Since 2016, the parties have been embroiled in protracted litigation over building defects in a 16-storey residential development on Elizabeth Street, Sydney. In this latest chapter, the NSW Supreme Court considered the adoption of a referee’s report on those defects. This case note highlights a pivotal issue: the principle of mitigation and its influence on defect claims.

In the context of building disputes, mitigation requires a party suffering loss from a breach of contract to take reasonable steps to minimise that loss. This often involves providing the builder with a fair opportunity to rectify defects—unless doing so would be deemed unreasonable.

The determination of what is ‘reasonable’ hinges on the unique circumstances of each case, considering factors such as the builder’s track record, their responsiveness to defects, and the Owners Corporation’s trust in their ability to deliver effective solutions.

Key Takeaways

• The Ceerose decision underscores the nuanced approach courts take in assessing mitigation. Reasonableness lies at the heart of this analysis, with factors such as trust, past performance, and the viability of further negotiations playing critical roles. Both builders and owners should be mindful of these considerations to ensure their conduct aligns with legal expectations and withstands scrutiny in disputes.
• For owners corporations, the decision highlights the need to document interactions carefully and justify decisions to engage third parties for repairs. Courts will look for evidence that the decision was not made lightly but was a rational response to the circumstances.
• For builders, this case serves as a reminder of the importance of maintaining trust and demonstrating a proactive approach to defect rectification. A history of inadequate repairs or dismissive responses to complaints can significantly undermine their position in mitigation disputes.

Overview

This case centred on a referee’s report regarding building defects, which the defendant builder sought to challenge on 13 grounds. The primary objection focused on the claim that the plaintiff Owners Corporation had failed to mitigate its loss by refusing to allow the builder to rectify the defects. In support of its argument, the builder relied on Owners SP 76674 v Di Blasio Constructions Pty Ltd [2014] NSWSC 1067, contending that if the Owners Corporation had permitted the builder to address the defects, it would not have incurred the claimed losses.

The principle of mitigation in building disputes obliges an owner to provide the builder with a reasonable opportunity to rectify defects unless refusal is justified. In Di Blasio, Ball J emphasised that this aligns with common law mitigation principles, requiring reasonable steps to minimise loss, and reflects the practical reality that a builder is often better positioned to carry out cost-effective repairs, particularly if still on-site, which has the dual effect of reducing the damages claimed against the builder. However, this obligation is not absolute and depends on the circumstances. Critically, the burden is on the builder to prove that the owner acted unreasonably by refusing the opportunity to rectify defects.

The referee had formed the view that the Owners Corporation acted reasonably in refusing to allow the builder to carry out remedial works. The Court upheld this finding, highlighting the builder’s history of inadequate repairs and lack of engagement with expert recommendations. These factors justified the Owners Corporation’s decision to engage third parties for rectifications due to diminished confidence in the builder.

The crux of the judgment is set out at [51]:

What each of these judgments indicate is that whether the owner acted reasonably or unreasonably generally depends on a review of events as they have unfolded since building work was initially undertaken, traversing when defects were identified, subsequent negotiations, conduct during litigation and the extent to which the owner’s complaints were ultimately vindicated by the court or tribunal. The following facts may tell upon whether an owner has acted unreasonably when dealing with the builder such that the owner’s loss may be disregarded:

1. The extent and seriousness of the defects
2. The quality of any repairs effected by the builder
3. The builder’s engagement with the owner in respect of the suggested defects and proposed method of rectification, in short, has the builder responded in a timely manner, taken the complaints seriously and acted fairly; and
4. The efficacy or perceived futility of continuing to negotiate with the builder.

This decision reinforces the broader legal principle that mitigation is not a ‘duty’ to act positively but an obligation to avoid acting unreasonably. Courts assess reasonableness on a case-by-case basis, considering the context and history of interactions. Owners are not required to accept inadequate offers or continue dealing with builders who fail to propose workable solutions, particularly where disputes remain unresolved or trust has been eroded by aggressive tactics.

If a builder's past performance has undermined confidence in their ability to carry out repairs, owners are generally not deemed unreasonable in seeking alternative solutions. Courts have repeatedly found that where builders propose inadequate or incomplete rectification plans, an Owners Corporation may justifiably refuse access and pursue other options.

Further information / assistance regarding the issues raised in this article is available from the author, Fabienne Loncar, Partner or your usual contact at Moray & Agnew.