that the pool was functional to conclude:[15]
Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained. If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate. A failure to achieve the precise contractual objective does not necessarily result in the loss which is occasioned by a total failure.
[15] Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344 at 357 (Lord Jauncey of Tullichettle).
I first observe about that passage that it holds that the proper measure of damage is to be selected on the facts of each particular case. Secondly, it is implicit in that passage that something more than a failure to meet the ‘precise contractual objective’ will generally be required for a rectification award to be made. Thirdly, a rectification award is implicitly limited to those cases in which there has been ‘a total failure’.
Lord Lloyd of Berwick proceeded on the basis that in building cases loss is almost always measured by the lesser of either the difference in value of the work done or the cost of reinstatement. His Lordship rejected the cost of reinstatement as the appropriate measure of damages when the expenditure would ‘be out of all proportion to the benefit to be obtained’ holding that the difference in value would be appropriate even if it would result in a nominal award. His Lordship accepted that personal preferences were relevant when selecting an appropriate measure of damages but denied that residential dwellings were a separate category with special rules. He held that the eccentric landowner was entitled to his whim only if the cost of reinstatement is not unreasonable. Lord Lloyd of Berwick accepted that intention was relevant to reasonableness but held that it was not determinative.
Lord Lloyd of Berwick described the decision of the High Court in Bellgrove as one which emphasized the central importance of reasonableness in selecting the appropriate measure of damages. The contrary is true. Bellgrove emphasized, instead, that the ordinary measure of damages was rectification subject to limited exceptions. Lord Lloyd of Berwick not only accepted that damages for loss of amenity may be preferable to an award of rectification damages but went further and suggested that damages for contractual disappointment might also be awarded. I return to that question below when dealing with the appellant’s ground that the general damages awarded by the Judge were manifestly inadequate.
In De Cesare v Deluxe Motors Pty Ltd (‘De Cesare’),[16] the issue before the Full Court of this Court was whether the developers of residential units were entitled to recover the costs of significant rectification work when they had already sold the units. Doyle CJ held that the primary measure of damages, the cost of rectification, was not displaced merely because the plaintiff did not intend to expend the money to carry out the rectification. Doyle CJ observed that a building owner may have sound economic reasons to sell his or her newly constructed building quickly and without first effecting repairs or recovering damages for rectification. I respectfully adopt those remarks. A building owner is entitled to the full measure of his or her contractual bargain without having to forego the right to deal with the product of that contract in a way which optimises his or her financial position. Doyle CJ placed some importance on the circumstance that, on the evidence adduced in De Cesare, it was reasonable to assume that the price obtained was less than it might otherwise have been even though no finding was made quantifying any diminution in value.
[16] (1996) 67 SASR 28.
In the course of his reasons, Doyle CJ adverted to the qualifications on the general rule in cases in which there has been ‘substantial performance’ and those cases in which the non‑performance has had no effect upon the ‘value or utility’ of the contractual work. The criterion of substantial performance comes as we have seen from Ruxley but is also similar to the ‘different character’ criterion referred to in Bellgrove. Nonetheless the application of criteria like those, as determinative, is problematic because they are of uncertain content and result in an opaque, largely unexplained judgment. It is more useful to treat the degree of departure from the contractual stipulation as a relevant factor which, in combination with others, may give good reason to depart from the primary rule, an approach to which I will shortly return.
In Brewarrina Shire Council v Beckhaus Civil Pty Ltd,[17] the New South Wales Court of Appeal was concerned with the proper measure of damages for the defective construction of levee banks intended to protect the town of Brewarrina from flooding of the Barwon River. The Court upheld an award of damages representing the cost of rectifying the wet side of the levees so as to conform with the contract but denied the additional cost of rectifying the dry side of the levees. Tobias JA (with whom Giles and McColl JJA agreed) allowed the cost of rectifying the wet side because the rectification work on the wet side of the levees resulted in levees with the equivalent security and capacity to repel floodwater as levees constructed in conformity with the contract and because the cost of that rectification was not out of proportion to the achievement of the objective of flood mitigation. The decision in that case, and the underlying approach to the reasonable course qualification, is mired by the complexity of the expert evidence on the effects of different methods of rectification. Nonetheless, it should be accepted that disproportionate expenditure on rectification work of little utility is a very relevant consideration.
[17] [2006] NSWCA 361.
Westpoint Management Ltd v Chocolate Factory Apartments Ltd[18] was another case of defective building work in home units which had been on sold by the plaintiff to unitholders who were not asking for the rectification work to be carried out. There was no evidence of diminution in the sale price and, obviously enough, no intention to carry out the rectification work. The New South Wales Court of Appeal accepted that neither the sale of the property nor the absence of an intention by the plaintiff to carry out the rectification work was determinative. However, the Court held that those factors remained relevant considerations in determining whether rectification was a reasonable course in order to achieve the contractual objective. In particular, Giles JA (with whom McColl and Campbell JJA agreed) explained that the reasons for carrying or not carrying out the rectification work will reveal more about the reasonableness of the decision than the decision itself. I respectfully agree. Some reasons, or the lack of any reason, for not carrying out rectification work will show that the undelivered, or poorly delivered, contractual benefit is of no, or little, value. If the reason is that the building has been on-sold then much will depend on whether the building owner has acted reasonably to mitigate his or her loss or to maximise the economic benefit of his or her contract. Giles JA continued:[19]
[61] So if supervening events mean that the rectification work cannot be carried out, it can hardly be found that the rectification work is reasonable in order to achieve the contractual objective: achievement of the contractual objective is no longer relevant. …
[18] [2007] NSWCA 253.
[19] [2007] NSWCA 253 at [61].
I question why the contractual objective should lose its relevance in all cases in which a supervening event makes rectification practically impossible. The contractual objective crystallises at the time of the making of the contract and is ascertained from the terms and, commonly understood, context of the contract. The reasonableness of rectification must be measured against that objective as at the time of delivery. The relevant question is whether, given the breach by the wrongdoer, there is reason to depart from rectification damages as the appropriate remedy as between the parties to the contract, having regard to its terms and objectively ascertainable context.
Giles JA accepted that the ordinary measure of damages for breach of contract in building cases is rectification damages, and that an intention not to rectify is not determinative, but nonetheless observed:[20]
[54]On the other hand, adherence to the compensatory nature of damages suggests that, if the plaintiff will not put itself in the position it would have been in had the contract been performed, the plaintiff should not be given the means of doing so.
This passage is a variation on the submission put by Ruxley’s counsel to the House of Lords and referred to in [22] above. It is not clear to me why rectification damages are not compensatory unless they are actually spent on rectification. Rectification damages may properly be regarded as compensatory even if a plaintiff decides not to expend them to achieve contractual compliance because they are a proper measure of the difference between the benefit for which the plaintiff stipulated, and paid the price, and the lesser product delivered by the defendant wrongdoer. Doyle CJ made the same point in De Cesare when he observed:[21]
What is awarded is the cost of bringing the building works into a state of compliance with the contract, not an amount which the plaintiff has in fact expended to do so or proves will be spent.
[20] [2007] NSWCA 253 at [54].
[21] (1996) 67 SASR 28 at 32.
In UI International Pty Ltd v Interworks Architects Pty Ltd,[22] the Queensland Court of Appeal considered the appropriate measure of damages for defective design and construction of buildings which had been sold. The plaintiff’s claim for the cost of demolishing and reconstructing the defective buildings was struck out because it neither pleaded that the defects had affected its return, nor that the buyers required or consented to any rectification work. The plaintiff’s appeal against the strike out was dismissed by the Queensland Court of Appeal.
[22] [2008] 2 Qd R 158.
Williams JA held that if rectification was no longer possible, in fact, then rectification was not a reasonable course for the purposes of the award of damages. In reaching that conclusion, Williams JA relied on a statement in the reasons in Bellgrove, made when discussing the example of a building painted in the wrong colour, that the building owner ‘is entitled to the reasonable cost of rectifying the departure or defect so far as that is possible’.[23] Williams JA reasoned that if rectification was not possible it was not a reasonable course to adopt. With respect, that reasoning reflects a misunderstanding of the passage. The rule stated in Bellgrove is that the plaintiff is entitled to the reasonable costs of rectifying the works to comply as nearly as possible with the contractual stipulation. To put it another way the award will cover the costs of bringing the works as close as possible to full compliance. It follows that it would generally not be good enough to effect some, but not all, of the possible measures which would ensure compliance. So much is clear in Bellgrove from both the immediately following endorsement of the statement of the rule in Hudson on Building Contracts that it is the cost of making the building conform to the contract which can be recovered as well as from other references in that judgement to awarding such rectification costs as will achieve substantial compliance with the contract. The statement on which Williams JA relied was not intended to limit the payment of rectification costs to achieve that result to those cases in which it remains, at the time of judgment, within the power of the building owner, as a practical matter, to carry out the rectification work.
