Bellgrove v Eldridge - Michael Filippich

Michael Filippich - 1 - 1-12-09

SEARCHING FOR CRACKS IN THE BELLGROVE v ELDRIDGE PRINCIPLE

By Michael Filippich

I INTRODUCTION

In Australia, the High Court decision in Bellgrove v Eldridge (1954) 90 CLR 613

remains the leading authority for the award of damages at common law for defective or

incomplete work.1 Over the years the application of the Bellgrove v Eldridge2 principle

has extended beyond the conventional realm of defective building cases and into disputes

related to contractor negligence and repair covenants in building leases. A number of

important legal arguments have also been raised regarding considerations of

reasonableness, the intention to rectify, betterment discounts and loss of amenity as an

alternative to rectification costs. This article reviews the cases that have reinforced the

Bellgrove v Eldgride3 principle within the Australian legal system and investigates what

points of law if any have the potential to prevent a plaintiff from claiming rectification

costs for defective work.

I THE BELLGROVE v ELDRIDGE PRINCIPLE

The ruling principle in assessing damages at common law for breach of contract is

the often cited statement made by Parke B in Robinson v Harman (1848) I Ex 850 that:

where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation with respect to damages as if the contract had been performed.

1 Thomas B, The assessment of damages for breach of contract for defective building work (2004) 20 BCL 230. 2 (1954) 90 CLR 613. 3 Ibid.


This statement highlights the fact that the purpose of damages in contract cases is to

compensate the plaintiff for the other partys non performance, not to punish the

defendant. In order for damages to be awarded for breach of contract a loss needs to be

established otherwise the plaintiff can only recover nominal damages. The measure of

damages for this loss is prima facie the cost of rectifying the breach such that the work

conforms to the contract.4 In some situations the only way to achieve contractual

conformity is to demolish the defective works and start again. An assessment of damages

based on demolition and reconstruction will often result in a large sum being awarded to

the plaintiff. Alternatively the loss may also be assessed as the diminution of value

between the works contracted for and that which was actually delivered. This typically

results in a damages award to the plaintiff that is significantly less than the cost of

rectification.

Both methods of assessing damages were considered by the High Court of

Australia in the case of Bellgrove v Eldridge.5 This case dealt with the construction of a

house where the builder had failed to comply with the concrete specification resulting in

a grave instability in the building foundations. The trial judge at first instance found

that this departure from the specification was so substantial:

that the only remedy which will place the plaintiff in substantially the position in which she would be if the contract were carried out, is to award her such damages as will enable her to have this building demolished and a new building erected in accordance with the contract and specification.6

The trial judge therefore awarded damages to the owner on this basis.

4 Cremean DJ, Shnookal BA and Whitten MH, Brooking on building contracts: the law and practice relating to building and engineering agreements (4th ed, 2004). 5 (1954) 90 CLR 613. 6 Ibid 613.


The builder appealed this decision claiming that damages should be assessed by

reference to the diminution in value between the building as its stands and the value it

would have had if it had been erected in accordance with the plans and specifications.

This amount would have been significantly less than the cost of demolition and

reinstatement. The High Court upheld the trial judges decision stating that:

the measure of damages recoverable by the building owner for a breach in a building contract is the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract, with the addition, in most cases, of the amount of profits or earnings lost by the breach.7

The court went on to say that this rule is subject to the qualification that not only must

the work undertaken be necessary to produce conformity, but that also it must be a

reasonable course to adopt.8 In the case of Belgrove v Eldridge9 it was considered that

the demolition and reinstatement of the building was both necessary and reasonable as

alternative methods of repair such as underpinning or replacing foundations in a

piecemeal fashion were at best doubtful remedies.

II SUBSEQUENT DEFECTIVE WORKS CASES

The defective works cases that have followed Bellgrove v Eldgridge10 have

demonstrated the courts willingness to assess damages on the basis of demolition and re-

construction in situations where this is necessary to achieve conformity with the contract

and is a reasonable course to adopt. In the case of J-Corp Ltd v Gilmour (2005) WASCA

136 the Supreme Court of Western Australia Court of Appeal awarded demolition and

reconstruction costs to rectify defective footings which didnt comply with the Building

7 Ibid 615. 8 Ibid 615. 9 (1954) 90 CLR 613. 10 (1954) 90 CLR 613.


Code of Australia. In reaching this decision the court considered the significance of the

defects, the practicality of repair, the reasonableness of demolition and reconstruction, the

impact of the defects on the cost of the property and the level of conformity with

contractual obligations. On the balance of facts the court concluded that reinstatement

damages would put the plaintiff in the position it would have been in if the contract had

been performed whereas an award for diminution in value would not.

A similar decision was reached by the Queensland Court of Appeal in Kirkby &

Anor v Coote & Ors (2006) QCA 61. This case dealt with the defective design of

building foundations and is an example of how the Bellgrove v Eldgridge11 principle has

also been applied to claims in negligence. In 1993 the Kirkby family engaged Titmus to

design the footings for their retirement home which was to be built on a steep ridge of

land overlooking a forest. Upon awarding the contract the Kirkbys provided Titmus

with a geotech report for the site that included recommendations for how the foundations

should be designed. Titmus elected not to follow the recommendations and instead

proposed a design that he considered to be more economical. This design was certified

by Titmus and his employer as complying with the principles of structural engineering

and soil mechanics as well as the requirements of the original geotech report. During the

construction phase Titmus also issued an inspection certificate asserting that the

foundations had been installed in accordance with his design.

Following a large rainfall event, the foundations designed by Titmus subsided

approximately 90 mm resulting in significant damage to the Kirkbys home. Although

Titmus argued that the failure of the foundations was due to faulty workmanship by the

11 (1954) 90 CLR 613.


builder, expert evidence presented at trial confirmed that the design itself was

fundamentally flawed. The fact that Titmus had issued a certificate certifying that the

foundations have been installed in accordance with the design also supported the

plaintiffs claim of negligence.

In assessing damages the court followed the Belgrove v Eldridge12 principle and

concluded that the cost of demolition and reconstruction was both necessary and

reasonable in order to achieve conformity with the contract. The defendants claim that

the damages should be based on the cost of underpinning the foundations was rejected as

none of the expert witnesses were willing to guarantee that this would prevent the

foundations from subsiding further.

