Come on, be reasonable! The appropriate measure of compensation in building defect cases

Consider a ceiling which is required by a building contract to be constructed to a height of 2700 mm but is instead constructed to an average height just 26mm less. To what extent is the builder expected to rectify (or pay compensation to rectify) the defect in circumstances where:

  • most people would not be able to detect the lower ceiling; and
  • the cost and work in raising the height would be significant?

The South Australian Supreme Court considered this issue in Stone v Chappel [2016] SASC 32 and the Full Court of the Supreme Court in Stone v Chappel [2017] SASCFC 72 (22 June 2017).

The facts

Relevantly the owners contracted with a builder to construct the shell and framework of an apartment within a retirement complex. The builder was issued with ceiling plans requiring a ceiling height of 2700mm. The ceiling was constructed to an average height of 2672 mm (taking into account accepted tolerances). The owners noticed the reduced celling height in the lack of space above the cupboards and paintings. They sued the builder for breach of contract, claiming the full rectification costs to raise the roof height to 2700mm as compensation.

The claim

The Court was required to determine whether the owners should receive their claim of full compensation for the cost of raising the roof height (at least $331,000.00) or simply compensation for disappointment and loss of amenity in the ceiling being lower than was expected.

The decision

The Full Court of the Supreme Court applied the long-established rule in the High Court’s decision of Bellgrove v Eldridge (1954) 90 CLR 613, holding that the ordinary measure of damages in building defect cases of this kind is the cost of rectifying the work so that it conforms with the building contract. However, this rule is subject to the qualification that the rectification work must be:

  • “necessary to produce conformity” with the contract; and
  • a “reasonable course to adopt”.

The Court indicated that reasonableness should be objectively determined in the context of the relevant contract, taking into account the needs and desires of the owner as reflected in the bargain that was struck.

The Court found that it was not reasonable to award the full cost of rectification to rebuild the roof to the specified level. Instead the owners should be compensated for their disappointment and loss of amenity resulting from the ceiling being lower than was expected. On that basis, the owners were awarded $30,000.00 in compensation. In coming to this decision the Court took into account that the work:

  • would have involved demolition of the ceiling and balcony windows, cutting of steel beams in the roof and insertion of party wall supporting columns before the ceiling and windows could be reinstated. The likely cost of that work (at least $331,188.00 together with relocation costs whilst the work was being undertaken) was relevant;
  • would have been out of all proportion to the likely benefit; and
  • would detract from the peace, comfort and amenity of other residents within the retirement complex and may cause a breach of contractual obligations to other residents.

Reasonableness is key

What is reasonable in the circumstances is central to determining the appropriate level of damages for defect rectification. Relevant considerations as listed by the Chief Judge in Stone v Chappel are:

  • the degree of departure from the contractual requirement;
  • the extent of any adverse functionality, amenity or appearance;
  • the reasons the innocent party included the contractual requirement which was breached;
  • the practical feasibility of rectifying the defect, including the effects on third parties;
  • whether or not the innocent party intends to carry out the rectification work;
  • the cost of the rectification work and whether it is in the circumstances disproportional to the value of the building and contract price, the diminution in commercial value of the building and the extent of any adverse functionality, amenity or appearance;
  • the nature of the wrongdoer’s fault for the defect; and
  • the public interest in reducing economic waste.

The test of reasonableness necessarily requires flexibility and its application will produce different outcomes depending on the circumstances – an identical defect may lead to different rectification outcomes, depending on the specific facts in issue.

If you have any queries or would like further information regarding this article, please contact:

Brett Cassidy
Senior Associate
M: 0438 368 053
E: bcassidy@pageseager.com.au

Alastair Oxbrough
Partner
M: 0400 818 636
E: aoxbrough@pageseager.com.au

Published: 19 July 2017

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