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14 May 2020

A riverside dream home produces a nightmare dispute

By Frazer Moss, Courtney Prior and Dr Matthew Bell

A recent decision from South Australia provides useful guidance on damages for defective construction work, whether representations as to competence might be misleading and deceptive, and the ability to contract out of the prevention principle.

In Tincknell v Duthy Homes Pty Ltd [2020] SASCFC 24 the Full Court of the South Australian Supreme Court delivered a complex and lengthy judgment on myriad defects-related issues relating to the construction of a residential property on the Murray River.

The Tincknells (Owners) entered in to a contract with Duthy Homes (Builder) for the construction of a "very large house over three levels". The contract value was $2.3M and the amount in dispute (initially generated by the Owners’ refusal to pay the Builder's final payment claim) was $271,434.65 plus interest.

The judgment is facts-heavy with duelling views (including from experts) about technical and evidential matters in relation to defects in the waterproofing, termite protection and tiling on the external balcony. It does, however, offer insights into several aspects of ongoing interest in construction law, including:

  • The measure of damages available in contract for defects (application of Bellgrove v Eldridge (1954) 90 CLR 613 in the light of the SA Full Court’s decision in Stone v Chappel (2017) 128 SASR 165), and in particular the relevance of disproportion of benefit to the cost of rectification;
  • The (non) availability of damages for distress and disappointment under the Trade Practices Act 1974 (the contract was signed in 2010 so the Australian Consumer Law did not apply);
  • What is on its face a very strong statement (especially at intermediate appellate court level) about the impact of contracts upon the "prevention principle".

Justice Parker wrote the primary judgment with short concurring judgments from Justices Peek and Doyle.

Damages for defective work

The issue of the applicable measure of damages in contract arose primarily in relation to an alleged waterproofing defect (whether there had in fact been any water ingress was itself in issue, as was the level of involvement which the Owners had in devising the waterproofing solution). At trial, the Judge considered expert evidence and found that the cost of repair was $166K and dismissed the Owners’ claim for $198,913 because of disproportionality between that cost and the benefit it would achieve. The Owners argued that consideration must be given to the contract price of $2.3 million in assessing the reasonableness of compensation.

Justice Parker reviewed the authorities, including Bellgrove and Stone. In the latter case, the SA Full Court – including Justice Doyle, who concurred with Justice Parker here – set out various factors which could be taken into account in relation to the "reasonableness" limb of Bellgrove, including proportionality. Justice Parker confirmed that proportionality relates to cost of rectification as against the benefit to be obtained, rather than the cost compared to the overall contract value. He therefore dismissed the Owners’ claim as the proposed remedial works were not reasonable given the risk of water damage was insubstantial.

Having said that, he suggested (consistent with the alternative measure referred to in Bellgrove) that, had the Owners framed their damages claim by reference to diminution in value, they may have been compensated because they would need to disclose the possible waterproofing issue upon sale of the house.

For similar reasons of (dis)proportionality of cost to benefit, the Court dismissed the Owners’ rectification claim in relation to termite protection.

While these findings seem unremarkable in the light of Stone v Chappel, they do reinforce the view that the Australian and English positions on the importance of proportionality of benefit (the latter reflected in the famous "swimming pool case", Ruxley Electronics and Construction Ltd v Forsyth [1996] AC 344) are closer than may have been thought after the Australian High Court’s reinforcement of the primacy of the rectification measure in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272.

Damages for distress and disappointment under the TPA

The Owners’ claim was under the misleading and deceptive conduct provision (section 52) of the TPA (now, section 18 of the ACL). They argued that the Builder had represented that it had “the necessary skill and expertise to carry out the works on the site and the owners have relied upon such representations in entering into the contract” under a recital to the building contract.

Justice Parker agreed with the Owners, based on the NSW Court of Appeal decision in Kavanagh v Blissett [2001] NSWCA 79, that the trial Judge had erred in finding that a misleading and deceptive conduct claim, in the context of defective work and delay for residential building work, was not recognised in law. However, while Justice Parker agreed that there were problems with some of the Builder's work, His Honour was not prepared to accept that they were such as to show incompetence at a level which would support a finding that the Builder's representation as to skill and expertise was misleading and deceptive at the time it was made.

He also found that, while the test for whether a representation is misleading and deceptive is generally objective, Mr Tincknell had previously inspected work performed by the Builder on other jobs and found that his quality of work was impressive and competent. This subjective observation was significant to the assessment of the accuracy of the representation in the recital to the building contract because Mr Tincknell possessed special knowledge as an experienced builder himself when inspecting the previous works.

Prevention principle

In response to a claim by the Owners for liquidated damages, the Builder argued that the Owners had contributed to some of the delays to practical completion from 20 October 2011 (date for practical completion) to 26 February 2013 (date of practical completion), and by operation of the prevention principle the Owners were not entitled to liquidated damages despite there being an extensions of time clause. Justice Parker said that he accepted

"the correctness of the statement of principle by Blue J in Built Environs that where a building contract confers upon a contractor a right to an extension of time for delays caused by the owner’s breach, the prevention principle has no operation. Thus, because the Builder failed to protect itself by the exercise of its right to seek an extension, it is prima facie liable for the losses arising from the delay in practical completion… until practical completion".

The Court’s endorsement of the trial decision in Built Environs Pty Ltd v Tali Engineering Pty Ltd [2013] SASC 84 is significant, providing further intermediate appellate court recognition (alongside Probuild Constructions (Aust) Pty Ltd v DDI Group Pty Ltd [2017] NSWCA 151) on the ability to "contract out" of the effect of the prevention principle.

Is this the end of the road (or river) for this case?

Though the Court adjusted certain aspects of the trial decision, including the costs award which was a major part of the judgment, the case does not result in there being a clear winner. It will be of interest to see whether a Special Leave application is made to the High Court, raising the prospect of further apex court guidance about:

  • defective work damages;
  • the prevention principle; and
  • the availability of misleading and deceptive conduct claims in the residential building context. 

The case was handed down before the High Court’s decision in Moore v Scenic Tours Pty Ltd [2020] HCA 17; as that case apparently opens the way to a broader range of claims in relation to the ACL consumer warranties provisions, it will be of interest to see whether it has an impact on home building owners’ willingness to make claims for misleading and deceptive conduct.

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Clayton Utz communications are intended to provide commentary and general information. They should not be relied upon as legal advice. Formal legal advice should be sought in particular transactions or on matters of interest arising from this communication. Persons listed may not be admitted in all States and Territories.