The recent case of Roluke Pty Ltd & Anor v Lamaro Consultants Pty Ltd & Anor

(2008) NSWCA 323 also demonstrates how the Belgrove v Eldridge13 principle can be

used to calculate damages for defective work due to a negligent design. Roluke Pty Ltd

engaged Lamaro Consultants to provide structural engineering advice for a three storey

car park. Upon reviewing the design, Lamaro changed the architects specification for

the waterproof slab on the roof of the building. The slab was subsequently built in

accordance with Lamaros revised specification and was found to be defective when

water ingress occurred resulting in damage to cars and property. Expert evidence

revealed that Lamaros design for the slab did not comply with Australian Standards and

that the roof would require periodic repairs over the life of the building. The court of

appeal awarded damages sufficient to cover past rectification costs and subsequent

repairs over the twenty year design life of the slab. 12 (1954) 90 CLR 613. 13 (1954) 90 CLR 613.


III TABCORP HOLDING LTD v BOWEN INVESTMENTS PTY LTD

Another case that has reaffirmed the Bellgrove v Eldridge14 principle is the recent

High Court Decision in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) HCA

8 (Tabcorp). This case was the first time that Bellgrove v Eldgridge15 has been applied

directly to a breach of covenant in a building lease. The facts of the case were as

follows. Tabcorp entered into a ten year lease with Bowen Investments for an office

building in Melbourne. The building had a high quality foyer constructed from materials

such as San Francisco Green Granite, Canberra York Grey Granite and Sequence Mated

Crown Cut American Cherry. The foyer refurbishment had been completed less than six

months before Tabcorp took up occupancy and was highly valued by the building owner.

Shortly after commencing their lease Tabcorp began to demolish the existing

foyer with the intention of replacing it with one that was more to their liking. Tabcorp

failed to notify the owner of their intention to carry out the renovations. This was a clear

violation of their lease which specifically forbid them from altering the premises without

prior written approval from the landlord. The landlord only became aware of the

demolition works when she attended Tabcorps offices to discuss the renovation plans.

By this stage it was too late to seek a court injunction to prevent Tabcorp from carrying

out the work so construction of the new foyer was allowed to proceed. The landlord

subsequently filed a claim for $1.38 million dollars in the Federal Court of Australia to

cover the cost of reinstating the original foyer and the loss of rental income while the

restoration work took place.

14 (1954) 90 CLR 613. 15 (1954) 90 CLR 613.


At first instance the trial judge held that it was inappropriate to award damages

based on the cost of reinstatement and instead awarded damages of $34,820 which

reflected the diminution in value between the old foyer and new foyer. This amount was

largely determined by the reduction in lettable area of the new foyer compared with the

old and did not take into account the value placed upon the appearance of the original

foyer by the owner. In reaching this decision the trial judge relied on expert evidence

that the tenants changes to the foyer would result in very little diminution in value when

the lease came to an end. His Honor also cited the English case of Joyner v Weeks (1891)

2QB 31 which dealt with a repair covenant in a building lease and established the

common law rule that a landlord is entitled to recover the cost of repairs including loss of

rental income if an action for damages is brought at or near the termination of the lease.

In the case of Tabcorp the trial judge noted that the tenants lease did not end until 2012

or 2017 meaning the claim for reinstatement costs was premature.

On appeal, the Full Federal Court reversed this judgment and awarded the cost of

reinstatement on the basis that Joyner v Weeks16 could be applied because Tabcorp and

Bowen Investments specifically contracted that the renewal of the building lease in 2006

shouldnt affect the court proceedings relating to the foyer. It should be noted that

Victoria is one of the jurisdictions where Joyner v Weeks17 hasnt been overridden by

legislation. In New South Wales and Queensland the maximum sum of damages

recoverable for a breach of repair covenant from a lessee cannot exceed the diminution in

value.18

16 (1891) 2QB 31. 17 (1891) 2QB 31. 18 Graeme S Clarke SC, Tabcorp Holdings Ltd v Bowen Investments Pty Ltd: Contract breakers beware! (2009) List A Barristers at 16 May 2009.


Tabcorp went on to appeal this decision in the High Court. The High Court put

aside arguments relating to Joyner v Weeks19 and instead focused on the principles

established in Bellgrove v Eldridge20. Tabcorp argued that if the test of necessity and

reasonableness in Bellgrove v Eldridge21 were applied to the facts of the case, it would

become apparent that damages should be awarded on the basis of diminution in value and

not the cost of reinstatement. To support this claim Tabcorp relied on expert evidence

that the original foyer would have required substantial refurbishment at the end of the

lease term meaning that the landlord had suffered no financial loss as a result of their

modifications. They also argued that given the commercial nature of the building that

reinstatement was unnecessary as the new foyer was no less effective from a leasing

perspective than the old foyer. Tabcorp drew attention to the large disparity between the

damages award for the cost of rectification and that based on diminution in value as

indicating that the reinstatement of the old foyer was an unreasonable use of funds. They

also claimed that awarding damages based on the cost of rectification would be punitive

in nature and put the landlord in a better position than if the breach had not taken place.

The High Court rejected these arguments claiming that in this case necessity to

produce conformity meant returning the foyer to its original state and not just providing a

foyer that was equally effective as a leasing tool. Tabcorp was bound by the terms of

their lease to leave the foyer unaltered and the only measure of damages that would put

the landlord in the same position that it would have been in had the breach not occurred

was the cost of rectification. The court took the view that the landlord was entitled to the

foyer that it wanted and that damages based on diminution in value would not achieve 19 (1891) 2QB 31. 20 (1954) 90 CLR 613. 21 Ibid.


this but rather leave them with the foyer that the tenant wanted.22 Although it was not

specifically discussed in the judgment, the tenants intention to carry out the rectification

work no doubt supported their argument that it was reasonable for them to expect that the

contract should be performed.23 The fact that Tabcorps breach was deliberate and

carried out covertly in order to prevent the owner from gaining an injunction would also

have been taken into consideration. This is evidenced by the High Courts reiteration of

the trial judges finding that the breach involved a contumelious disregard for the tenants

rights. In regards to the disparity between the two methods of calculating damages the

court made it clear that the reasonableness test in Belgrove v Eldridge24 did not mean

that any amount in excess of the diminution in value was unreasonable. For these reasons

the appeal was dismissed and the award of $1.38 million dollars to Bowen Investments

was allowed to stand.

