The still new Court of Appeal in South Australia has handed down its judgment in Bedrock Construction and Development v Crea [2021] SASCA 66. In short, it was a win for the contractor.

The short story is that the contract contained a defects liability provision. The Court of Appeal adopted (at least in part) the authority in Turner Corporation v Austotel (1994) 13 BCL 378 and Britannia v Parkline [2009] NSWSC 1302 to the effect that:

• the standard clause obliging the contractor to carry out rectification work notified to it by the architect carried with it, as a matter of implication, an entitlement to carry out that work and that
• if the owner denies the contractor the opportunity to rectify, then the owner loses his right to claim damages in respect of those defects.

The idea, perhaps somewhat harsh on owners, and contrary to English High Court authority[1], is that the defects liability arrangement constitutes a complete code dealing with the contractor’s liability for such defects, and there is no room for an additional common law right to recover damages.

Unhappily, however, the Court of Appeal’s decision fails to give us a satisfactory or definitive answer in this interesting area of the law.

The decision says nothing about the position which applies as a matter of mitigation.  Sometimes, where the courts have found that the owner has failed to mitigate her loss by accepting a reasonable offer by the contractor to rectify defects, then the owner’s damages are limited to the amount that it would have cost the contractor to rectify.  Such an approach might seem logical, but it is not in accordance with legal principle. The doctrine of mitigation is concerned with the loss suffered by the plaintiff, not the financial  ramifications for the defendant. If the plaintiff fails reasonably to mitigate, her damages should be limited to the loss that she would have suffered if she had mitigated. And so, if the contractor was offering to rectify defects without charge, the effect of a failure to accept a reasonable offer to remedy should mean that the owner recovers nothing.  Interestingly, there is little or no authority that directly addresses this point, and the Court of Appeal did not take the opportunity to provide such authority in this case.

The “complete code” point is of course parallel to but different from the mitigation point, the complete code point arising out of the defects liability provisions in the contract, and the mitigation point arising as a matter of common law. The Court of Appeal deferred, apparently with approval, to the following passage in Brooking.

Ordinarily, contractual provisions relating to a DLP are inserted primarily for the benefit of the builder.  The usual contractual arrangement is that the builder not only has the obligation to rectify defective work during the DLP but, in most instances, has the right also to make good at its own cost those defects which appear during that period.  If the principal does not give the contractor the opportunity to make good its defective work, then its claim for damages may be limited to what it would have cost the contractor to carry out the rectification works.[2]  Typically, the cost to a builder to rectify defective work is substantially less than the cost to a proprietor of engaging an outside contractor to rectify.  However, as always, the terms of the contract must be carefully examined.

That passage does not say that an owner who fails to give the contractor the opportunity to remedy is denied all damages: merely that the damages are pegged back to what it would have cost the contractor to rectify. In some circumstances, that might be zero. It would be zero, for example, if the contractor could require the subcontractor to come back and remedy defects without charge to the contractor. When the defect is in the contractor’s own work, then the usually will be a cost the contractor to rectify, albeit that it is typically less than the cost incurred if the owner brings in a fresh contractor.

But then the Court of Appeal’s judgment goes on, following the decision of White J in Bitannia v Parkline, to say that the owner has no entitlement:

127   White J accepted the builder’s contention that clause 6.11 meant that the builder was both “obliged and entitled” to carry out the rectification work notified to it by the Architect.[3] It followed that the proprietors were not entitled to recover the cost of a third party carrying out the rectification work in circumstances where they had denied the builder the contractual opportunity to rectify contemplated by the regime provided for in clauses 5.06 and 6.11.

128   Indeed, White J held that the regime in clauses 5.06 and 6.11 was tantamount to a code outside of which there was no entitlement on the part of the proprietor to recover damages for defective work.[4] …

Having hovered between these two formulations (the owner can only recover what the contractor’s cost would have been, and the owner can recover nothing at all) the Court of Appeal then settled on a third formulation, that the damages recoverable by the owner are reduced only by those for items which the contractor could have rectified at “essentially no cost to itself”:

143     On one view, it could be said that the whole defects claim should have failed by reason of the failure by Mr Crea to afford Bedrock the 10 working days access to which it was entitled.  But I think this would be to go too far, and indeed I do not understand Bedrock to contend for such an outcome on appeal.  In paragraphs 10 and 42.2 of its written submissions, and in its supplementary written submissions, Bedrock appears to accept that the appropriate approach would be to reduce Mr Crea’s damages to remove the component referable to those items which Bedrock could have rectified, if given a few additional days access, at essentially no cost to itself.  In my view, that reflects an appropriate approach.

So what is the position in the usual case where an owner fails to allow a contractor to rectify defects, and where the contractor could have rectified the defects for around half what the owner has spent getting another contractor in to do the remedial work? Is the owner entitled to recover:

• Half the actual remedial cost, being the formulation in Brooking?
• Nothing, following the authority in Turner v Austotel and Bitannia v Parkline?
• The full cost of rectification, on the basis of what the Court of Appeal says is the “appropriate approach”?

The answer is as clear as mud.

[1] H W Neville (Sunblest) Limited v William Press & Son 20 BLR 78. Nobody, it seems, has ever brought this authority to the attention of this or any other Australian court.

[2]              See Bitannia Pty Ltd v Parkline Constructions Pty Ltd (2010) 26 BCL 335.

[3]              Bitannia Pty Ltd v Parkline Constructions Pty Ltd (2010) 26 BCL 335 at [81].

[4]              Bitannia Pty Ltd v Parkline Constructions Pty Ltd (2010) 26 BCL 335 at [71]-[77].