[23] Bellgrove v Eldridge (1954) 90 CLR 613 at 617-8.
Keane JA (with whom Holmes JA agreed) distinguished Bellgrove and personal occupation cases from cases in which the product of the building contract is intended to be placed on the real estate market. They may be described as building commodity cases and as such fall within analogous class to the exception recognised in Bellgrove.[24] Keane JA held that in building commodity cases an award of the diminution in value of the building caused by the defect fully vindicates the plaintiff and is the prima facie measure of damage.
[24] [2008] 2 Qd R 158, 196 at [106] (Keane JA).
At [93], Keane JA referred to the following passage in the judgment of Gibbs J in Director of War Service Homes v Harris:[25]
… If the owner subsequently sold the building, or gave it away, to a third person, that would not affect his accrued right against the builder to damages according to the same measure. The fact that the building had been sold might be one of the circumstances that would have to be considered in relation to the question whether it would be reasonable to effect the remedial work, but assuming that it would be reasonable to do the work the owner would still be entitled to recover as damages the cost of remedying the defects or deviations from the contract (assuming of course that the contract price had been paid). In assessing those damages it would not be relevant whether the owner was under a legal liability to remedy the defects, or whether he had made a profit or a loss on the sale of the building, for the builder has no concern with the details of any contract that the owner might make with a third party.
(Emphasis of Keane JA)
At [103], Keane JA cited Gibbs J further:[26]
There is a principle that in actions for non-delivery or breach of warranty under a contract for the sale of goods ‘the law does not take into account in estimating the damages anything that is accidental as between the plaintiff and the defendant, as for instance an intermediate contract entered into with a third party for the purchase or sale of the goods’ (Rodocanachi v Milburn (1886) 18 QBD 67 at 77; Williams Brothers v Ed T Agius Ltd [1914] AC 510; Slater v Hoyle [1920] 2 KB 11) and this principle (which has been applied to a contract for the sale of a lease, plant, buildings and stock, treated as realty–Brading v F McNeill & Company Limited [1946] 1 Ch 145) should in my view be similarly applied to the case of a building contract. The owner of a defective building may decide to remedy the defects before he sells it so that he may obtain the highest possible price on the sale; he may sell subject to a condition that he will remedy the defects; or he may resolve to put the building in order after it has been sold because he feels morally, although he is not legally, bound to do so. These matters are nothing to do with the builder, whose liability to pay damages has already accrued.
(Emphasis of Keane JA)
[25] [1968] Qd R 275 at 278.
[26] [1968] Qd R 275 at 278-9.
In relation to the first passage cited above, Keane JA noted that Gibbs J did not rule out as irrelevant an incapacity to effect repairs.[27] The passage from Director of War Services Homes v Harris[28] does not expressly do so however Gibbs J must have contemplated that, generally, rectification would not be possible after a sale of the building. More importantly, Keane JA distinguished between the contractual expectation in personal occupation building contracts and building commodity cases. It is not obvious to me why the intended use of a building should change the rule in Bellgrove that the ordinary measure of damages in building contract cases is rectification damages. True it is that in the case of speculative building developments in which it is intended to sell the completed building on the open market, profit on resale is the predominant interest. For that reason there is a close analogy with industrially produced commodities. However, buildings, and houses in particular, are not as standardised in function, appearance and market price as industrial products. Moreover, the intended use may not be known to both parties at the time of contract and may change over time.
[27] [2008] 2 Qd R 158, 192 at [94] (Keane JA).
[28] [1968] Qd R 275 at 278.
Keane JA distinguished the decision in De Cesare because in that case it was reasonable to assume that the price obtained by the building owner on resale was less than it otherwise would have been. It can be accepted that Doyle CJ relied on the real likelihood of diminution as a reason for not departing from the primary rule of damages. However, that circumstance was not determinative in the reasoning of Doyle CJ and not mentioned by Nyland J (with whom Bollen J agreed) for reaching the same conclusion.
It is not clear to my why a possible, but not proved, diminution in value is any more reason to order rectification costs than cases in which it is proved conclusively that there was a quantified diminution on the one hand, or that there was no diminution at all on the other.
The distinction drawn by Keane JA raises the question whether a building owner should be limited to damages based on proving a shortfall between the price received and the hypothetical price which might have been achieved if the building placed on the market complied with the contractual stipulations which were intended to maximise the profit. Keane JA concluded:[29]
[106]Where, by reason of the ownership of a property by a third party, the repairs cannot be carried out by the claimant, the claimant cannot claim the cost of repairs. In such a case, it is not a matter of the claimant being entitled to do what he or she pleases with his or her property or the damages due to him or her; rather, it is simply that the damage to the claimant’s interest in the performance of his or her contract with the builder cannot reasonably be measured by the cost of repair which cannot occur.
[29] [2008] 2 Qd R 158, 196 at [106].
The correctness of that passage in its application to what I have called building commodity cases does not arise on this appeal. I observe only that different views might be taken as to whether it is reasonable for damages to be assessed, as against the builder, on the basis of rectification costs irrespective of whether they are able to show a diminution in value based on a hypothetical sale. The building owner’s assessment of the character and nature of the building which would maximise his or her profit may not be shared by the experts who give evidence of value but the building owner may still have been proved right, if he or she had had an opportunity to put the building, constructed in accordance with the contract, on the market. It is the conduct of the builder which has denied the building owner the proof of the soundness of his or her economic judgment and the reaping of the consequential profits. The premise underlying freedom of contract, and the ancillary common law rule that damages reflect the cost of attaining the undelivered benefit, is that the parties best know which terms will most benefit them.
Be that as it may, I would not apply the rule stated by Keane JA to personal occupation cases, at least as an absolute rule, because I do not accept that in a personal occupation case the sale of a defective building, in which the occupier could no longer bear to reside, precludes rectification damages if the contractual non-compliance does not cause any loss of value.
The primacy of the general rule as to rectification costs was affirmed by the High Court in Tabcorp Holding Ltd v Bowen Investments Pty Ltd (‘Tabcorp’).[30] In that case, the landlord of a commercial building recovered the cost of reinstating the foyer of that building after the tenant had significantly altered it without consent. The Judge’s award in favour of the plaintiff of $34,820 reflecting the diminution in value of the building by the tenants fitout of the foyer was set aside by the Full Federal Court. An award of $1.38 million was substituted comprising $580,000 for the cost of restoring the foyer and $800,000 for rent lost during the restoration.
[30] (2009) 236 CLR 272.
The High Court upheld the decision of the Full Federal Court. The Court held that ‘the test of unreasonableness is only to be satisfied by fairly exceptional circumstances’ and that ‘the diminution in value measure of damages will only apply where the innocent party is ‘merely using a technical breach to secure an uncovenanted profit’.[31]
[31] Tabcorp Holding Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272, 288 at [17].
The terms ‘technical breach’ and ‘uncovenanted profit’ are of uncertain meaning. Presumably technical breach means more than a de-minimis variation but beyond that it remains a matter of judgment. As to the latter term, building contracts rarely apportion the contract price between elements of the build, save for some prime cost items. Nonetheless, it is clear that the High Court in Tabcorp affirmed the primary measure of damages established in Bellgrove and took a narrow approach to the circumstances which warranted a departure from it.
The Court in Tabcorp doubted the correctness of the decision in Ruxley observing that on one view the decision was inconsistent with the principle in Bellgrove v Eldridge and Radford v De Froberville.[32]Interestingly, counsel for Ruxley had contended that in a landlord and tenant case the measure of damages for breach of covenant to repair is the damage to the landlord’s reversion, a submission directly controverted by the decision in Tabcorp.[33]
[32] Tabcorp Holdings v Bowen Investments 236 CLR 272, 289 at [18].
[33] The position in England has been affected by statutory intervention.
In Willshee v Westcourt Ltd,[34] the Full Court of the Western Australian Supreme Court awarded the plaintiff the cost of rectifying his home by removing and replacing inferior limestone used in its construction. The contract had stipulated for ‘high quality’ limestone cladding but the builder had supplied inferior or second quality limestone cladding. The damages awarded by the Judge allowed only for the cleaning and sealing of the second grade limestone. The Judge concluded that the cost of $257,977.91 to replace the limestone was disproportionate to the value of the house at $1.7 million. Martin CJ observed that the plaintiff, Mr Willshee, had ‘entered into a contract which he considered served his interests’ and that he was entitled to the performance of that contract in ‘quite irrespective of the views which other people might form in relation to the advancement of those interests, such as views relating to the aesthetic appearance of the house’.[35]
[34] [2009] WASCA 87.
[35] [2009] WASCA 87 at [68] (Martin CJ).