IV CONSIDERATIONS OF REASONABLENESS

The decision in Tabcorp v Bowen Investments25 once again demonstrated that

within the Australian legal system the cost of rectification is the starting point for

assessing damages and that awards based on diminution in value are the exception rather

than the rule. Cases from Bellgrove v Eldridge26 onwards have consistently assessed

damages against the contract breaker and in favour of the innocent plaintiff. Those cases

which have gone against the plaintiff and awarded diminution in value damages or

nominal damages have generally been decided on the basis that the cost of rectification

was unnecessary and unreasonable.

22 Clarke GS, above n 18. 23 Ibid. 24 (1954) 90 CLR 613. 25 (2009) HCA 8. 26 (1954) 90 CLR 613.


The New South Wales Court of Appeal decision in Brewarrina Shire Council v

Beckhaus Civil Pty Ltd & Anor (2006) NSWCA 361 is one example of where the court

has decided that it would be unreasonable to rectify defective work. This case dealt with

the construction of earthen levee banks around the New South Wales town of Brewarrina

which were designed to protect the town against flooding from the nearby Barwon River.

Geotechnical testing carried out by the council upon completion of the works revealed

that there were problems with the compaction of the soil on the levee banks. This had the

potential to allow seepage and erosion which could eventually result in the failure of the

levee. An expert assessment concluded that only the wet side of the levee bank needed to

be rectified as it was the side in contact with the water and therefore at risk of erosion.

Despite this fact the council claimed rectification costs for both the wet and dry side.

Based on the facts of the case the court found that rectification of the dry side of the levee

was unreasonable because the levee would adequately perform its function without this

work being done. The court concluded an award of damages based on the cost of

rectifying both sides of the levee would be:

out of all proportion to the benefit to be achieved by that expenditure and, further, would not enhance the contractual objective which would be satisfactorily achieved by the rectification work being confined to the wet side of the batter.27

In reaching this decision the New South Wales Court of Appeal cited a number of

defective works cases including the House of Lords decision in Ruxley Electronics &

Construction Ltd v Forsyth (1996) 1 AC 344 (Ruxley). Ruxley28 is the leading common

law case on unreasonable rectification costs. This case dealt with a swimming pool that

was incorrectly built to a depth of 6 foot 9 inches instead of 7 foot 6 inches as specified in

27 Brewarrina Shire Council v Beckhaus Civil Pty Ltd & Anor (2006) NSWCA 361, 92. 28 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344.


the contract. The owner sued the constructor for a sum of 21,560 which represented the

cost of demolishing the pool and reconstructing it to the correct depth. The case spent

many years working its way through the English court system before eventually being

tried in the House of Lords.

The key issue facing the House of Lords in Ruxley29 was that apart from failing to

meet the specification in regards to depth, the pool was in all other respects adequate for

recreational use. The owner Forsyth was a large man and claimed that he did not feel

safe diving into the pool.30 Expert evidence was provided during the trial to establish that

a man of his stature would be no safer diving into a pool that was 7 foot 6 inches deep

instead of 6 foot 9 inches. It was also noted that the pool did not have a diving board and

there did not appear to be any intention to install one. The court decided that the only

loss that Forsyth had suffered was the loss of enjoyment of the pool. No financial loss

could be attributed to the reduction in depth. The court was therefore reluctant to award

damages on the basis of demolition and reconstruction as they considered that such an

award would be unreasonable because the expenditure would be wholly disproportionate

to the benefit gained. Despite Forsyths undertaking to carry out the demolition and

reconstruction works the court was concerned that an award of rectification costs would

provide him with an underserved windfall. 31 It is a fundamental principle of the common

law that an innocent plaintiff is not entitled to use a technical breach to secure and

uncovenanted profit.32 In the end Forsyth was awarded damages of 2500 pounds for

loss of amenity.

29 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344. 30 Thomas B, above n 1. 31 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344. 32 Dorter J and Sharkey J, Building and Construction Contracts in Australia (Thomson LegalOnline).


The House of Lords decision in Ruxley33 provides a valuable insight into how

considerations of reasonableness are applied to the assessment of contract damages at

common law. According to the judgment of Lord Jauncey:

Damages are designed to compensate for an established loss and not to provide a gratuitous benefit to the aggrieved party from which it follows that the reasonableness of an award of damages is to be linked directly to the loss sustained. If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate.34

When this interpretation of damages is applied to the facts in Ruxley35 it becomes

apparent that an award of reinstatement costs would have been unreasonable as the loss

sustained by Forsyth was minor and there was no real need to increase the depth of the

pool. Lord Jauncey went on to justify this assessment by stating that a failure to achieve

the precise contractual objective does not necessarily result in the loss which is

occasioned by a total failure.36

Another important point of law raised in Lord Jaunceys judgment was that

reasonableness is a factor to be considered in determining what the loss was and not

merely a factor in determining which method of assessing damages should be used once a

loss has been established.37 In the case of Ruxley38 the owner had acquired a perfectly

good pool so it would have been unreasonable to demolish it and construct a new one.

