Duty to mitigate loss for defective building work

The Owners – Strata Plan No 76674 v Di Blasio Constructions Pty Ltd [2014] NSWSC 1067 at [42] to [47]

Relevant legal principles

Generally speaking, a person who suffers loss as a consequence of a breach of contract is required to act reasonably in relation to that loss in order for the loss to be recoverable. An important aspect of this general principle is that the party who has suffered a loss is under a duty to mitigate its loss. Sometimes the use of the word “duty” in this context is criticised, since there is no requirement that the plaintiff act in a particular way and no requirement that the plaintiff minimise its loss: see, eg, J Carter, E Peden and GJ Tolhurst, Contract Law in Australia, (5th ed, 2007, LexisNexis) at [35-35]. Rather, the principle is that the plaintiff is not entitled to recover losses attributable to its own unreasonable conduct. As O’Connor J explained in Hasell v Bagot, Shakes & Lewis Ltd [1911] HCA 62; (1911) 13 CLR 374 at 388:

[O]ne of the principles on which damages are assessed [is] that a party to an agreement suffering injury from the other party’s breach of its terms is bound to exercise reasonable care in mitigating the injurious consequences of the breach, and is not entitled to recover from the party in default any damage which the exercise of reasonable care on his part would have prevented from arising.

The duty to mitigate, however, is not the only example of the application of the general principle. Another is the principle that a plaintiff whose property is damaged or defective as a consequence of the defendant’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 that it is unreasonable to insist on reinstatement: Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 at 618-9.
In the case of building contracts, it is also generally accepted that the owner must give the builder a reasonable opportunity to rectify any defects. Often, of course, the building contract itself requires the owner to repair defects or sets out a procedure by which defects are to be made good: see, eg, Bitannia Pty Ltd v Parkline Constructions Pty Ltd [2009] NSWSC 1302; (2010) 26 BCL 335. But, even if it does not, the owner is required to give the builder an opportunity to minimise the damages it must pay by rectifying the defects, except where its refusal to give the builder that opportunity is reasonable or where the builder has repudiated the contract by refusing to conduct any repairs: see J Bailey, Construction Law, (Vol II, 2011, Informa Law) at [14.109]; Cassidy v Engwirda Construction Co (No 2) [1968] Qd R 159 (reversed on other grounds in Cassidy v Engwirda Construction Co (No 2) [1968] QWN 47 (HC); (1968) 42 ALJR 168). That obligation may be an aspect of the duty to mitigate, since it may be less expensive for the builder rather than a third party to rectify the defects, particularly if the builder is still on site. But the obligation is not simply an aspect of the duty to mitigate. The cost to the builder of undertaking the repairs is likely to be less than the amount that a third party would charge the owner for the same work. In that case, the owner is not mitigating its loss, but rather the builder’s damages.
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: see A Chambers, Hudson’s Building and Engineering Contracts, (12th ed, 2010, Sweet & Maxwell) at [4-144]; Eribo v Odinaiya [2010] EWHC 301 (TCC) at [70].
It is for the defendant to prove that the plaintiff has acted unreasonably. It is not for the plaintiff to prove that it acted reasonably: TC Industrial Plant Pty Ltd v Robert’s Queensland Pty Ltd [1963] HCA 57; (1963) 180 CLR 130 at 138; Burns v MAN Automotive (Aust) Pty Ltd [1986] HCA 81; (1986) 161 CLR 653 at 673 per Brennan J; TCN Channel 9 Pty Ltd v Hayden Enterprises Pty Ltd (1989) 16 NSWLR 130 at 158 per Hope JA (with whom Priestley and Meagher JJA agreed); Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [187] per Giles JA (with whom Handley and Stein JJA agreed).
The 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 a plaintiff has failed to mitigate its loss, or failed to act reasonably in some other respect, the plaintiff is entitled to have that question tested in court; and the mere fact that it does so is not itself evidence that it has failed to act reasonably. As Oliver J explained in Radford v de Froberville [1978] 1 All ER 33; [1977] 1 WLR 1262 at 1287E-F:

[O]nce proceedings have been commenced and are defended, I do not think that the defendant can complain that it is unreasonable for the plaintiff to delay carrying out the work for himself before the damages have been assessed, more particularly where his right to any damages at all is being contested, for he may never recoup the cost. If, therefore, the proceedings are conducted with due expedition, there seems to me to be no injustice if, by reason of the time that it takes for them to come to trial, the result of inflation is to increase the pecuniary amount of the defendant’s ultimate liability…