Analysis
Imposing limits on awards for breaches of building contracts by reference to ‘contractual objective’ ‘substantial performance’ or ‘different character’ is problematic. What is in issue is not the right to terminate the contract, but whether there is reason to depart from the ordinary measure of damages.
The contractual objective of the parties is to be determined by reference to the terms they agree. The motive of a purchaser of a building may be to profit by resale. However, the purchaser effects that objective by stipulating specifications and agreeing a price which the purchaser estimates will maximise that profit. The contract therefore remains one for the supply of a particular building and not for an approximation of that building. That is especially so in home building contracts. If rectification costs are not awarded there is, in effect, if not in form, a rewriting of the contract. The building for which the building owner stipulated is replaced with a different building but with a correlative reduction in the purchase price through the mechanism of an award of quasi-tortious damages for diminution in value or loss of amenity.
The Bellgrove qualification that rectification must be a ‘reasonable course’ to adopt is calculated to control the level of damages and to address those cases in which the prima facie rule produces a result which is manifestly unjust. It is not limited to the question of mitigation in the sense of awarding damages for that method of rectification which best mitigates the loss. It is a qualification which allows the selection, in special circumstances, of an alternative measure of damages. The qualification reflects two methods often employed by the common law. First, in recognition that a sound general rule may nonetheless still work an injustice in a particular case, it qualifies the general rule with a proviso. Secondly, it translates what is, at base, a determination of legal policy into a quasi-factual question by engaging the reasonableness standard. The reasonableness of rectification is not determined by an entirely factual enquiry. The test of reasonableness is only quasi-factual and imports a normative standard. For that reason, the practical capacity to rectify is not determinative. Contracting parties are entitled to protect their self-interest, and in some circumstances are bound to mitigate their loss. For that reason, they may sell or otherwise dispose of, or change, the subject matter of the contract, without relieving the wrongdoer of the consequences of his or her breach of contract. Nor are the circumstances that there are physical or legal impediments to rectification, or that rectification may create risks to the person or property of others, determinative.
Rectification damages are awarded for a breach of a building contract unless there is good reason to adopt another measure because the award of rectification damages would be manifestly disproportionate to the attaining of the contractual benefit. That rule entrenches rectification costs as the primary measure of damages and emphasises the exceptional nature of any lesser award. In determining whether good reason exists, the authorities suggest that the following are relevant considerations:
(1)the degree of departure from the contractual stipulation;
(2)the adverse effect of the departure on the functional utility, amenity and aesthetic appearance of the building;
(3)the reasons, objectively ascertained and commonly known, for which the innocent party made the stipulation which was breached;
(4)the practical feasibility of rectifying the work, including the effects on third parties of attempting to do so;
(5)whether or not the innocent party intends to carry out the rectification work;
(6)the absolute cost of the rectification work and the disproportion between that cost and
· the value of the building and contract price;
· the diminution in commercial value of the building;
· the effect of the departure on the functional utility, amenity and aesthetic appearance of the building;
(7)the nature of the wrongdoer’s fault for the defect; and
(8)the public interest in reducing economic waste.
The following observations should be made by way of exegesis of those considerations.
The degree of departure from the contractual stipulation encompasses the ideas of de-minimus or technical breach and substantial performance but, instead of attempting to fix a qualitative descriptor of the breach which will be determinative, the degree of departure is treated it as one of a number of considerations. There is considerable overlap between the first and second considerations but I wish to emphasise that non-performance of any contractual stipulation and the degree of departure from it is in itself an important consideration whether or not it is shown to effect functional utility or aesthetic appearance. The decision of one party to a contract to stipulate for a particular design feature is presumed to have a purpose and to arise from that party’s assessment of what is necessary to provide the functional utility and aesthetic appearance he or she desires for personal or commercial reasons.
The third consideration draws attention to the reasons for the making of the breached stipulation and may also disclose how important satisfaction of that stipulation was to the innocent party and therefore the degree of disappointment with the result.
The practical feasibility of rectifying the work deals with the factual aspects of the rule and encompasses questions like whether the building has been sold, and the risks and inconvenience to others in attempting rectification work.
Whether or not the innocent party intends to carry out the rectification work is both an indication of the subjective importance of the stipulation and affects the question whether or not the award of damages is reasonable as between the parties.
The sixth consideration, disproportion, is at the core of the evaluative judgment which must be made.
The seventh consideration, the nature of the wrongdoers fault for the defect, is important because, as between the parties, an award of burdensome rectification costs on a builder may be justified by his or her knowledge, negligence or recklessness with respect to that defect.
The final consideration was rejected as a determinative factor in Bellgrove because, as such, it would deny the primacy of the contractual agreement. However the concept of reasonableness inevitably incorporates a consideration of the public interest in avoiding economic waste. Collaterally it also imports a consideration of the public interest in minimising transactional costs in the building industry which may be increased if insurance is taken against damages based on rectification costs.
In this case, the degree of departure from the contractual stipulation is not merely technical. Even though in absolute terms the difference in ceiling height is a matter of millimetres, that is to be measured against not just the total ceiling height but also against the 300 mm above the standard height for which the Stones contracted. Moreover, it appears to me of little significance that the Stones did not appreciate that the ceilings were lower than the contractual specification until they had installed the joinery. It is natural that the difference became obvious by reference to the space between the height of the joinery and the ceiling. It is convenient to record here that for the reasons given by Doyle J the Stones did not elect to forego rectification damages by moving into their apartment.
The visual perspective was, as the Stones testified, a large part of the enjoyment of a higher ceiling. The evidence establishes that higher than standard ceilings were important to the Stones. They are not alone in that preference. The degree of departure from the stipulated term and the objectively ascertainable reasons for the stipulation, which must have been known to the defendants, weighs in favour of making an award in accordance with the ordinary measure so that the plaintiffs’ bargain is fully enforced.
The nature of the defendants’ fault also tells in favour of a strict enforcement of the contract by awarding the full measure of rectification damages. The Stones had negotiated for higher than standard ceilings for some time before the formal contract was signed on 22 December 2009. The defendants accordingly arranged for the building of a unit which would accommodate their request. Nonetheless, at some point in 2009 the design of the roof was changed which resulted in the fixing of a steel RB 5 beam which compromised the capacity to provide a ceiling at the requested height. The building supervisors were aware of that problem. They told Mr Chappel that the beam would have to be modified. The Judge accepted the evidence of Mr Chappel that he was not told that the depth of the RB5 beam precluded a ceiling height of 2700mm.
For the reasons given by Doyle J, I accept that Mr Chappel had a reasonable basis on which to make a representation as to ceiling height for the purposes of liability on the statutory misrepresentation action. The reasonable basis was that he had entrusted the building of the apartment to an independent builder who had not informed him that the architectural specifications could not be met. For the purposes of making the representation Mr Chappel was entitled to act on the assumption that the builder would meet its contractual obligation.
However, that finding is not dispositional of the question of responsibility for rectification. When Mr Chappel executed the contract with the Stones and undertook to provide an apartment with a ceiling height of 2700mm, he knew that the change in design of the roof meant that the beam was ‘too deep’ and would need to be modified. Nonetheless, Mr Chappel took no additional precautions to ensure that the building work was carried out in a way which ensured that he would discharge his contractual obligation. Mr Chappel’s knowledge must also be imputed to Mr Smallacombe because they were partners. The defendants’ reliance on the disproportionate cost of rectification is undermined by their failure to take steps reasonably open to them at the time to avoid the risk of incurring substantial rectification costs.
Be that as it may, against those considerations there is undoubtedly a great disproportion between the cost of the rectification work and the contract price for the unit and its value. The full 2700mm ceiling height was important to the Stones but the ceiling height is still substantially higher than a standard ceiling. It is not without significance that Mr Stone’s evidence that he would rectify was not unequivocal and was premised on receiving an award of damages on that basis:
Q.Suppose the court agreed with you and suppose the court, for argument’s sake, made an award of damages in your favour, do you have any intention to carry out rectification work to the ceiling.
A.Very probably.
Q.Would you do that even if the costs were in excess of a quarter of a million dollars.
A.The quarter of a million dollars being paid by whom?
Q.Suppose you were given an award of damages of an amount to cover the cost of rectification and suppose the costs of the rectification were over $250,000, would you actually carry out the rectification work.
A.Very, very probably.
Later, he was asked:
Q.Supposing the court found in your favour on certain issues and it is said that it wasn’t reasonable to do the rectification work to the ceiling, what would be your position as to whether or not you would still want to remain in the apartment.
A.I know my wife is disappointed. I don’t know. I really, really don’t know, your Honour.
Mrs Stone said that she would be prepared to move out of the apartment for six months if that was necessary and intended to have the apartment rectified even if the cost exceeded a quarter of a million dollars. She said:
A.Well, this is not my fault. I haven't caused it, I haven't caused any of the problems, and I don't see why I should suffer or we should suffer.
