Australian court provides guidance on duty to act reasonably in building defects cases

Alexandria Semyonov, infrastructure dispute resolution specialist at Pinsent Masons, said: “This case highlights that the party bringing a claim for building defects has no positive duty to mitigate, but rather a ‘duty’ not to act unreasonably. It also demonstrates that if a defendant contends the party claiming should have taken steps in mitigation, the onus of proof is on the defendant.”

The dispute centred on a 16-storey building in Sydney, constructed by Ceerose Pty Ltd under contracts signed in 2010 and 2012. The building, which includes 19 apartments, a commercial lot and extensive basement parking, was completed and certified for occupation in 2014. However, the owner identified several defects, leading to legal proceedings initiated in 2016.

The proceedings concerned a claim for loss and damage caused by breaches of the statutory warranties under section 18B of the Home Buildings Act 1989 (NSW). The builder and developer of the apartment development were together defendants in the case.

The owner sought to adopt two referee’s reports – the first addressing liability and the second in respect of quantum – under rule 20.24(1)(a) of the Uniform Civil Procedure Rules 2005 (NSW). The builder and developer opposed the adoption of the reports on multiple grounds, including that the owner failed to mitigate its loss.

The defendants’ main attack on the referee’s reports was the finding that the owner did not fail to mitigate its loss. The defendants contended that the owner had failed to mitigate its loss by unreasonably refusing access to carry out rectification works. The parties had been negotiating a draft deed which was said to have given rise to an agreement that the defendants would attend to work set out in the proposed deed. The owner declined to allow the defendants to attend the property. The referee found that the owner’s refusal to permit access was reasonable, as it had lost confidence in the defendants’ ability to undertake the works.

Before considering the defendants’ arguments, the judge examined the common law principles. The judge identified that the party bringing the claim has no positive duty to mitigate but does have a duty not to act unreasonably. An obligation to mitigate is a question of law, but what is reasonable for a person to do in mitigation is a question of fact in the circumstances of each case, the judge said. Additionally, it is for the defendant to prove steps should have been taken to mitigate losses in such cases.

The judge noted that there are economic advantages to both parties by allowing the builder to remedy the defects, rather than a new builder. It was concluded that whether or not an owner has acted reasonably depends upon a review of the events since the building work was undertaken. This can include identification of defects, negotiations or commencing litigation. However, there are factors which may indicate whether an owner has acted unreasonably in respect of the losses it has suffered – the extent and seriousness of the defects, the quality of any repairs effected by the builder, and the builder’s engagement with the owner in respect of the suggested defects and proposed fixes. The efficiency of continuing to negotiate with the builder should also be considered.

The judge agreed with the referee’s initial decision that the owner did not act unreasonably by refusing to allow the builder to rectify the defects. The owner lost confidence in the builder’s ability to undertake such works which was reasonable considering the circumstances.