The owners loss was not the lack of a useable pool so it followed that damages should

not be awarded on this basis. In determining the owners true loss, the court held that

33 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344. 34 Ibid 357. 35 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344. 36 Ibid 357. 37 Ibid 358. 38 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344.


personal preference may well be a factor in determining reasonableness but it cannot

itself be determinative of what the loss is.39 The mere fact that Forsyth didnt get exactly

what he bargained for did not necessarily mean that the contract had been inadequately

performed and the works should be demolished. To illustrate this point Lord Jauncey

described a hypothetical situation where an owner has specified that a house shall be

constructed from blue bricks but the builder uses yellow bricks instead. If the house was

otherwise entirely adequate for its designed purpose then it would be unreasonable to

award the owner the cost of demolition and reinstatement solely for the lack of aesthetic

pleasure that blue bricks would provide.40

Another issue that was discussed in detail in Ruxley41 was whether or not the

owners intention to rectify was relevant in determining if reinstatement costs should be

awarded. The court clearly stated that in normal situations it has no concern with how a

plaintiff uses an award of damages once a loss has been established. The innocent party

is entitled to be compensated for the loss regardless of whether or not they intend to use

the money to rectify the breach. This approach is necessary in order for the court to reach

finality by its decision. The decision in Ruxley42 did however establish that the intention

or lack of it to rectify the breach can be relevant to the consideration of reasonableness

and hence the extent of the loss sustained. Once the loss is established the intention to

rectify ceases to be relevant. In discussing this decision, Forsyths solicitor considered

that the House of Lords approach to the intention to rectify meant the only safe course

for an owner to adopt is to not carry out any rectification work but to give an undertaking

39 Ibid 358. 40 Ibid 358. 41 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344. 42 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344.


to the court to do so if awarded damages.43 The reason for this is that even if the owner

has carried out the rectification work there is no guarantee that the court will consider it

to be necessary and reasonable and award damages that are sufficient to cover the costs

incurred.

V INTENTION TO RECTIFY

Arguments related to the innocent partys intention to rectify have featured

prominently in Australian defective works cases. The issue has been particularly

contentious in situations where the defective building has been sold by the owner or there

is no way for the owner to rectify the defects. The basis for many of these cases is the

Supreme Court of Queensland decision in Director of War Service Homes v Harris

(1968) Qd R 275. Although the owners intention to rectify was not disputed in this case,

it did deal with whether or not the subsequent sale of a defective building limits the

original owners right to damages. In Director of War Service Homes v Harris44 the

builder had substantially departed from the architects specification when constructing a

number of homes. The defective work was not identified until after the homes had been

sold. When the original builder refused to carry out the repairs the Director engaged

another contractor to rectify the defects and commenced proceedings to recover the costs.

43 Miller D, Damages for Defective Works: Reasonableness and Restitution (1995) 11 BCL 348. 44 (1968) Qd R 275.


The original builder argued that he was not liable for these costs as the properties

had all been sold. The court rejected this argument and awarded damages based on the

cost of rectification in accordance with Bellgrove v Eldridge45. In assessing damages the

court found that it was irrelevant whether or not an owner has sold or given away a

building to a third party as this does not affect their accrued rights. According the Gibbs J:

The owner of a defective building may decide to remedy the defects before he sells it so that he may obtain the highest possible price on the sale; he may sell subject to a condition that he will remedy the defects; or he may resolve to put the building in order after it has been sold because he feels morally, although he is not legally, bound to do so. These matters are nothing to do with the builder, whose liability to pay damages has already accrued.46

The court went on to state that the sale of the building might be one of the

material facts to be considered when assessing whether or not it would be reasonable to

carry out the rectification work but it is by no means fatal to the plaintiffs cause. In this

particular case the court found that the repairs were necessary and reasonable and that it

was irrelevant that the owner had no legal liability to the purchaser to carry out the

repairs. The Director of War Services was a not for profit organisation and therefore felt

morally bound to make repairs. In this instance an assessment of damages based on

diminution in value would be inappropriate as this was not the purpose of erecting the

houses.47

Another case that dealt with the sale of a property and the intention to rectify was

Scott Carver Pty Ltd v SAS Trustee Corporation (2005) NSWCA 462. The architectural

firm Scott Carver Pty Ltd had been engaged by SAS Trustee Corporation to join two

towers by means of a glass pavilion. Upon completion of the works a number of defects

45 (1954) 90 CLR 613. 46 Director of War Service Homes v Harris (1968) Qd R 275, 278-279. 47 Thomas B, above n 1.


were claimed relating to waterproofing, paving and the construction of a steel pergola.

Carver was named as a party to the claim for defective waterproofing as it had specified

the membrane which had not been adequately installed by the contractor. Prior to the

trial the property was sold to a trust in which SAS had a 50% holding.

Carver submitted that SAS was not entitled to any damages as it had not

performed any rectification work or demonstrated an intention to rectify and that no loss

had been sustained because the property had been sold without any true diminution in

value. It should be noted that the property was sold at a loss however the sale was not at

arms length and the price was specifically reduced to preserve the cause of action. The

case was evaluated by a referee and decided by a Master Macready in favour of SAS

Trustee Corporation.

The decision was appealed to the New South Wales Court of Appeal where all

three judges upheld the Masters decision. Once again the court decided that damages

should be assessed based on the cost of rectification in accordance with the Belgrove v

Eldgridge48 principle. According to the judgment of Hodgson J Bellgrove v Eldgridge

applied regardless of whether or not the owner carried out the rectification work so long

as it would be reasonable to do so. The mere fact that there was no apparent reduction in

the value of the property upon sale was also not a valid reason for displacing the

Belgrove v Eldridge principle.

48 (1954) 90 CLR 613.


His Honor proposed that Belgrove v Eldridge would only be displaced if there

were a supervening event that showed with substantial certainty that the work would

never be carried out.49 Hodgson J cited the case of Central Coast Leagues Ltd v Gosford

City Council (Unreported Giles CJ CommD, 9/6/98) in which orders made by the

Environment and Lands Council required more extensive work on a property than that

associated with rectifying the defects. As the rectification work was no longer required

reinstatement costs were not included in the damages assessment. His Honor also drew

attention to the decision in Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen

Agency Pty Ltd (2002) 18 BCL 122; (2001) NSWCA 313. This case dealt with defective

paving works at an industrial premise. The owner obtained a quote of $512,946 to rectify

the defects however the repairs were actually done at a cost of $354,281 by completing

the work as part of a much larger infrastructure upgrade. The court confirmed that the

owners loss should be assessed based on the actual cost of repair and not the theoretical

cost obtained in the quote. It was considered that the owners decision to carryout the

repairs as part of a larger scope was a supervening event which displaced the original

damages assessment.