…
A.I do want it done. Surely the operators understood that I wanted, or we wanted, 2700. They signed for it. Mr Smallacombe promised it.
I doubt that anyone in the Stone’s position would expend their own money to rectify the ceiling height no matter how great the financial resources at their disposal. That consideration is entitled to some, albeit limited, weight.
If the relevant considerations rested there, I would have been inclined to hold the defendants to their contract and award rectification costs. However, an award of rectification costs in this case must be premised on the performance of building work which, if carried out, would create significant risks of damage to the property of other persons and is likely to result in substantial collateral litigation involving the defendants and other occupants of the building. In fact, despite the earnest evidence of the Stones that they intended to carry out the rectification work, the chances of them doing so are not strong. Indeed the rectification work is unlikely to be carried out because of its complexity and the risk of damage to the property of others. An attempt to undertake the work will also almost certainly provoke litigation which is likely to delay it, if not obstruct it altogether.
I acknowledge, of course, that an award of rectification costs may be made without any intention or possibility of the work being carried out. Indeed there could be little objection if an award of rectification costs allowed the Stones to recoup their lost expenditure and, if they so chose, to purchase accommodation which better suited them than the apartment which does not comply with the contract they made.
However, it appears particularly artificial, and unjust, to award damages on the basis of such a fraught undertaking. The public interest against economic waste and against the promotion of unconstructive litigation is relatively strong in this case. The matter might also be tested by considering a hypothetical claim by the Stones for the legal costs of litigation with their neighbours over the works, and for damages to indemnify them for liability for nuisance and property damage had they undertaken the rectification before bringing this action. Those heads of loss would almost certainly be regarded as remote and unreasonably incurred.
For those reasons, I would find that rectification is not a reasonable course and that there is good reason to depart from the ordinary rule in this case.
Misrepresentation
I agree with Doyle J that the Stones’ claim of misrepresentation must fail because there was a reasonable basis for the defendants’ contractual promise.
However, if there were an actionable misrepresentation then I would have held that it was causative of loss. This is a no-contract case for the simple reason that, but for the misrepresentation, the Stones would not have purchased the unit.
I agree with Doyle J that for the purposes of determining the question of reliance on the misrepresentation made by the defendants it is necessary to ask whether the Stones would still have contracted for the purchase of the apartment if the defendants had disclosed that they did not have a reasonable basis for making the contractual representation that the ceiling height would be 2700 mm. On the posing of that hypothetical question, I have no doubt that the Stones would not have entered into the contract. The hypothetical question, posed in order to test and determine the issue of reliance, ends with that answer. I acknowledge that if the hypothetical discussion had, in fact, taken place, it would not have ended there and other steps and actions may have been taken. There may have been a request by the Stones that enquiries be made to ascertain whether there was a reasonable basis. If the defendants had returned and reported that they were satisfied with the enquiries and reported that they had a reasonable basis for making the contractual representation, then the Stones may well have contracted to purchase the property. If the defendants had returned and reported that their enquiries had revealed that the ceiling was just under 2700 mm, the Stones may or may not have contracted for the purchase of the apartment, with, or without, some adjustment of the purchase price.
However, that is all irrelevant. The hypothetical posed for the purpose of testing reliance cannot be extended to a position where the misrepresentation is corrected, or shown not to be a misrepresentation. Nor can it be extended to take into account how the Stones may have responded to an adjustment in contract price. Extensions of the hypothetical question in that way deny the very premise of the enquiry that a misrepresentation has been made. If there were no reasonable basis for for the representation, the defendants cannot escape liability on the basis that if they had disclosed that it had no reasonable basis, they might have been asked to make enquiries which revealed a reasonable basis for the misrepresentation, or that they may have disclosed the true position and still won the contract.
I acknowledge that after their purchase the Stones’ overcapitalised on the fit-out of the apartment. That however is a foreseeable and natural consequence of their purchase of the apartment. Most new dwellings are over-capitalised, at least in the short term, in order to meet the occupants’ personal preferences. Had the Stone’s not purchased the apartment they would have retained the purchase price, and the cost of the over-capitalisation, in hand, to spend on an apartment which had not been misrepresented to them.
In Kenny & Good Pty Ltd v MGICA (1992) Ltd,[36] damages were awarded on the basis of the total loss suffered by a financier of a property development who relied on a negligent property valuation even though part of that loss was attributable to a fall in the property market.
[36] (1999) 199 CLR 413.
In Henville v Walker (‘Henville’),[37] the High Court considered the proper measure of damages in a claim based on s 52 of the Trade Practices Act 1974 (Cth) in which a developer relied on the misrepresentations of a real estate agent as to the sale price he might obtain upon developing and selling units. McHugh, Gummow and Hayne JJ held that the proper measure of damages was the total loss made by the developer even though a portion of it was due to his miscalculation of the costs of the development.[38] There is no analogy between the example given by Hayne J in Henville of wasted construction costs and this case because Henville concerned a property developed for resale and not the expenditure and fit out of a home which the purchaser believed complied with the contract. For the same reason, the Stones’ overcapitalisation is not unforeseen or unreasonable conduct which operates as a supervening cause of the kind postulated.[39]
[37] (2001) 206 CLR 459.
[38] (2001) 206 CLR 459, 507 at [145]-[146] (McHugh J); 510 at [166] (Hayne J).
[39] I & L Securities Pty Ltd v HTW Valuers (Brisbane) Pty Ltd (2002) 210 CLR 109 at [28] (Gleeson CJ); [58]-[62] (Gaudron, Gummow and Hayne JJ); [69], [89] (McHugh J).
The plaintiff in Copping v ANZ McCaughan Ltd[40] was found not to have suffered loss because the evidence showed that he would have entered into another foreign currency loan of the same kind with another bank even if the defendant had not made the alleged misrepresentation. In short the misrepresentation did not prejudice the plaintiff. No such finding could be made in this case.
[40] (1997) 67 SASR 525.
Had the defendant misrepresented the ceiling height, the Stones would have been entitled to be placed back in the financial position they enjoyed before the misrepresentation induced them to enter into a contract they would not otherwise have made. Their loss would have been the change in their financial position occasioned by the purchase of an apartment that they would not have purchased otherwise. It is not to the point that the difference between what they have spent on the apartment and its value was not caused by the representation. Their loss would have been the commitment of their liquid financial resources to residential premises in which they did not want to reside.
General Damages
In Australia an award of general damages may be made to compensate for a defendant’s breach of promise to prevent vexation or annoyance, or to provide enjoyment or pleasure. General damages for breach of a building contract may include awards for physical inconvenience and consequential anxiety and distress.[41] Such awards need not be restrained or modest. However, a distinction is maintained between mere disappointment at the loss of the contractual benefit and physical inconvenience.[42]
[41] Boncristiano v Lohmann [1998] 4 VR 82 at 94-95.
[42] Parker v Cunningham (1879) 5 VLR(L) 202; Athens-MacDonald Travel Services Pty Ltd v Kazis (1970) SASR 264; D Galambos & Son Pty Ltd v McIntyre (1974) 5 ACTR 10; Brickhill v Cooke [1984] 3 NSWLR 396; Burke v Lunn [1976] VR 268.
In D Galambos & Son Pty Ltd v McIntyre,[43] damages for loss amenity were awarded in a case in which the garaging and other areas below the main house had been considerably reduced in height by reason of a failure to observe the strict height requirements for habitable areas which were laid down in the plans and specifications. That failure, however, was not capable of reasonable rectification nor did it affect the value of the house. Woodward J accepted that an award could be made for ‘amenity value’, which was something more than ‘mere annoyance’ and resulted in ‘substantial inconvenience and discomfort’.[44] He made an award of $500 in a case in which the contract price for the building work was $16,300 and in which an award of 15 per cent of the contract price had already been made to compensate for other defects which had diminished the value of the home.
[43] (1974) 5 ACTR 10.
[44] (1974) 5 ACTR 10 at 14, citing Bailey v Bullock [1950] 2 All ER 1167.
In Burke v Lunn,[45] on an application not to accept, and enter judgment for, awards made by referee, Menhennitt J accepted that damages could be awarded for physical inconvenience and discomfort of a substantial nature. The dispute in that case related to a sunroom added to a private home in Malvern. The contract price was for $3,500. Alterations and renovations were also made to the house and the claim for those was $14,543.30. An award of $200 for inconvenience associated with carrying out rectification work which was first imposed by a referee was allowed by the Judge.
[45] [1976] VR 268.
