Introduction
In late 2020, we published Update 2003 on a recent decision of the District Court of South Australia, highlighting the need for parties to follow their contract when variations arise. There was no appeal on this point.
However, the decision went to the Court of Appeal on another thorny issue that often troubles builders and their clients. [1]
Background
In January 2016, Mr Crea engaged Bedrock Construction and Development Pty Ltd (“Bedrock”) to fit out a new restaurant in Adelaide. The parties used the standard form Simple Works Contract – ABIC SW – 2008 (“Contract”). Mr Genesin was the appointed “Architect” under the Contract, adopting the role generally known as the superintendent.
When the works were approaching completion, the Architect issued three successive lists of defects requiring rectification by Bedrock. The parties fell into dispute and ultimately, Crea terminated the Contract, refusing Bedrock access to carry out further rectification work. This Update deals with the refusal to allow the builder to carry out rectification work.
A short history
A short chronology of the dispute is necessary. The works were originally scheduled to reach practical completion on 12 March 2016, having commenced on 7 January 2016. Some delays occurred and extensions of time were granted to Bedrock. Bedrock was still carrying out works on 22 April 2016 when Crea took possession. Under the Contract, taking possession of the works resulted in them being deemed practically complete.
Clause M11 of the Contract required Bedrock to correct any defects within 10 working days of a written request. The Architect issued written requests on 12 April 2016 (List A), 20 April 2016 (List B) and 13 May 2016 (List C). List A included 157 items. Lists B and C were largely repeats of unresolved items from List A, although each of them also included some new items.
Given the restaurant had commenced operation, remedial work could only occur on Mondays or after hours. Bedrock attempted to carry out work in these windows of time, but a lack of communication or coordination resulted in some difficulties in Bedrock’s subcontractors obtaining access for full days.
A meeting on site on 3 May 2016 became heated and the relationship between the parties deteriorated rapidly. On 11 May 2016 Mr Crea asked Bedrock to hold off from further work and effectively refused access to the site.
Bedrock’s director became abusive towards Mr Crea and on 15 May 2016 Mr Crea obtained an intervention order against him.
Bedrock offered to have the remedial work supervised by a third party at its cost, to overcome the personal tensions arising on the site.
On 19 May the Architect terminated the Contract. On 28 June, the Architect provided a certificate of defects asserting that Crea had decided to have the rectification work done by others and would deduct from the outstanding contract sum the cost of that work.
The general principles
The common law principles that establish the builder’s right to fix defects are well established. They can be summarised as follows:
- An owner is not entitled to recover losses attributable to its own unreasonable conduct.
- An owner whose property is damaged or defective as a consequence of the builder’s breach is generally entitled to recover the costs of reinstating the property so that it corresponds to the contractual promise, except to the extent it is unreasonable to insist on reinstatement.
- In the case of building contracts, it is generally accepted that the owner must give the builder a reasonable opportunity to rectify any defects even if the contract does not expressly require this.
- However, this does not apply where the owner’s refusal to give the builder that opportunity is reasonable or where the builder has repudiated the contract by refusing to conduct any repairs.
- The question of what is reasonable depends on all the circumstances of the particular case.
- One relevant factor is what 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 reasonably lost confidence in the willingness and ability of the builder to do the work.
- It is for the builder to prove the owner has acted unreasonably.
- The owner’s obligation not to act unreasonably does not come to an end once court proceedings have commenced. But the existence of court proceedings is relevant to the content of the obligation.
- Once there is a dispute concerning whether an owner has failed to mitigate its loss, or failed to act reasonably in some other respect, the owner is entitled to have that question tested in court; and the mere fact it does so is not itself evidence it has failed to act reasonably.
In the District Court applied these principles and determined that the owner had been reasonable and therefore was entitled to deduct from all amounts owing to the builder the cost of having the remedial work performed by other parties.
The decision on Appeal
The Court of Appeal was unanimous in holding that the terms of the Contract must be complied with before resorting to the general principles.
The Contract required that the builder be given 10 working days to carry out the remedial work. The Contract then provided that, if the builder had failed to carry out that remedial work within the 10 days, the owner could claim the cost of having the work done.
The Honourable Justice Doyle who wrote the leading judgment said these two provisions inherently combine to require the owner to allow the 10 working days timeframe for the work to be done.
Once the owner has done so, the owner can rely on the general principles established by common law to deny the builder the opportunity to return to the site. However, that step would have to be taken acting reasonably in accordance with the nine principles set out above.
Generally, a builder may be able to prevail upon subcontractors to rectify their defective work without charge to the builder. In this case, Bedrock was able to establish that, if it had been allowed to rectify the defects, it would have done so at far lower cost than had been assessed by the District Court, where the award was based on the cost of an unrelated third party carrying out the work.
This reduction in the cost of remedial work resulted in a significant reversal of fortunes in this case, with possible implications of a reduction in the legal costs awarded against Bedrock. Justice Doyle indicated that the costs orders previously made will have to be reconsidered.
Finally, Justice Doyle held that where a builder and an owner have a completing claim and counterclaim, with both enjoying some measure of success, the Court should issue on balance judgment, even if the parties have not pleaded their case that way.
Conclusion
Builders should ensure that contracts include the right to rectify defects and a reasonable period for that work.
The decision to refuse the builder the right to return to carry out remedial work is a difficult one. Each case is to be judged on its merits. However, the contract terms will dictate the initial strategy.
It is not uncommon when relationships have fractured for a party to feel threatened by the return of the builder to carry out remedial work. In those circumstances, the builder’s offer of an independent third party to supervise the work may be a workable approach.
[1] Bedrock Construction and Development Pty Ltd v Crea [2021] SASCA 66
