Mitigation during rectification works – not necessarily unreasonable to refuse builder access to correct defects

Demonstrating that an original builder was permitted the opportunity to correct defects (and that they failed to do so) is often a key element of successfully establishing an entitlement to recover rectification costs.

Failure to do so can result in a substantial reduction to any damages awarded. This reduction is grounded on principles of mitigation: an aggrieved party cannot recover as damages additional costs that were unreasonably incurred.

In the case of defect rectification, these principles may apply to the additional costs incurred by an owner or main contractor in engaging a replacement builder to correct defects. The argument is that the owner or main contractor could have avoided such additional costs if it had given the original builder the opportunity to perform the corrective works free of charge.

But what if an owner or main contractor has lost confidence in the original builder's ability or willingness to correct defects? Is it unreasonable to incur additional costs by hiring a replacement builder?

These questions were considered in Ceerose Pty Ltd v The Owners – Strata Plan No 89074 [2025] NSWCA 235 in which the court held that there is no positive duty to allow a builder the opportunity to rectify defects. Instead, the onus was on the builder to demonstrate that the owner's decision to appoint a replacement builder was unreasonable. To fully understand this decision requires consideration of the relevant context.

Commercial context

The case involved a dispute between the Owners Corporation and the Developers of "The Eliza", a 16 storey residential apartment building located in Sydney's CBD.

Following completion in 2014, a number of disputes arose regarding alleged defects. In October 2018, the parties agreed ‘in principle’ to terms which included the performance of certain corrective works by the Developer though no final agreement had been reached more than a year later. However, negotiations stalled and the matter proceeded to a formal dispute.

Through various pieces of correspondence between 2018 and 2019, the Owners Corporation raised concerns about the Developer's ability and willingness to carry out the required corrective works. This culminated in a refusal by the Owners Corporation to allow the Developers access to perform corrective works.

The Developer argued that this refusal by the Owners Corporation created a presumption that it had failed to mitigate its loss. According to the Developer, this meant that the entirety of the defect rectification costs claimed by the Owners Corporation should be disregarded.

No positive duty to allow builders opportunity to correct defects

The NSW Court of Appeal held that:

• any assessment of whether an owner has failed to mitigate its loss requires consideration of whether the owner acted unreasonably; and

• there is no presumption that an owner's refusal to provide a builder with the opportunity to rectify defects is unreasonable.

It held that there is no invariable requirement for an owner to give a builder the opportunity to correct defects. Instead, the onus lies with the builder to establish that failing to do so is unreasonable taking into account the relevant context.

In this case, the builder had failed to do so. Relevant considerations in this case included that:

• minutes of committee meetings evidenced that the owners considered that the builder was stalling the rectification of urgent building defects and were losing faith in the builder undertaking the remaining defect rectification works;

• the Owners Corporation had expressed its concerns about the Developer's ability and willingness to correct the defects in earlier correspondence; and

• the relationship appears to have broken down following extended negotiations in relation to the performance of certain rectification works by the builder which never eventuated.

This result is that there was no basis to reduce the Owners Corporation's damages claim because it was not unreasonable to incur additional costs in engaging another builder to rectify defects.