Home Owners and property developers’ duty to mitigate has recently been a focus of attention by both the Supreme Court and the NSW Legislature. This attention has confirmed its current status as a material consideration, the significance of which is likely to increase.
The Supreme Court
In The Owners - Strata Plan No 76674 v Di Blasio Constructions Pty Ltd the Court recently affirmed the owner’s duty to mitigate losses and that the common law principles on mitigation apply to claims under the Home Building Act. The decision provides guidance for builders and owners on what is expected of them and confirms that an owner’s loss of confidence in the builder is relevant in determining the bounds of their duty to mitigate.
The Owners Corporation (OC) brought proceedings against the builder (Di Blasio) for breach of the statutory warranties implied under the Home Building Act 1989 (Act). Among other things, Di Blasio asserted that the OC had failed to mitigate its loss by not engaging it to perform the rectification works. There was no dispute that there were defects in the works or that Di Blasio was in breach of the statutory warranties in respect of its work.
Di Blasio asserted that the OC acted unreasonably in not:
- pursuing the discussions concerning the scope of the works to be undertaken by Di Blasio; and
- accepting Di Blasio's offer made in Mr Di Blasio's affidavit sworn after proceedings had commenced.
The Court did not accept Di Blasio's submissions and awarded the Owners $481,405.61. It did however confirm the application of the following general principles of mitigation:
- An owner is not entitled to recover losses attributable to its own unreasonable conduct;
- An owner whose property is damaged or defective is generally entitled to recover the costs of reinstating the property so that it corresponds to the contractual promise (which include the statutory warranties);
- an owner is required to give the builder an opportunity to minimise the damages it must pay by rectifying the defects, except where its refusal to give the builder that opportunity is reasonable or where the builder has repudiated the contract by refusing to conduct any repairs;
- the attempts the builder has made to repair the defects in the past and whether, in the light of the builder's conduct, the owner has lost confidence in the willingness or ability of the builder to do the work are relevant factors in determining reasonableness; and
- it is for the builder to prove that the owner has acted unreasonably.
The Court found that, among other things:
- As the defects continued to emerge, the OC took the reasonable step of engaging an expert to identify the defects and took the reasonable position that Di Blasio should prepare a scope of works to remedy the defects that had been identified. In the Court’s opinion, Di Blasio's response was inadequate;
- The OC obtained expert reports. Before commencing court proceedings, it served those reports on Di Blasio and gave Di Blasio an opportunity to indicate whether it was prepared to rectify the defects in accordance with those reports; and
- The OC could reasonably have taken the view that it no longer had confidence in Di Blasio and that it wanted someone else to undertake the rectification work.
The decision should be read in the light of the incoming section 18BA “Duties of person having benefit of statutory warranty”, introduced in the Home Building Amendment Bill 2014 (2014 Act). The 2014 Act is to commence on about 1 December 2014.
Section 18BA confirms that an owner has a duty to mitigate its loss. The duty extends to both contracting owners and successors-in-title who enjoy the benefit of the statutory warranties. Under s18BA, an owner:
- must make reasonable efforts to notify the builder of the breach within 6 months after the breach becomes apparent; and
- has a duty to allow reasonable access.
The new section 18BA is builder-friendly and arguably imposes broader obligations on the Owner to mitigate than is currently required under the common law. The new section 48MA leaves little doubt as to the significance of mitigation and access in stating:
“A court or tribunal determining a building claim involving an allegation of defective residential building work or specialist work by a party to the proceedings (the responsible party) is to have regard to the principle that rectification of the defective work by the responsible party is the preferred outcome.”
The new statutory duty to mitigate will only apply to contracts entered into after the commencement of the 2014 Act. An owner (or owners corporation) should be mindful of these additional mitigation obligations when identifying issues with the works.
Conversely, the new s18BA is good news for builders nervous about potential defects claims 'bundled up' that are left dormant while an owner prepares large claims to be launched just prior to the expiry of warranty periods.