One interesting statement made by Hodgson J in obiter was that:

if it were shown that the price received on a sale was unaffected by the defects, or that it was reduced by an amount less than the cost of rectification, this could displace the Bellgrove measure.50

The view that certain circumstances of the sale may displace the Bellgrove v Eldridge51

principle was not embraced by the judgment of Ipp J who considered that the details of

49 Scott Carver Pty Ltd v SAS Trustee Corporation (2005) NSWCA 462, 44. 50 Ibid 47. 51 (1954) 90 CLR 613.


any contract the owner makes for the sale of a defective building is collateral to the issue

of the owners loss.52 If this were not the case the builder could obtain an undeserved

windfall depending on the rise and fall of the property market. This approach is

consistent with the judgment in De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28

in which the court concluded that even though a defective building had been sold for no

apparent loss it could be inferred that the value of the property had been depressed by the

defects.

Scott Carvers request for special leave to appeal to the High Court was refused

by Kirby J. In delivering this decision His Honor felt that the request did not challenge

the High Court decision in Belgrove v Eldridge nor seek to modify its application. Kirby

J went on to say that whether the subsequent resale of a defective building deprived the

owner of an entitlement to damages in accordance with Belgrove v Eldridge53 might be a

question that would need to be considered by the High Court however the reduction in

sale price by SAS meant that it was an inappropriate case to test this.

Westpoint Management Ltd v Chocolate Factory Apartments Ltd (2007)

NSWCA 253 is another case which illustrates that the sale of a property at a non-reduced

value prior to repairs being carried out does not prevent the owner from recovering the

cost of rectification. In this case the owner Chocolate Factory Apartments Ltd

(Apartments) purchased an old chocolate factory in Stanmore NSW with the view of

redeveloping the site into eighty-seven new apartments. The project was managed and

constructed by Westpoint Management Ltd (Westpoint) who failed to comply with the

52 Ibid 121. 53 (1954) 90 CLR 613.


plans and specifications by providing finishes of a lower standard. Following the sale of

the units, Apartments filed a claim for damages against Westpoint to recover the

rectification costs for the defective work. The defects included inadequate mechanical

ventilation, the use of hollow doors instead of filled doors, the installation of incorrect

skirting board, the use of the wrong piping materials, problems with the carpark shutters,

repairs requested by the purchasers, falls to showers and the supply of a non-conforming

security system.

The proceedings were referred to the Honorable J M N Rolfe QC for inquiry.

The referees report rejected a majority of the plaintiffs claims on the basis that there

was no evidence that the rectification work would ever be carried out. The claims in

relation to the installation of incorrect skirting boards and the use of hollow doors were

dismissed because the referee considered that their rectification failed to pass the test of

necessity and reasonableness as presented in Belgrove v Eldridge54. These

recommendations were adopted by McDougall J and damages were awarded accordingly.

Apartments appealed this decision claiming that the damages awarded by the

judge should have included the reasonable cost of rectification of the defective work. It

was also submitted that when assessing damages it did not matter that the property had

been sold by the owner, that it was not demonstrated that the owner had suffered a lower

price by reason of the defects, or that the owner had no intention of rectifying the

defects. In considering these arguments the New South Wales Supreme Court applied the

decisions in Scott Carver Pty Ltd v SAS Trustee Corporation55, Director of War Service

54 (1954) 90 CLR 613. 55 (2005) NSWCA 462.


Homes v Harris56 and De Cesare v Deluxe Motors Pty Ltd57 to conclude that the sale of a

property or the owners decision not to carryout any rectification work did not in itself

establish that the work was unnecessary or unreasonable.

According to the judgment of Gibbs JA with whom McColl and Campbell JJA

agreed the sale of the units was simply one factor that could be considered when

determining whether or not the rectification work was reasonable. For example if

achieving the contractual objective was not of any significance to either Apartments or

the purchasers then it would be possible to conclude that the rectification work was out of

all proportion to the benefit achieved.58 His Honor took a similar approach to the

question of whether Apartments intention not to carry out the rectification work could

prevent them from recovery damages by stating that:

The plaintiffs intention to carry out the rectification work, it seems to me, is not of significance in itself. The plaintiff may intend to carry out rectification work which is not necessary and reasonable, or may intend not to carry out rectification work which is necessary and reasonable. The significance will lie in why the plaintiff intends or does not intend to carry out the rectification work, for the light it sheds on whether the rectification is necessary and reasonable.59

It was considered by Gibbs JA that if the court were concerned with the likelihood of

whether or not rectification work would be performed then there would be the potential

for expensive and time consuming inquiries. His Honor went on to state that once a

compensable loss has been established the court is not concerned with the use to which a

plaintiff puts its damages.60

56 (1968) Qd R 275. 57 (1997) 13 BCL 136. 58 Westpoint Management Ltd v Chocolate Factory Apartments Ltd (2007) NSWCA 253, 51. 59 Ibid 60. 60 Ibid 54.


This reasoning was applied to the matters in the case as follows. The court held

that the referees rejection of the damages claims for the mechanical ventilation, hollow

doors, incorrect piping materials, purchasers repairs, falls to showers and the security

system on the basis that Apartments had no intention of carrying out the rectification

work was erroneous and inconsistent with the Bellgrove v Eldridge principle. On this

basis it was decided that the issues should were remitted to McDougal J for further

consideration. The court concluded that the referees assessment was based on an

incorrect interpretation of the judgment of Giles J in Central Coast Leagues Ltd v

Gosford City Council (Unreported Giles CJ CommD, 9/6/98) (Central Coast Leagues

Ltd).61 In Central Coast Leagues Ltd62, the court refused to award damages based on the

cost of rectification as the work would not be carried out because other more extensive

work needed to be done to achieve compliance with local planning requirements. The

court considered this to be a supervening event that established that the plaintiff had not

been deprived of the benefit of performance of the contract and thus had not suffered a

compensable loss. In the case of Westpoint Management Ltd v Chocolate Factory

Apartments Ltd63 no such supervening event had occurred so the reasoning in Central

Coast Leagues Ltd64 did not apply. The court agreed with the referees finding that the

rectification of the skirting board was unnecessary and unreasonable citing the fact that

none of the purchasers had made any complaints in regards to the skirting board and that

carrying out the rectification work would inconvenience them considerably.