In Ruxley Lord Lloyd of Berwick suggested that damages for breach of contract in a building case may extend beyond an award for loss of amenity and include an award for disappointed expectation:[46]
What is then to be the position where, in the case of a new house, the building does not conform in some minor respect to the contract, as, for example, where there is a difference in level between two rooms, necessitating a step. Suppose there is no measureable difference in value of the complete house, and the cost of reinstatement would be prohibitive. Is there any reason why the Court should not award by way of damages for breach of contract some modest sum, not based on difference in value, but solely to compensate the buyer for his disappointed expectation? Is the law of damages so inflexible, as I asked earlier, that it cannot find some middle ground in such a case? I do not give a final answer to that question in the present case. But it may be that it would have afforded an alternative ground for justifying the Judge’s award of damages.
[46] (1996) 1 AC 344 at 376.
An award for disappointed expectation could narrow the large differential between an award of rectification costs and general damages for loss of amenity, and satisfy subjective views of the justice of the case. However the splitting of the difference between the two would be a largely arbitrary, and therefore, uncertain exercise. Be that as it may it is not open to this Court to depart from the limited basis from which damages for loss of amenity or enjoyment are awarded in Australia.
The ceiling height was a matter of special concern to the Stones. They emphasised its importance to them in many meetings with the builder and architect. When asked about the height of the ceiling and in particular the distance between the top of the cupboard which was installed in the ceiling, Mr Stone replied, ‘it looks mean and it’s wrong’.
Mrs Stone testified as follows about the effect of the ceiling on her:
Q.It might be put against you that the average person wouldn’t be able to notice a change in the ceiling height. What’s your response.
A.I don’t care what the average person thinks; it’s my home, I’m living there with my husband.
Q.Are there aspects of the ceiling which bother you.
A.Yes. It feels like it’s coming down on me. I don’t like it at all. I’m very unhappy with it (INDICATES).
Q.Does the ceiling height impact in any way on the topic of the artwork in the house.
A.Of course, yes.
Q.Can you explain to his Honour where in the house and why.
A.There are several positions in the house, your Honour. There is - when you came, I don’t know if you noticed - a very large painting in our entrance, it’s called The Juggler, there is another large painting over our cupboard in the lounge room, there is another large painting in the lounge room and there’s a not-so-large painting in our bedroom, but the three I first mentioned do not have the desired space around them. Aesthetically they look wrong and that does bother me. We’ve had those paintings many years and we knew we were going to hang them there and we expected to see them looking correct, and they are not.
The Judge gave the following reasons for his quantification of the award of general damages for loss of amenity:[47]
[168]Given the conclusion that this is one of the fairly exceptional cases that falls within the qualification to the rule in Bellgrove, I turn to the basis for assessing damages for breach of contract. In my view, the appropriate basis for the primary award is damages for disappointment and loss of amenity in accordance with the approach in Ruxley Electronics and Construction Ltd v Forsyth.I accept that in terms of amenity and aesthetic satisfaction the plaintiffs have lost something. The basis for an award to compensate for such an intangible loss is necessarily problematic and, to a degree, subjective. In Ruxley the court awarded £2,500 in 1993. In Farley v Skinner an award of damages of £10,000 was made in 1999 for discomfort and loss of amenity in a somewhat different case. In Farley a surveyor was sued for negligent advice in advising a prospective purchaser of a property that it was unlikely the property would suffer greatly from aircraft noise. This proved not to be the case.
[169]Doing the best I can, allowing for changes in the value of money and exchange rates, and endeavouring to fairly compensate the plaintiffs for their loss, I would award them $30,000 for disappointment and loss of amenity.
(citations omitted)
[47] [2016] SASC 32 at [168]-[169].
I observe that the Judge appears to have taken into account mere disappointment at the loss of the contractual benefit in quantifying the award at $30,000. To that extent, his Honour may have erred in the appellants’ favour. For that reason, and because of the obvious difficulties in relying on awards made in a foreign jurisdiction, there is reason to think that his Honour has taken into account irrelevant considerations in quantifying his award.
The proper approach in a case like this is to commence with an evaluation of the loss of amenity in the sense of the loss of enjoyment of and diminished aesthetic appearance of the apartment. The translation of that loss into a monetary figure is incapable of precision or even substantial explanation. Measurement of the extent of the loss of amenity against the price paid for the apartment provides some guidance. The Stones paid for a luxury apartment, the premium elements of which included its location, views, architectural design, floor space and ceiling height. All but the ceiling height have been delivered. The ceiling height remains high but does still affect the aesthetic perspectives in that relationship between the apartment’s shell and the joinery and artwork. It can also be accepted that the lower ceiling height detracts from the enjoyment of the other premium elements for which the purchase price was paid. Nonetheless I am unable to justify an award above that made by the Judge. For that reason, and without deciding whether the Judge’s reasons disclose an error of law adverse to the Stones, I would dismiss the appeal against the award.
Remaining Issues
For the reasons given by Doyle J, I agree that the Stones are entitled to the sum of $19,942.45 for the defective door frames. I also agree that the obligation to pay the instalment of $509,000 arose on the handover of the apartment in a condition which allowed the fitout to proceed. I agree that handover occurred on 29 September 2010. I also agree that by the acceptance of the apartment for the purposes of fitting it out, the Stones elected not to enforce any right to withhold payments under the contract.
Conclusion
For these reasons, I consider that the trial judge erred in holding that the payments of $500,000 and $480,000 were made prematurely so as to entitle the plaintiffs to damages for loss of use of those amounts. It is appropriate that the awards of $30,676.85 and $5,535.39 be set aside.
The set off for interest on late payment of $480,000
As a corollary of my conclusion in relation to the time at which the obligation to pay the various instalments fell due, the plaintiffs’ payment of the second instalment on 26 July 2011 was late. If fell due 60 days after handover, which occurred on 29 September 2010, and was thus 240 days late.
Under the contract, interest is payable on late payments at the rate of 10.61 per cent per annum. On the defendants’ unchallenged calculation, this equates to an amount of $33,486.90 in interest. It is appropriate that the cross appeal be allowed to include a set off in the defendants’ favour of $33,486.90 on account of interest.
Conclusion and orders
On the plaintiffs’ appeal, while disagreeing with some aspects of the trial judge’s reasoning, I have ultimately rejected the plaintiffs’ challenges to the trial judge’s refusal to award them damages for the cost of rectifying the ceiling height deficiency, and to the trial judge’s refusal to award damages for misleading conduct. My rejection of the latter is based on various grounds which include, but are not confined to, the matters raised in the defendants’ notice of contention.
On the defendants’ cross appeal, I have rejected their challenge to the trial judge’s awards of damages for loss of amenity associated with the defective ceiling height and for the defective door frames. However, I have upheld the challenge to the awards of damages on account of the first two instalment payments being premature, and, consequentially, the challenge to the trial judge’s refusal to permit a set off for interest owing to the defendants on account of the second payment being late.
It follows that I would dismiss the plaintiffs’ appeal and allow the defendants’ cross appeal to the extent of setting aside the awards of $30,676.85 and $5,535.39 in favour of the plaintiffs on account of damages for loss of use of monies, and include a set off in favour of the defendants of $33,486.90 on account of interest for the late payment of the second instalment of the purchase price.
The plaintiffs’ reduced entitlement to damages would be calculated as follows:
· loss of amenity $30,000.00
· cost of rectifying door frames $19,942.45
· cost of window seals $445.00
· fire inspection fee $539.00
· less cost of variations ($6,092.51)
· less interest on late payment ($33,486.90)
Total $11,347.54
Accordingly, I would make the following orders:
1. Appeal dismissed.
2. Cross appeal allowed in part.
3. The judgment for the plaintiffs in the sum of $81,046.98 dated 4 March 2016 be set aside, and there be substituted judgment for the plaintiffs in the sum of $11,347.54.
HINTON J:
I have had the benefit of reading the judgment of Doyle J for which I am grateful. I agree with Doyle J for the reasons he gives that the plaintiffs’ appeal should be dismissed and the defendants’ cross-appeal should be allowed to the extent that his Honour has indicated. I also agree with the dispositional orders that Doyle J would make.
With respect to the second, third and fourth grounds of appeal and the application of the rule expounded in Bellgrove v Eldridge and, in particular, the qualification to that rule, I prefer to express my own reasons.[159]
[159] (1954) 90 CLR 613.
Bellgrove v Eldridge is authority for three propositions.[160] First, the appropriate measure of damages in cases where a builder has departed from specifications forming part of a contract for the erection of a building is “the reasonable cost of rectifying the departure or defect so far as that is possible”.[161] Second, that rule is subject to the qualification that the rectification work to be undertaken must “be necessary to produce conformity” with the contract and “must be a reasonable course to adopt”[162] in that it constitutes a “reasonable method of dealing with the situation” (the qualification).[163] Third, if undertaking the necessary rectification work is not a reasonable course to adopt, “the true measure of the building owner’s loss will be the diminution in value, if any, produced by the departure from the plans and specifications or by the defective workmanship or materials”.[164]
[160] (1954) 90 CLR 613.
