The Supreme Court of NSW recently affirmed that the common law concept of mitigation of loss applies to home owners seeking to enforce statutory warranties under section 18B Home Building Act 1989 (NSW) (Act). 

Background

In The Owners – Strata Plan No 76674 v Di Blasio Constructions Pty Ltd [2014] NSWSC 1067, Di Blasio Constructions Pty Ltd (Builder) was both the builder and developer responsible for the construction of a three storey, nine unit residential strata scheme in Queenscliff, New South Wales.  The Owners Corporation (Owners) brought a claim against the Builder alleging breach of statutory warranties in respect of serious leaking and waterproofing issues.

The Builder did not dispute that there was defective work, but rather, defended the action on the basis that the Owners had failed to mitigate their loss by:

  • refusing to engage in discussions concerning the scope of rectification works to be undertaken by the Builder, and
  • rejecting an offer made by the Builder to perform the rectification works.

The Owners claimed they had lost confidence in the Builder’s ability to perform any rectification works.

Decision

The Court confirmed the application of general principles of mitigation:

  • there is no requirement that the owner act in a particular way and no requirement that the owner minimise its loss, rather the principle is that the owner is not entitled to losses attributable to its own unreasonable conduct
  • an owner is generally entitled to recover any reasonable costs of reinstating the property so that it corresponds to the contractual promise (which include the implied statutory warranties), and
  • the owner must give the builder a reasonable opportunity to rectify any defects.  Often, the building contract itself requires the owner to repair defects or sets out a procedure by which defects are to be made good. But even if it does not, the owner is required to give the builder an opportunity to minimise the damages 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 Court found that the Owners acted reasonably in the circumstances. The defects were significant and the Builder’s initial attempts to repair defects were inadequate.  The Owners:

  • engaged an expert to identify the defects
  • provided the Builder with the expert report
  • requested the Builder to prepare a scope of works to remedy the defects
  • attempted negotiations with the Builder to agree on the scope of works, and
  • ultimately adopted an opinion that it no longer had confidence in the Builder and sought someone else to undertake the rectification work.

The Court awarded damages of $481,405.61.

Amendments to the Home Building Act 1989 (NSW) and the new section 18BA ‘Duties of person having benefit of statutory warranty’

The principle of mitigation is to be reinforced in the new amendments to the Act which have been passed and are awaiting a commencement date.

Under new section 18BA an owner:

  • must mitigate any losses arising from a breach of the warranties
  • must make reasonable efforts to notify a builder within 6 months of a defect becoming apparent, and
  • must not unreasonably refuse the builder access to the site as the builder reasonably requires to rectify the work.

A failure to comply with the above duties may be taken into account by the court or tribunal hearing the defects case or, in the case of refused access, must be taken into account.