61 Ibid 78. 62 Giles CJ CommD, 9/6/98 63 (2007) NSWCA 253. 64 Giles CJ CommD, 9/6/98


An important principle established by the decision in Westpoint Management Ltd

v Chocolate Factory Apartments Ltd65 is that if a supervening event occurs which makes

reinstatement impossible then the measure of the building owners loss should be

assessed as the diminution in value. If no diminution in value has occurred the plaintiff

can only recover nominal damages. According to Giles JA with whom McColl and

Campbell JJA agreed:

if supervening events mean that the rectification work cannot be carried out, it can hardly be found that the rectification work is reasonable in order to achieve the contractual objective: achievement of the contractual objective is no longer relevant. If sale of the property to a contented purchaser means that the plaintiff did not think and the purchaser does not think the rectification work needs to be carried out, it may well be found to be unreasonable to carry out, the rectification work.66

This rationale was applied by the Queensland Court of Appeal in UI International

Pty Ltd v Interworks Architects Pty Ltd (2007) QCA 402. In this case the developer sued

the builder for approximately $34 Million to cover the cost of demolishing and rebuilding

a multipurpose residential, retail and office premises that they considered to be poorly

constructed. The developer had already subdivided the premises into several community

title schemes which had been on sold to various other parties. As a result of these sales

the developer was unable to unilaterally carry out the demolition and reinstatement work.

None of the other owners required or permitted the demolition and rectification work to

be done. The court considered that the sale of the units and lack of intention to rectify by

the subsequent owners was a supervening event which made demolition and rebuilding

an unreasonable course to adopt. In this instance the court was satisfied that the owner

could not tear down and re-construct the building and therefore should not be awarded

65 (2007) NSWCA 253 66 Westpoint Management Ltd v Chocolate Factory Apartments Ltd (2007) NSWCA 253, 61.


damages on this basis. As no diminution in value could be established by the sale of the

property the developer was only awarded nominal damages.

The Victorian Supreme Court decision in Alucraft Pty Ltd v Grocon Ltd (No 2)

(1996) 2 VR 386 is another example of where the owners intention not to rectify the

defective work limited the plaintiffs ability to claim the full cost of rectification. Grocon

was the head contractor on a project to construct an office building and car park in

Flinders Street, Melbourne. Alucraft entered into an agreement with Grocon to supply

and install the aluminum and steel windows for the building. It should be noted that

neither party in the dispute had any ownership or financial interest in the building. Upon

completion of the works defects were identified in the paint work of the steel surrounds

that supported the windows. The rectification of the defective paint work was not given a

high priority by the owner or contractors during the defects liability period. Prior to

issuing the final certificate the owner showed no concern that the defects had not been

rectified.

Four years later Alucraft claimed the balance outstanding under their subcontract.

Grocon issued a counter claim of $118,000 for the cost of rectifying the defective work

citing the Belgrove v Eldrige principle. This claim was based on the possibility that

Grocon would incur a loss if they were required by the owner to carry out the repairs to

the defective work done by Alucraft. Grocon also claimed that it had suffered a loss

because it had not received the benefit contracted for. Alucraft argued that neither the

owner nor Grocon had attempted to rectify the defective work or shown any intention to

do so in the past four years. It was also submitted that if Grocon were awarded the full

cost of rectification without being required to complete the repairs they would be placed

in a better financial position as a result of the breach.


In deciding the case Smith J considered that an assessment of damages in

accordance with the Belgrove v Eldridge67 principle would not pass the reasonableness

test because over four years had elapsed since all parties had become aware of the breach,

no work had been done to rectify the defects, the proprietor had accepted the work and

issued the final certificate and Grocon had no intention of carrying out the repairs. His

Honor concluded that the proper assessment of damages was by reference to the risk of

Grocon being required to complete the work. After a thorough review of the

correspondence between the parties in relation to the defects, Smith J concluded that the

risk of the owner seeking compensation from or rectification by Grocon was very

remote. His Honor then evaluated the two different proposals for carrying out the repairs

and decided that the appropriate cost of rectification was approximately $35,000. In

awarding damages to Grocon this sum was discounted to $5000 to reflect the low risk of

the loss actually being incurred.

VI ALTERNATIVE METHODS OF ASSESSING DAMAGES

The judgment in Alucraft Pty Ltd v Grocon Ltd (No 2)68 illustrates the difficulty

faced by the court in striking an appropriate balance when assessing damages so as not to

enrich the aggrieved party or award damages that are too low. In most cases an

assessment of damages based on the cost of rectification or diminution in value provides

a suitable remedy for the offending party's breach. Situations inevitably arise when the

cost of rectification is out of all proportion with the benefit to be obtained by the

owner or no diminution in value can be attributed to the defective work. Due to the

compensatory nature of contract damages the court has traditionally been prevented from

67 (1954) 90 CLR 613. 68 (1996) 2 VR 386.


awarding anything more than a nominal sum under these circumstances. Over the past

few decades there has been a growing recognition of a third intermediate measure of

damages based on loss of amenity.69 This method of assessing damages is linked to the

owner's expectation of contractual performance and enables the court to find a middle

ground between the cost of rectification which may be unreasonably large and the

diminution in value of the defective works which may be nil.

An assessment of contract damages based on loss of amenity was first introduced

by the House of Lord's in Ruxley Electronics & Construction Ltd v Forsyth70 to deal with

the owner's loss of enjoyment of a pool which had been constructed seven inches too

shallow. The court introduced this concept in order to place some value on the builder's

promise to construct the pool as specified even though no financial loss could be

attributed to the reduction in depth. According to Lord Mustill this represented the value

of the 'consumer surplus' a reasonable person would have attributed to the successful

performance of the contract.71 Although this sum is usually incapable of precise

calculation in terms of money, because it represents a personal, subjective and non-

financial gain, Lord Mustill held that the court should nevertheless recognise its existence

and compensate the promisee if the misperformance takes it away. His Honor was not

concerned by the fact that the amount could not be directly quantified stating that 'judges

are well accustomed to putting figures to intangibles' and that the assessment of damages

should not be so inflexible that the only remedy to unjustly awarding too little was to

unjustly award to much.72

69 Bates D, The Assessment of Contractual Damages for Defective Building Work in Australia: Is Loss of Amenity an Available Measure? (1999) 15 BCL 2. 70 (1996) 1 AC 344. 71 Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344, 361. 72 Ibid 361.


