No automatic right of builders to rectify defects says NSW Court of Appeal in Ceerose decision

Mitigation turns on reasonableness; not the builder’s preference to repair 5 min read

In a cautionary tale for contractors, the New South Wales Court of Appeal has dismissed an appeal by builder Ceerose and its developer, confirming the court's original order that Ceerose pay an Owners Corporation $1.95 million (plus GST) for the costs of rectifying defective works in its building, along with Ceerose paying the Owners Corporation's legal costs of the appeal.¹

In this Insight, we explain the court’s approach to mitigation and the practical lessons for construction stakeholders.

Background: construction defects rectified by different constructor

The dispute (and appeal) concerned whether the Owners Corporation must allow Ceerose the opportunity to rectify defects in 'The Eliza' residential apartment tower, built by Ceerose, located in the Sydney CBD. The Owners Corporation had used a different contractor after it lost confidence in Ceerose.

Ceerose did not dispute that particular defects existed but rather argued that the Owners Corporation had failed to meet its duty to mitigate its loss by not allowing Ceerose to perform the rectification works.

However, the Court of Appeal was unanimous in finding in favour of the Owners Corporation, determining that Ceerose had failed to make out any of its grounds of appeal.

Key takeaways

Of note for other builders and principals involved in construction contracts are the following points of the court's judgment:

• While a plaintiff must prove its loss, if a defendant wishes to allege a plaintiff failed to mitigate, the onus remains on the defendant to prove that failure (including a failure to take any steps at all to mitigate).
• This onus always sits with the party alleging a failure to mitigate (in this case, Ceerose, the builder) and does not 'shift' from one party to the other during the course of the proceedings if the party alleging the failure establishes certain facts (eg that the Owners Corporation refused to allow Ceerose to rectify the defective works, as was argued by Ceerose). A plaintiff is not under a 'positive duty' to prove they have mitigated their loss.
• There is no special common law rule applicable to this as concerns construction contracts, and no 'invariable requirement' that an owner must allow a builder the opportunity to rectify defective works. Instead, the long-established general principles regarding mitigation of loss still apply.
• As such, if a party is to successfully show that the other party failed to mitigate (or to properly mitigate) its loss, the focus must remain on whether that party's mitigation actions were reasonable in all of the circumstances. It is only unreasonable actions (and related costs) that will bar recovery.

Factors to consider when assessing reasonableness

While the Court of Appeal was not specifically asked to determine whether the Owners Corporation's actions were reasonable, its dismissal of the appeal means reference should be had to the original decision of Justice Rees. In this decision, Justice Rees noted that factors in determining whether an owner has acted unreasonably might be:

• the extent and seriousness of the defects
• the quality of any repairs effected by the builder
• 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
• the efficacy or perceived futility of continuing to negotiate with the builder.

Justice Rees' decision ultimately adopted the reasons of the prior decision by a court-appointed Referee, who had determined that the Owners Corporation losing confidence in Ceerose (and therefore refusing to allow Ceerose to complete rectification of the defects) was not unreasonable. Delay was a decisive factor in the Referee's decision. While the building was completed in 2014, and proceedings first commenced in 2016, the parties' settlement discussions saw the proceedings stood over for around two years until an 'in principle' settlement agreement was reached. However, another year passed without final resolution of that agreement. The Referee considered that Ceerose had been given a reasonable opportunity to undertake defect rectification but had failed to keep the owners properly informed of their progress.

Having not sufficiently challenged this before the Referee, Ceerose was unsuccessful in arguing before the New South Wales Supreme Court or Court of Appeal that the Referee's decision was not valid. The Court of Appeal was less than glowing in its view of Ceerose's arguments in this regard, characterising them as 'a forensic choice made based upon their own legal misunderstanding'.

Final thought

This case is a reminder to parties that builders do not have an unassailable right to be the party that rectifies their defective works, and a reminder to legal representatives as to where the onus sits if electing to argue for a failure to mitigate loss (and the forensic steps that should be taken in first instance determinations if choosing to do so).