[161] Bellgrove v Eldridge (1954) 90 CLR 613 at 617 (Dixon CJ, Webb and Taylor JJ).
[162] Bellgrove v Eldridge (1954) 90 CLR 613 at 618 (Dixon CJ, Webb and Taylor JJ).
[163] Bellgrove v Eldridge (1954) 90 CLR 613 at 618, 619 (Dixon CJ, Webb and Taylor JJ).
[164] Bellgrove v Eldridge (1954) 90 CLR 613 at 619 (Dixon CJ, Webb and Taylor JJ).
I do not stay to deal with the third proposition beyond accepting that the law of damages is not so inflexible such that in a case where a builder has departed from specifications forming part of a contract for the erection of a building, the only possible awards available are those subject of propositions one and three. More recent authority establishes that an award may be made, as indeed the trial Judge rightly did in this case, for loss of amenity, inconvenience or loss of aesthetic satisfaction.[165]
[165] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 354 (Lord Bridge of Harwich), at 360 (Lord Mustill), at 365, 374 (Lord Lloyd of Berwick).
The first proposition reflects a plaintiff’s interest in the performance of the contract entered into with a defendant builder. It is also reflects the long standing rule of the common law “that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.”[166] In this regard in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (Tabcorp) the High Court explained:[167]
Oliver J was correct to say in Radford v De Froberville that the words “the same situation, with respect to damages, as if the contract had been performed” do not mean “as good a financial position as if the contract had been performed” (emphasis added). In some circumstances putting the innocent party into “the same situation … as if the contract had been performed” will coincide with placing the party into the same financial situation. Thus, in the case of the supply of defective goods, the prima facie measure of damages is the difference in value between the contract goods and the goods supplied. But as Staughton LJ explained in Ruxley Electronics Ltd v Forsyth such a measure of damages seeks only to reflect the financial consequences of a notional transaction whereby the buyer sells the defective goods on the market and purchases the contract goods. The buyer is thus placed in the “same situation … as if the contract had been performed”, with the loss being the difference in market value. However, in cases where the contract is not for the sale of marketable commodities, selling the defective item and purchasing an item corresponding with the contract is not possible. In such cases, diminution in value damages will not restore the innocent party to the “same situation … as if the contract had been performed”.
(footnotes omitted).
[166] Robinson v Harman (1848) 1 Exch 850 at 855; 154 ER 363 at 365 (Parke B); Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [13] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
[167] (2009) 236 CLR 272 at [13] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
The purpose of damages in cases of defective building is not, therefore, to compensate for financial loss.[168] Rather it is the enforcement of the performance interest that is the primary concern of the law in this area,[169] hence in Bellgrove v Eldridge the ‘doubtful remedy’ involving the removal and replacement of three-foot sections of the foundations at a time “could not in any sense be regarded as ensuring to her the equivalent of a substantial performance by the appellant”.[170]
[168] Bellgrove v Eldridge (1954) 90 CLR 613 at 617 (Dixon CJ, Webb and Taylor JJ).
[169] See generally, B Coote, ‘Contract Damages, Ruxley, and the Performance Interest’ (1997) 56(3) Cambridge Law Journal 537.
[170] (1954) 90 CLR 613 at 620 (Dixon CJ, Webb and Taylor JJ).
With respect to the second proposition, the qualification, in Bellgrove v Eldridge the High Court said:[171]
… No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of second-hand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks. In such circumstances the work of demolition and re-erection would be quite unreasonable or it would, to use a term current in the United States, constitute “economic waste”. (See Restatement of the Law of Contracts, (1932) par. 346). We prefer, however, to think that the building owner’s right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions “necessary” and “reasonable”, for the expression “economic waste” appears to us to go too far and would deny to a building owner the right to demolish a structure which, though satisfactory as a structure of a particular type, is quite different in character from that called for by the contract. Many examples may, of course, be given of remedial work, which though necessary to produce conformity would not constitute a reasonable method of dealing with the situation and in such cases the true measure of the building owner’s loss will be the diminution in value, if any, produced by the departure from the plans and specifications or by the defective workmanship or materials.
As to what remedial work is both “necessary” and “reasonable” in any particular case is a question of fact. But the question whether demolition and re-erection is a reasonable method of remedying defects does not arise when defective foundations seriously threaten the stability of a house and when the threat can be removed only by such a course. …
[171] (1954) 90 CLR 613 at 618-619 (Dixon CJ, Webb and Taylor JJ).
Thus with respect to the qualification the analysis to be undertaken is two staged. First, is the work necessary to produce conformity? This inquiry focuses upon the departure from the terms of the contract and what is required to produce conformity. The question to be answered is whether the work to be undertaken is “apt to conform with the plans and specifications which had not been conformed with.”[172] Second, if it is necessary to undertake the work to produce conformity in the relevant sense, is the performance of the rectification work a reasonable method of dealing with the situation? This inquiry involves a consideration of whether the work method proposed is reasonable and, if it is, whether it is reasonable to make an award of damages sufficient to pay for the work to be done. The former, in a sense, is no more than accounting for the duty to mitigate. The latter, however, constitutes a broader control on the availability of an award of rectification damages.
[172] Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [19] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
In the illustration given, the use of new bricks and not second-hand bricks constituted a departure from the terms and conditions of the contract. Replacement of the new bricks with second-hand bricks would be apt to achieve conformity. However, the use of new bricks made no material difference to the achievement of the outcome contracted for – the performance interest. The new bricks were a sufficient and suitable substitute with the consequence that the performance interest was met. In those circumstances, despite there being a departure from the terms and conditions of the contract which would necessitate work to rectify, it would be unreasonable to require rectification. That is to say, the extent to which the performance interest was met rendered an award of rectification damages an unreasonable method of dealing with the situation. Different considerations may arise if, for example, the contract specified the use of a particular type of second-hand brick in order to achieve a particular and distinct appearance, one which new bricks would not achieve. No longer can there be any suggestion of a suitable substitute having been supplied. No longer can it be said that the performance interest has been sufficiently or substantially met such that an award of rectification damages would be unreasonable. In these circumstances, the performance interest would extend beyond the functional to include a subjective, aesthetic aspect.
Whilst Bellgrove v Eldridge makes plain that as part of the second stage of the inquiry consideration is given to whether the proposed work method is reasonable and whether it is reasonable to award damages so that the work may be undertaken, it provides little further assistance regarding the content of the latter – the broader control. That said, bearing in mind the primacy to be afforded the enforcement of the performance interest, it may be accepted that the degree of unreasonableness necessary to disentitle a plaintiff to rectification damages will not be inconsiderable. It may also be accepted that rarely will it be unreasonable for the plaintiff to seek no more than what he or she hoped to obtain by entering into the contract in the first place. Further, bearing in mind the outcome in Bellgrove v Eldridge, an award of rectification damages will not be unreasonable just because the award may total an amount greater than the value of the contracted end.
It is also important to observe the rejection in Bellgrove v Eldridge of the qualification as incorporating consideration of economic wastage.[173] That would be to “go too far” as it would “deny to a building owner the right to demolish a structure which, though satisfactory as a structure of a particular type, is quite different in character from that called for by the contract.”[174]
[173] (1954) 90 CLR 613 at 619-620 (Dixon CJ, Webb and Taylor JJ). The Court refers to paragraph 346 of the American Law Institute, Restatement of the Law of Contracts (American Law Institute Publishers, 1932) ch 12 at 572-574. Paragraph 346 provided:
(1)For a breach by one who has contracted to construct a specified product, the other party can get judgment for compensatory damages for all unavoidable harm that the builder had reason to foresee when the contract was made, less such part of the contract price as has not been paid and is not still payable, determined as follows:
(a)For defective or unfinished construction he can get judgment for either
(i)the reasonable cost of construction and completion in accordance with the contract, if this is possible and does not involve unreasonable economic waste; or
(ii)the difference between the value that the product contracted for would have had and the value of the performance that has been received by the plaintiff, if construction and completion in accordance with the contract would involve unreasonable economic waste.
…
The difference in approach under the Restatement is readily apparent in the commentary accompanying paragraph 346 subsection (1a). It stated (at 574-575):
The purpose of money damages is to put the injured party in as good a position as that in which full performance would have put him; but this does not mean that he is to be in the same specific physical position. Satisfaction for his harm is made either by giving him a sum of money sufficient to produce the physical product contracted for or by giving him the exchange value that that product would have had if it had been constructed. In very many cases it makes little difference whether the measure of recovery is based upon the value of the promised product as a whole or upon the cost of procuring and constructing it piecemeal. There are numerous cases, however, in which the value of the finished product is much less than the cost of producing it after the breach has occurred. Sometimes defects in a completed structure cannot be physically remedied without tearing down and rebuilding, at a cost that would be imprudent and unreasonable. The law does not require damages to be measured by a method requiring such economic waste. If no such waste is involved, the cost of remedying the defect is the amount awarded as compensation for failure to render the promised performance.