The judgment of Lord Lloyd adopted the more conservative view that loss of

amenity damages were based upon an exception to the general rule in Addis v

Gramophone Co Ltd (1909) AC 488 which established that contractual damages may not

be awarded for injured feelings.73 The distinguishing feature in Ruxley74 was that the

pool was constructed for the purpose of providing pleasure so the plaintiff was entitled to

recover damages for his disappointment. In reaching this conclusion Lord Lloyd

followed the precedent set in Jarvis v Swans Tours Ltd (1973) 1 All ER 71 which dealt

with a damages claim against a tour operator. In this case the court concluded that a tour

was effectively a contract to afford pleasure between the operator and the customer. If

the tour was unacceptable the customer would be entitled to claim damages against the

operator for a breach of contract. One common feature of the judgments of Lord Mustill

and Lord Loyd is that both judges referred to loss of amenity damages as being primarily

applicable to small building works on residential property and not complex commercial

agreements between sophisticated parties.75

Critics of the decision in Ruxley76 argue that an assessment of damages based

upon the idea of 'a consumer surplus' effectively introduces a form of restitutionary

damages into contractual disputes that will lead to greater uncertainty and

unpredictability in the assessment of damages.77 By applying loss of amenity damages

the House of Lords created an artificial distinction between different types of builiding

work based on whether or not it is used to provide pleasure. For example loss of amenity

damages may be recoverable for a defective pool but not an imperfect fence as this has no 73 Ibid 373. 74 (1996) 1 AC 344. 75 Ibid 359. 76 (1996) 1 AC 344. 77 Miller D, above n 43.


pleasureable quality.78 Similary an owner may be able to recover loss of amenity

damages for defective work at their domestic residence but not at their investment or

commercial property. It is an underlying principle in the law of contracts that the owner

is entitled to work which conforms to the plans and specifications. If a contractor

disagrees with the owner's requirements they should raise their concerns during the

tender phase. Skilled contractors operating in their area of expertise should not need the

courts to save them from the obligation of rectifying their defective work. Such an

approach would protect inefficient and incompetent builders from the consequences of

their actions.

Within the Australian legal system loss of amenity damages have only been

awarded in a small number of lower court cases. In D. Galambos & Sons Pty Ltd v

McIntyre (1974) 5 ACTR 10 Woodward J found that the reduced height of a garage

ceiling diminished the owner's enjoyment of their house but did not result in any loss of

value to the property. His Honor was not prepared to the find that the owners had

suffered a compensable financial loss and instead awarded loss of amenity

damages. More recently in Coshott v Fewings Joinery Pty Ltd (Unreported Gleeson CJ,

Priestley and Beazley JJA, 15 July 1996) the trial judge awarded the plaintiff $5 as

compensation for the inconvenience they had suffered due to defective work. It remains

to be seen whether loss of amenity damages will be adopted by the High Court in

Australia. Although such an approach has the potential to provide a more equitable

remedy in situations where the cost of rectification is unreasonable and the diminution in

value is nil there is scarce authority to support such a judgment in cases outside the realm

of domestic building contracts. 78 Bates D, above n 70.


Another approach to reducing contract damages that has yet to gain widespread

application in Australian defective works cases is the concept of a 'betterment discount' .

The purpose of a betterment discount is to take into consideration the depreciation of the

works due to wear and tear prior to the need for rectification. This issue was considered

by the High Court of Australia in the case of Tabcorp Holdings Ltd v Bowen

Investments79 as a way of reducing the rectification damages for a building foyer that

would not be refurbished by the owner for at least another five years. By this stage the

foyer would have had between fifteen to twenty years wear and tear. In the end no issues

were raised by the tenant in regards to this so the discount was not applied.

It is proposed that any request made by the tenant for the application of a

betterment discount would more than likely have been unsuccessful. A similar issue was

considered by the New South Wales Court of Appeal in Hyder Consulting (Australia) Pty

Ltd v Wilh Wilhelmsen Agency Pty Ltd80. This case dealt with a section of pavement that

had a design life of twenty years but had failed after four. Although all three Court of

Appeal judges agreed that the owner should be awarded the full cost of rectification

Meagher JA considered that this amount should be reduced by 20% to take into

consideration that the pavement was four years old by the time the defects were

identified. His Honor held that by receiving a brand new pavement in place of a four

year old pavement the owner was receiving a windfall that he did not deserve. According

to Sheller JA with whom Giles JA agreed:

The plaintiff had no choice but to replace the defective pavement with new pavement. It could not do so by paying less for a four year old pavement. There was no evidence of any advantage to the plaintiff beyond the speculative proposition that the new pavement might last longer than the old one would have, if it had been properly laid.

79 (2009) HCA 8. 80 (2002) 18 BCL 122; (2001) NSWCA 313.


It is likely that a similar line or reasoning would have been followed by the High

Court in Tabcorp81 when considering whether or not a betterment discount should be

awarded. If a betterment discount was applied by the High Court it would more than

likely have been calculated based on an assessment of the tenant's loss on the day of the

breach plus interest or by estimating the future cost of the rectification work and

discounting this amount to net present value rather than by applying a 'crude percentage

discount'.82 Another method which could be used to calculate damages taking into

consideration betterment would be to apply the formula detailed in Waddams, The Law of

Damages (1983) and referred to with approval by Sheller JA in Hyder Consulting. 83

This approach attempts to calculate the loss imposed on the plaintiff as a result of them

having to spend money they would otherwise not have spent if it were not for the

defective work. For example in the case of the defective pavement the plaintiff's

discounted loss could be calculated based on the additional costs they have incurred by

having to replace the pavement after four years instead of after twenty.

81 Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) HCA 8. 82 Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd (2002) 18 BCL 122; (2001) NSWCA 313 ,55. 83 Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd (2002) 18 BCL 122; (2001) NSWCA 313.


