When will rectification damages not be awarded?

Where a builder constructing a house builds a garage which does not comply with the contract should the builder be required to pay damages equivalent to the cost of demolishing and rebuilding the house if that were the only way to rectify the faulty garage? Watson J in Stanley v EWH Construction West Pty Ltd [2025] VSC 699 had to resolve this problem.

The prima facie rule is that the wronged party is entitled to performance-based damages and therefore entitled to the amount required to rectify the defect which in Stanley meant demolishing and rebuilding the house.

The contract term breached was a requirement that the garage floor be level or nearly level with the footpath at the front of the house. The builder was aware that reason for this was to enable the home owners to reverse their caravan down the driveway, through the garage and into the backyard.

Watson J upheld VCAT’s decision not to require the builder to pay damages equivalent to the cost of demolishing and rebuilding the house but varied the Tribunal’s order concerning damages. Before reaching his decision, His Honour considered leading cases concerning when it would be unreasonable to require a wrongdoer to pay damages equivalent to rectification.

In Bellgrove v Eldridge (1954) 90 CLR 613 the High Court held (at 617) that:

“the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which formed part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her….her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so to give her the equivalent of a building on her land which is substantially in accordance with the contract.”

(emphasis added)

But the Court in Bellgrove noted (at 618) that the prima facie rule was subject to a qualification that “not only must be the work be undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt” (emphasis added).  The Court gave an example of where compliance with a contract may be unreasonable: where a contract called for the erection of a house with cement rendered walls of second-hand bricks and the builder used new bricks of first quality.

Bellgrove was considered by the High Court in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 where the Court discussed the qualification that the work undertaken must not only be necessary to produce conformity with the contract but that it must also be a necessary course to adopt. The plurality quoted the example of the second-hand bricks being replaced by new bricks and said (at 288, [17]):

“That tends to indicate that the test of ‘unreasonableness’ is only to be satisfied by fairly exceptional circumstances. The example given by the Court aligns closely with what Oliver J said in Radford v De Froberville, that is, that the diminution in value measure of damages will only apply where the innocent party is ‘merely using a technical breach to secure an uncovenanted profit’”.

(emphasis added)

The reference in Tabcorp to using a technical breach to secure an uncovenanted profit is not an exhaustive description of what will constitute exceptional circumstances: see The Owners of Strata Plan No 97315 v Icon Co (NSW) Pty Ltd [2023] NSWCA 303, [12].

In Stone v Chappel (2017) SASR 165, a decision of the Full Court of the South Australian Supreme Court, Kourakis CJ (at 182, [55]) listed eight relevant considerations in determining whether it was reasonable to award rectification damages:

(1) the degree of departure from the contractual stipulation;

(2) the adverse effect of the departure on the functional utility, amenity and aesthetic appearance of the building;

(3) the reasons, objectively ascertained and commonly known, for which the innocent party made the stipulation which was breached;

(4) the practical feasibility of rectifying the work, including the effects on third parties of attempting to do so;

(5) whether or not the innocent party intends to carry out the rectification work;

(6) the absolute cost of the rectification work and the disproportion between that cost and

• the value of the building and contract price;
• the diminution in commercial value of the building;
• the effect of the departure on the functional utility, amenity and aesthetic appearance of the building;

(7) the nature of the wrongdoer’s fault for the defect; and

(8) the public interest in reducing economic waste.

In Stanley, Watson J applied considerations (1) to (7) in Kourakis CJ’s list and held (at [86]) that “most of the factors identified by Kourakis CJ point to the appropriateness of rectification as a remedy”. Despite that finding, His Honour (at [88]) said that he was “satisfied that that the degree of disproportion between the cost of rectification work and the..[home owners’] interest in the performance of the contractual stipulation is such as to make that remedy unreasonable in the circumstances”. It was also relevant that there was no suggestion of a structural defect in the house or that the driveway was not adequate for vehicles other than caravans.

Watson J agreed with VCAT that the home owners were entitled to damages for loss of amenity and held that the homeowners were entitled to damages for physical inconvenience. The loss of amenity related to having to store the caravan elsewhere.

This post orginally appeared on roberthaykc.blog