[174] Bellgrove v Eldridge (1954) 90 CLR 613 at 619 (Dixon CJ, Webb and Taylor JJ).
Rectification damages and the qualification were not considered further by the High Court for some 55 years, until Tabcorp.[175] In between times the House of Lords decided Ruxley Electronics & Construction Ltd v Forsyth (Ruxley).[176] Doyle J has dealt with Ruxley in detail. For present purposes it is sufficient to observe that in Ruxley all of their Lordships assumed that rectification damages as a remedy was subject to the qualification of reasonableness. Lord Bridge of Harwich considered acceptance of the proposition that an award of rectification damages was appropriate “however unreasonable it would be to incur that cost” to “fly in the face of common sense”.[177] Lord Mustill spoke of the qualification being decisive “when the cost of reinstatement would be wholly disproportionate to the non-monetary loss suffered”.[178] His Lordship considered that there was “no need to remedy the injustice of awarding too little”, that would be reflected in an award equal to depreciation value, “by unjustly awarding far too much”, as an award of rectification damages may be in some cases.[179] Lord Lloyd of Berwick considered an award of rectification damages inappropriate if “the expenditure would be out of all proportion to the benefit to be obtained”.[180]
[175] (2009) 236 CLR 272.
[176] [1996] 1 AC 344.
[177] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 354.
[178] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 361.
[179] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 361.
[180] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 367, 369.
The language of their Lordships suggests that the qualification will only apply where the disproportion is high. Accepting this, one way to state the qualification would be that rectification damages are not to be awarded where the cost of the work to be undertaken is such that no reasonable person would expend that sum bearing in mind the benefit that would be generated.[181] A difficulty arises, however, in framing the qualification in this way because it does not account for the truly subjective performance interest, that which is aesthetic or eccentric. The qualification must take into account a plaintiff’s particular performance interest. I do not understand any of Lords Keith, Bridge, Mustill or Lloyd as requiring otherwise, hence all accept an award of rectification damages appropriate for the folly defectively constructed that would reduce the value of an estate.[182]
[181] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 353 (Lord Bridge of Harwich).
[182] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 353 (Lord Bridge of Harwich).
Lord Jauncey of Tullichettle’s approach was slightly different. His Lordship said:[183]
Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained. If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate. A failure to achieve the precise contractual objective does not necessarily result in the loss which is occasioned by a total failure. This was recognised by the High Court of Australia in the above cited passage in Bellgrove v Eldridge, 90 CLR 613, 617-618, where it was stated that the cost of reinstatement work subject to the qualification of reasonableness was the extent of the loss, thereby treating reasonableness as a factor to be considered in determining what was that loss rather than, as the respondents argued, merely a factor in determining which of two alternative remedies were appropriate for a loss once established. …
[183] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 357; at 370-371 (Lord Lloyd of Berwick; Lord Keith of Kinkel, Lord Bridge of Harwich and Lord Mustill agreeing).
And:[184]
What constitutes the aggrieved party’s loss is in every case a question of fact and degree. Where the contract breaker has entirely failed to achieve the contractual objective it may not be difficult to conclude that the loss is the necessary cost of achieving that objective. Thus if a building is constructed so defectively that it is of no use for its designed purpose the owner may have little difficulty in establishing that his loss is the necessary cost of reconstructing. Furthermore in taking reasonableness into account in determining the extent of loss it is reasonableness in relation to the particular contract and not at large. Accordingly, if I contracted for the erection of a folly in my garden which shortly thereafter suffered a total collapse it would be irrelevant to the determination of my loss to argue that the erection of such a folly which contributed nothing to the value of my house was a crazy thing to do. As Oliver J said in Radford v De Froberville [1977] 1 WLR 1262, 1270:
If he contracts for the supply of that which he thinks serves his interests – be they commercial, aesthetic or merely eccentric – then if that which is contracted for is not supplied by the other contracting party I do not see why, in principle, he should not be compensated by being provided with the cost of supplying it through someone else or in a different way, subject to the proviso, of course, that he is seeking compensation for a genuine loss and not merely using a technical breach to secure an uncovenanted profit.
However where the contractual objective has been achieved to a substantial extent the position may be very different.
It was submitted that where the objective of a building contract involved satisfaction of a personal preference the only measure of damages available for a breach involving failure to achieve such satisfaction was the cost of reinstatement. In my view this is not the case. Personal preference may well be a factor in reasonableness and hence in determining what loss has been suffered but it cannot per se be determinative of what that loss is.
[184] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 358.
For Lord Jauncey an award of rectification damages would only be unreasonable where rectification was not needed. If rectification is not needed that must be because the performance interest has been substantially satisfied, has been abandoned or can no longer be achieved. In each of those circumstances, rectification damages would not truly reflect the loss sustained.
Lord Jauncey’s approach emphasises the proper characterisation of the loss – the extent to which the performance interest has not been met – in the individual case. His Lordship agreed with the trial Judge that Mr Forsyth’s loss did not extend to the cost of rectification.[185] His Lordship’s approach can perhaps best be understood by his treatment of an illustration raised in argument. He said:[186]
I take the example suggested during argument by my noble and learned friend, Lord Bridge of Harwich. A man contracts for the building of a house and specifies that one of the lower courses of brick should be blue. The builder uses yellow brick instead. In all other respects the house conforms to the contractual specification. To replace the yellow bricks with blue would involve extensive demolition and reconstruction at a very large cost. It would clearly be unreasonable to award the owner the cost of reconstructing because his loss was not the necessary cost of reconstruction of his house, which was entirely adequate for its design purpose, but merely the lack of aesthetic pleasure which he might have derived from the sight of blue bricks. Thus in the present appeal the respondent has acquired a perfectly serviceable swimming pool, albeit one lacking the specified depth. His loss is thus not the lack of a useable pool with consequent need to construct a new one. Indeed were he to receive the cost of building a new one and retain the existing one he would have recovered not compensation for loss but a very substantial gratuitous benefit, something which damages are not intended to provide.
[185] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 359.
[186] Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 358.
The house was fit for purpose despite not having the lower course of blue brick just as the swimming pool was fit for purpose despite not being of the depth specified. That is, that aspect of the performance interest that reflected functional considerations was satisfied – the house provided all the normal benefits of a house and the swimming pool provided all the normal benefits of a swimming pool.
Turning to that aspect of the performance interest bound up in the subjective value to a plaintiff of a swimming pool or house built in conformance with contractual specifications, the question becomes whether that value, over and above the value of the functional which has been satisfied, is such that an award of damages in an amount other than equal to the cost of rectification would be disproportionate to the loss of the subjective value of the house or swimming pool built in conformity with the specifications, bearing in mind the extent to which the performance interest has otherwise been met. Accepting this, the qualification is confined in its ambit and does not embrace unreasonableness at large.
The swimming pool and the house with a lower course of blue brick may be contrasted with the construction of a “folly” that is of little if any utility, save the aesthetic contribution it makes. The value of the folly may be considered coextensive with its subjective value. It has no real functional value. In such circumstances to award other than rectification damages would be to make an award disproportionate to the loss of the subjective value of the folly – disproportionate to the unsatisfied performance interest.
In Ruxley, the notional proportion of the subjective value of the swimming pool built in conformance with the contract specifications to the functional value of that built was such that, bearing in mind the extent to which the performance interest had been met by that built, to award rectification damages would be to make an award that the reasonable person would consider disproportionate to the unsatisfied performance interest.[187] It follows that to characterise the performance interest at a high level of abstraction – she contracted for, but did not get, a house with a lower course of blue brick therefore she should have whatever she needs to get a house with a lower course of blue brick – risks mischaracterising the performance interest and overlooking the extent to which the performance interest was satisfied.
[187] Here it is to be borne in mind that Mr Forsyth did not notice anything untoward until nine months after the pool was completed; Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344 at 362 (Lord Lloyd of Berwick).
In Tabcorp the High Court reaffirmed the paramountcy of the performance interest in agreeing with Oliver J in Radford v De Froberville that damages for breach of contract are intended to put a plaintiff in “the same situation” as if the contract had been performed and not “as good a financial position”.[188] In dealing with the breach of a negative covenant within a lease the Court considered that the applicable principles governing the relevant measure of damages reflected that belying the thinking in Bellgrove v Eldridge and what I have referred to above as the first proposition.[189] The Court accepted the qualification to that proposition. The Court referred to the illustration reproduced above[190] from Bellgrove v Eldridge and commented:[191]
That tends to indicate that the test of “unreasonableness” is only to be satisfied by fairly exceptional circumstances. The example given by the Court aligns closely with what Oliver J said in Radford v De Froberville, that is, that the diminution in value measure of damages will only apply where the innocent party is “merely using a technical breach to secure an uncovenanted profit”. It is also important to note that the “reasonableness” exception was not found to exist in Bellgrove v Eldridge. Nothing in the reasoning in that case suggested that where the reasoning is applied to the present circumstances, the course which the Landlord proposed is unnecessary or unreasonable.