VI CONCLUSION

It is a fundamental principle of law that contracts should be performed. In this

regard the High Court decision in Bellgrove v Eldridge84 remains binding precedent for

the assessment of contract damages at common law for defective work. The line of cases

that have followed this landmark decision have confirmed the ruling principle that the

plaintiffs loss for a breach of contract is prima facie the cost of rectifying the defective

works. This assessment is subject to the qualification that not only must the rectification

work be necessary to produce conformity but that it must also be a reasonable course to

adopt. In situations where the cost of rectification is considered to be unnecessary or

unreasonable, damages should be awarded based on the diminution in value. If the

diminution in value is nil then there is some scope for the court to award damages for loss

of amenity particularly in situations where the purpose of the works is to provide

pleasure. Within the Australian legal system there is scarce authority to indicate the

widespread acceptance of loss of amenity damages as an intermediate measure between

the cost of rectification and nil diminution in value.

Over the years a number of cases have further qualified the Belgrove v Eldridge85

principle. Scott Carver Pty Ltd v SAS Trustee Corporation86, Director of War Service

Homes v Harris87 and De Cesare v Deluxe Motors Pty Ltd88 have established that

although a plaintiffs intention to rectify the defective work may be one factor to consider

when determining whether or not the cost of rectification is reasonable it ceases to be

84 (1954) 90 CLR 613. 85 (1954) 90 CLR 613. 86 (2005) NSWCA 462. 87 (1968) Qd R 275. 88 (1997) 13 BCL 136.


relevant once a compensable loss has been established. Similarly the fact that the

defective works has been subsequently sold for no apparent diminution in value does not

preclude the plaintiff from recovering the cost of bringing about compliance with the

contract.

Recent decisions in Central Coast Leagues Ltd v Gosford City Council89,

Westpoint Management Ltd v Chocolate Factory Apartments Ltd90 and UI International

Pty Ltd v Interworks Architects Pty Ltd91 have indicated that the Belgrove v Eldridge

principle may be displaced by certain supervening events. In the case of UI International

Pty Ltd v Interworks Architects Pty Ltd92 the sale of a building and the new owners

intention not to rectify was considered to be one such supervening event which precluded

the owner from claiming the cost of demolition and reconstruction. It is still unclear what

recognition if any the High Court will give to the rationale that Belgrove v Eldridge93 can

be displaced by supervening events that show with substantial certainty that rectification

work will not take place. Future arguments against an assessment of damages in

accordance with Belgrove v Eldridge94 will most likely be framed with the aim of

extending the scope of what the court considers to be a supervening event. It is also

likely that defendants will attempt to discount the full cost of rectification by raising the

issue of betterment and unjust enrichment against the plaintiff. Whether or not this

approach is capable of restricting the application of the Belgrove v Eldridge principle

remains to be seen.

89 (Giles CJ CommD, 9/6/98) 90 (2007) NSWCA 253. 91 (2007) QCA 402. 92 (2007) QCA 402. 93 (1954) 90 CLR 613. 94 (1954) 90 CLR 613.


BIBLIOGRAPHY

1. Articles / Books / Reports

Bailey IH and Bell M, Understanding Australian construction contracts (2008). Bates D, The Assessment of Contractual Damages for Defective Building Work in Australia: Is Loss of Amenity an Available Measure? (1999) 15 BCL 2. Cremean DJ, Shnookal BA and Whitten MH, Brooking on building contracts: the law and practice relating to building and engineering agreements (4th ed, 2004). Dorter J and Sharkey J, Building and Construction Contracts in Australia (Thomson LegalOnline). Jones D, Building and Construction Claims and Disputes (1996). Miller D, Damages for Defective Works: Reasonableness and Restitution (1995) 11 BCL 348. Thomas B, The assessment of damages for breach of contract for defective building work (2004) 20 BCL 230. 2. Case Law Addis v Gramophone Co Ltd (1909) AC 488. Alucraft Pty Ltd v Grocon Ltd (No 2) (1996) 2 VR 386. Bellgrove v Eldridge (1954) 90 CLR 613. Brewarrina Shire Council v Beckhaus Civil Pty Ltd & Anor (2006) NSWCA 361. Coshott v Fewings Joinery Pty Ltd (Unreported Gleeson CJ, Priestley and Beazley JJA, 15 July 1996). D Galambos & Sons Pty Ltd v McIntyre (1974) 5 ACTR 10. De Cesare v Deluxe Motors Pty Ltd (1997) 13 BCL 136. Director of War Service Homes v Harris (1968) Qd R 275. Central Coast Leagues Ltd v Gosford City Council (Unreported Giles CJ CommD, 9/6/98)


Hyder Consulting (Australia) Pty Ltd v Wilh Wilhelmsen Agency Pty Ltd (2002) 18 BCL 122; (2001) NSWCA 313. J-Corp Ltd v Gilmour (2005) WASCA 136. Jarvis v Swans Tours Ltd (1973) 1 All ER 71. Joyner v Weeks (1891) 2QB 31. Kirkby & Anor v Coote & Ors (2006) QCA 61. Robinson v Harman (1848) I Ex 850. Roluke Pty Ltd & Anor v Lamaro Consultants Pty Ltd & Anor (2008) NSWCA 323. Ruxley Electronics & Construction Ltd v Forsyth (1996) 1 AC 344. Scott Carver Pty Ltd v SAS Trustee Corporation (2005) NSWCA 462. Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) HCA 8. UI International P/L v Interworks Architects P/L & Ors (2007) QCA 402. Westpoint Management Ltd v Chocolate Factory Apartments Ltd (2007) NSWCA 253. 4. Other Sources

Christopoulous N and Fan J, When can rectification costs be recovered as damages for breach of contract? High Court clarifies (2009) Clayton Utz Project Insights at 16 May 2009. Graeme S Clarke SC, Tabcorp Holdings Ltd v Bowen Investments Pty Ltd: Contract breakers beware! (2009) List A Barristers at 16 May 2009. Jim Doyle, Defective Work Claims (2005) Doyles Construction Lawyers at 16 May 2009. Minter Ellison Alert, High Court confirms damages award on unauthorised alterations to leased premises (2009) Minter Ellison Lawyers at 16 May 2009.

Bellgrove v Eldridge - Michael Filippich

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