Damages

The purpose of a damages award

The way in which damages assessment is approached is referred to as the 'measure of damages'. This can vary depending on the legal basis of the claim. In a claim based upon breach of contract the aim of the courts is to place the party who has suffered a loss in the same situation as if the contract had been performed, in so far as monetary compensation can achieve this outcome.

In tort-based claims (eg negligence) damages are assessed on the principle that the wronged party is to be put into the position that they would not have been in had the negligence not occurred.

Sometimes the same facts can give rise to several different legal claims. However, a person can only be compensated once for the same loss, no matter how many different legal avenues are available. Often the different approaches to damages will have no practical consequences. However, in some situations, fact assessment on different bases will yield different results.

Back to top

How damages are measured

The award of damages is underpinned by the principle that damages are for compensation. In relation to a contract claim it has been said that:

the object of the award is to compensate the plaintiff rather than to penalise the defendant. This is true even if the breach is intentional or accompanied by an element of malice, the guiding principle being that the measurement of damages is not affected by considerations such as the motive or intention of the defendant breaching the contract.

Damages will not be given to compensate for loss which is regarded as 'too remote' at law or are unreasonable.

Whether or not a particular claim is too remote to be recoverable will depend upon whether the loss was a foreseeable consequence of the defendant's wrong. In many cases foreseeable losses will include amounts for consequential financial loss such as the loss of profit, or costs associated with the loss of use of a building, in addition to the direct costs of remedying any defects in the building itself.

Whether the rectification costs are unreasonable is dependent on the facts of the case.

Back to top

Case law

Case law - Bellgrove v Eldridge

The correct approach to the assessment of damages was discussed by the High Court in Bellgrove v Eldridge (1954, 90 CLR 613). This case involved an action against a builder for breach of contract. The builder had departed from the specifications and in doing so had built a house with defective foundations, which was unstable. The main question in the case was whether the builder should pay damages on the basis of the difference between the value of the house in its defective state and the value if constructed in accordance with the specifications, or the cost involved in remedial work to make the building comply with the plan and specifications.

The High Court held that the measure of damages was the cost of making the work or building conform to the contract less any part of the contract price remaining unpaid. In addition, the owner would be entitled to compensation for any consequential, but foreseeable consequences of the breach which caused the defects, eg the cost of alternative accommodation.

The rule is subject to the qualification that the work is necessary to produce conformity with the plans and that it must be a reasonable course to adopt. If remedial work, though necessary to produce conformity with the plans, would not constitute a reasonable method of dealing with the situation, then the true measure of the building owner's loss would be the diminution in value or loss of amenity, if any, produced by the departure from the plans and specifications or by the defective workmanship or materials. In Bellgrove, the Court gives as an example of an 'unreasonable course' demolishing a (structurally sound) house in order to replace bricks used in the exterior walls.

The question of what is 'reasonable and necessary' remedial work is a question of fact, and is determined on a case-by-case basis.

On the facts of Bellgrove, the High Court found that because the faulty construction of the foundations resulted in the grave instability of the building, the work reasonable and necessary to remedy the defects was in effect demolition and re-erection of the whole building.

The reasonableness of the work can be related to the probability of the loss in this case, structural failure, occurring.

Case law - Stone v Chappell

In Stone v Chappell (2017 ASACFC 72), Mr and Mrs Stone bought an apartment. They instructed the architect that they wanted a uniform ceiling height of 2700 mm and the drawings provided for this.

The ceilings as constructed were 40mm below the specified height and Mr and Mrs Stone sought damages of $331,188 to rectify the defect.

The trial judge held the ceiling height was lower than contracted for but rejected the damages claim on the basis that the ceiling as constructed was substantially in accordance with the contract and that it would be unreasonable to carry out the rectification work contemplated.

Instead, Mr and Mrs Stone were awarded $30,000 for loss of amenity.

Case law - Alucraft Pty Ltd v Grocon

In Alucraft Pty Ltd v Grocon (1996, 2 VR 382) a subcontractor had performed defective work for a contractor. The contractor had not paid money owing under the subcontract. The principal had paid the contractor in full and it was extremely unlikely that the principal would call upon the contractor to remedy the defects. The subcontractor sued for the price unpaid on the subcontract and the contractor counter-claimed for the loss occasioned by the defective works. The court found that the contractor was entitled to succeed on its counterclaim and that it would cost $35,000 to remedy the defects. However, the damages were assessed at $5000 to take account of the fact that it was very unlikely that the contractor would ever be called upon to make good the defects.

Case law - Miller v Platinum Constructions Vic Pty Ltd

In Miller v Platinum Constructions Vic Pty Ltd (Building and Property) (2023 VCAT 510), the Tribunal Member said that even if he had found a breach of the contract relating to a scope of works, the fact that there was no evidence:

1. to demonstrate the functionality or value of the roof as fixed had been compromised
2. to suggest that the contractual performance objective of the roof has not been met
3. that any defects can be observed from a normal viewing position

it was not reasonable to award damages based on the cost of replacement of the upper roof.

Cost of rectification is also relevant in cases based upon negligence.

Case law - Carosella v Ginos and Gilbert Pty Ltd and others

An example of assessment of damages in a case based upon the negligence of the builder concerning defective foundations is Carosella v Ginos and Gilbert Pty Ltd and others (1981, 27 SASR 515).

In Carosella a house was to be built on a soil type described as 'black earth', known to be unstable and subject to large movements when its moisture content changed. The consulting engineer was asked to 'consider and recommend footings', for the building in question. The consulting engineer prepared a 'preliminary report' as distinct from a 'construction plan', and advocated a 'deep beam' type footing, which was found to be unsuitable for any solid brick house even if it were articulated.

The house erected by the builder was non articulated, solid brick and cracked excessively within twelve months. The consulting engineer did not appear to know what material the builder was intending to use, did not ask, and did not qualify his plan as is recommended in the guidelines for professional engineers set out by the Institute of Engineers Australia.

The purchasers of the house brought an action against the builder, the consulting engineer and the local council.

Four options were presented to the court as to rectification and for consideration as to damages:

• Option 1 was to keep the existing footings and underpin them with reinforced concrete piers going to bedrock. Existing cracks would then be repaired. The cost of this procedure was considered 'completely uneconomic'.
• Option 2 was to demolish the house and rebuild on suitable foundations with some degree of articulation. This option would give the plaintiffs what they thought they were getting in the first place.
• Option 3 was to remove internal brick walls, replace them with timber-framed plaster-sheet walls and attach plaster sheeting to timber frames on the inside of external walls such that some degree of movement would not be visible.
• Option 4 was to sell the house with its faults and be compensated for the loss based upon a reduction in value.

The court decided that the plaintiffs' damages should be assessed on the basis of demolition and rebuilding. Although this was a case based upon negligence (ie the legal basis of the claim was tort not contract) the court relied upon the approach to assessment of damages taken by the High Court in Bellgrove v Eldridge, illustrating that there can be little practical difference in the approach to assessment of damages, notwithstanding the legal basis of the claim.

Back to top

Summary

When a court assesses damages for loss suffered by a building owner arising from a building contract the starting point will be the cost involved in rectifying the works. Only in circumstances where it would not be reasonable to award compensation based upon the cost of rectification will other approaches, such as the reduction in value of the asset or loss of amenity, be used. What is reasonable will depend upon the facts of each particular case.

A recommendation for future engagements is to consider negotiating a ’Limitation of liability’ cap clause in your contracts. For example, liability for contractual or tortious loss can be capped at a percentage of the amount actually paid to you. Refer Acumen note Limitation of liability.

Back to top