[188] Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [13] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ). Contrast paragraph 346 of the Restatement of the Law of Contracts and related commentary quoted at fn 173 above.
[189] Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [13]-[15] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
[190] At [424].
[191] Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [17] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
The High Court then referred to Ruxley noting that their Lordships did not disagree with the principles expressed in either Bellgrove v Eldridge or Radford v De Froberville and purported to apply those principles.[192] The Court then observed that “on one view” the result in Ruxley was “inconsistent with those principles”.[193] Such comment calls into question, without deciding, whether the circumstances in Ruxley were fairly exceptional such as to make an award of rectification damages unreasonable. Ruxley was in any event, the Court concluded, distinguishable on its facts. Referring back to Bellgrove v Eldridge the Court said:[194]
Further, the Landlord correctly submitted that the Tenant’s submission misconstrued what this Court said in Bellgrove v Eldridge. The “qualification” referred to in the passage quoted above that the “work undertaken be necessary to produce conformity” meant, in that case, apt to conform with the plans and specifications which had not been conformed with. Applied to this case, the expression “necessary to produce conformity” means “apt to bring about conformity between the foyer as it would become after the damages had been spent in rebuilding it and the foyer as it was at the start of the lease”. And the Landlord also correctly submitted that the requirement of reasonableness did not mean that any excess over the amount recoverable on a diminution in value was unreasonable. The Tenant’s submissions rested on a loose principle of “reasonableness” which would radically undercut the bargain which the innocent party had contracted for and make it very difficult to determine in any particular case on what basis damages would be assessed. That principle should not be accepted.
(footnote omitted).
[192] Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [18] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
[193] Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [18] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
[194] Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [19] (French CJ, Gummow, Heydon, Crennan and Kiefel JJ).
In Tabcorp there was no sense in which it could be contended that the negative covenant contained in cl 2.13 of the lease under consideration had been substantially complied with. The tenant’s actions had set the respondent’s performance interest at nought. It could not be said that the performance interest was substantially satisfied, had been abandoned or could no longer be achieved. It could not be said, bearing in mind the nature of the respondent’s performance interest as expressed in the negative covenant, that the cost of rectification was disproportionate to the benefit to be attained or that an award of rectification damages would be disproportionate to the unmet proportion or aspect of the performance interest. Similar to Lord Jauncey, the High Court in Tabcorp rejects the suggestion that the qualification is of broad application.
In this analysis I have not dealt with the question of the relevance of a plaintiff’s intention to carry out the rectification works. In view of the trial Judge’s finding that the plaintiffs wanted to undertake the work it is unnecessary to do so.[195] Nor have I dealt with the question of impossibility of rectification. It was not contended that it would be impossible in this case to undertake the rectification works.
[195] Stone v Chappel [2016] SASC 32 at [167].
I agree with Doyle J for the reasons he gives that the trial Judge erred in holding that the plaintiffs were precluded by the common law doctrine of election from seeking rectification damages. I turn to the application of the qualification.
The trial Judge gave five reasons for concluding that this case fell within the qualification. First, bearing in mind the impact upon the appearance of the interior living space of the apartment, rectification damages in the amount of $331,188.00 (the cost of demolishing the ceiling, making structural adjustments and installing a ceiling that conformed to the contract) was disproportionate to the benefit to be obtained.[196] Second, the proposed rectification works would cause considerable nuisance to other residents in the apartment complex for between five weeks and two months that may result in the respondent breaching contractual obligations owed to those residents, including the obligation not to interfere with their reasonable peace, comfort and privacy.[197] Third, the rectification work would involve an unacceptable fire risk.[198] The trial Judge considered that if a fire were to be caused it could be catastrophic to persons and property. Bearing in mind that the ceiling height was, in the trial Judge’s opinion, substantially compliant with the contract, “incurring the risk of a catastrophic fire is disproportionate to the benefit to be obtained.”[199] Fourth, having concluded that the lower ceiling did not have a significant impact on the appearance of the interior of the apartment the trial Judge considered the breach of contract “technical”, although causative of a small loss of amenity.[200] Fifth, the trial Judge considered that to award rectification damages would result in the Court also ordering that the work be undertaken which could then result in the Court being placed in the undesirable position, in effect, of supervising the work.[201]
[196] Stone v Chappel [2016] SASC 32 at [162].
[197] Stone v Chappel [2016] SASC 32 at [163].
[198] Stone v Chappel [2016] SASC 32 at [164].
[199] Stone v Chappel [2016] SASC 32 at [164].
[200] Stone v Chappel [2016] SASC 32 at [165].
[201] Stone v Chappel [2016] SASC 32 at [166].
There is no contest that the proposed rectification work is necessary in the sense that it is apt in the relevant sense to bring about conformity with the contract.
I agree with Doyle J that the trial Judge’s fifth reason was irrelevant and may immediately be put to one side. In my view the second and third reasons expose what may be considered consequential costs that would likely be incurred in effecting the rectification work and thus could form a component of an award of rectification damages. I do not understand the award sought in this case to include any allowance for such costs. Two things flow from this. First, it calls into question the likelihood that the plaintiffs would undertake the rectification work. In view of the conclusion I have arrived at it is unnecessary to consider this further. Second, it suggests that the award sought is less than required. This is significant in that for the purposes of the second stage of the analysis required by Bellgrove v Eldridge the sum sought is not the true cost of rectification but something greater.
I agree with Doyle J that the trial Judge’s first and fourth reasons are of the greatest relevance to the second stage of the inquiry.
The plaintiffs’ performance interest was not simply aesthetic. It included the functional. I agree with Doyle J that with respect to the functional, there was compliance with the contract.
Mr Stone gave evidence that the ceiling height was important to him and his wife. They wanted the “ambience and the volume” that they were used to. Mrs Stone described feeling “like it’s coming down on me”.
Ceiling height was also important to such things as the height at which artwork was hung on walls in addition to the height of cupboards. The plaintiffs were concerned with matters of presentation and appearance and the relativity of space above such things as artwork and cupboards.
It may be said that for the plaintiffs cupboard height and hanging height cannot be considered in isolation of the other fittings, finishes and furnishings. The totality of the fit out was important. There is no evidence, however, of the extent to which the failure to provide a ceiling at a height that conformed to the contract compromised or frustrated the fitout and the aesthetic appeal it was intended to achieve generally beyond the perception associated with the gap between the top of the cupboards and the ceiling being described as looking “mean” and being “wrong”, disappointment at the visual space around certain artwork (but not all), and Mrs Stone’s perception of the ceiling “coming down on me”. Mrs Stone did add that the “finishes were wrong” but exactly what she meant, and whether it was anything more than the gap between ceiling and cupboard tops or the space around artworks, was not pursued. The fitout was completed despite the lower ceiling becoming known relatively early in the piece. That suggests the value of the subjective aspect of the performance interest not met was not significant overall. So too does the fact that the spatial impact of the lower ceiling was not appreciated before the installation of the kitchen cupboards commenced.
This case is not unlike Lord Bridge’s blue brick/yellow brick illustration. It differs to the High Court’s new brick/second-hand brick illustration, but not greatly – the apartment supplied is not a perfect substitute. As Doyle J has indicated, analogies can be drawn in this case with the circumstances in Ruxley. The extent to which the performance interest was met in this case and the limited benefit to be gained for the money that would need be spent to produce conformity distinguish this case from Bellgrove v Eldridge, Tabcorp, Willshee v Westcourt Ltd,[202] Wheeler v Ecroplot Pty Ltd[203] and Unique Building Pty Ltd v Brown.[204]
[202] [2009] WASCA 87.
[203] [2010] NSWCA 61.
[204] [2010] SASC 106.
Bearing in mind the benefit to the plaintiffs that rectification work is likely to provide, I think the trial Judge was right to conclude that the cost of such work would be disproportionate to the benefit to be attained. Put slightly differently, this case falls within the category of the exceptional in that despite the departure from the contract specifications, the performance interest was substantially met such that an award of rectification damages in the amount sought would be disproportionate to the benefit to be achieved. It was not a reasonable method of dealing with the situation. In the language of one commentator, the cost of rectification would be out of all proportion to the loss of the consumer surplus.[205]
[205] D Harris, A Ogus and J Phillips, ‘Contract Remedies and the Consumer Surplus’ (1979) 95 Law Quarterly Review 581 at 606.
For these reasons I would dismiss the second, third and fourth grounds of appeal.
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