What are your rights if your builder’s work is defective or too slow?

This is an all-too-common occurrence that the owners (of buildings), builders, courts and tribunals of NSW have been dealing with for years. As a result, a body of legal principles (precedents) has developed to guide those who deal with these issues. This article summarises some of those principles. It is drafted from an owner’s perspective.

Your general rights and obligations 

Building work that does not comply with the contract is defective. Defective work is a breach of the contract and, in the absence of contractual provisions to the contrary, gives you the entitlement to rectify the defective work and claim damages against the builder.

Where defects are discovered during the work’s progress, standard form contracts typically provide a process by which the builder can be directed to rectify the work.

In short, defects are a breach of contract, entitling the owner to damages (compensation). 

How is damage (compensation) assessed?

The general measure of damages is the amount, so far as money can do, necessary to put you in the position you would have been in had the contract been performed. The fact that the contract has since been terminated, does not extinguish this right. Assessing damages requires the court to compare your actual position having sustained loss due to the breach, to what your position would likely have been had the breach not occurred.

The ruling principle is that contractual damages are assessed at the date of the breach, other than in exceptional circumstances. This principle ensures that whatever happens after the breach, these developments have no bearing on your entitlement and the builder’s liability.  However, if the court considers it more appropriate to regard subsequent events, if to do so will make the damages awarded more accurate, then the court may choose to do so. The court must do its best to assess damages notwithstanding the difficulties involved. Estimation, if not guesswork, may be necessary in assessing the damages to be awarded.

Is the builder liable for the cost of completing work?

Whether the builder is liable for the cost to complete the building works depends on whether the builder repudiated the building contract, entitling the owner to terminate the contract. I explain what repudiation is later in this article.

Where the builder repudiates the contact and that the owner accepts repudiation, the owner is entitled to damages flowing from the breach. Those damages include the cost of rectifying and defects and completing the works; but the amount of work to be done under the contract is a relevant factor. Usually, the owner can recover damages or sue for a reasonable price for the work – quantum meruit.

Damages for defective building work

The measure of damages for defective building work usually is the reasonable cost of rectification to give you a building that substantially matches what you agreed to within the contract.

However, rectification must be necessary to produce conformity with the contract and be a reasonable course to adopt. These are questions of fact to be examined in each case. Such rectification work will only be considered unreasonable in fairly exceptional circumstances. For example, the High Court has held that where under a building contract calling for the erection of a house with cement-rendered external walls of second-hand bricks, the builder constructed the walls of brand-new bricks, the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks. In such circumstances, the demolition and re-erection work would be unreasonable. The Court preferred to think that the owner’s right to undertake rectification works at the expense of a builder is subject to the work being necessary and reasonable. 

What is repudiation?

Repudiation is conduct by a party to a contract (relevantly, the builder) which demonstrates an intention in the builder to no longer be bound by the contract, or an intention to ‘perform’ the contract only in a manner substantially inconsistent with the contract’s terms. The test is whether the builder’s conduct conveys to a reasonable person, in the situation of you (the owner), renunciation of the contract as a whole or a fundamental obligation under it.

Repudiation is not ascertained from an inquiry into the state of mind of the builder.  It is found in the conduct of the builder. Suppose the builder’s conduct conveys the builder’s inability to perform the contract, or to only do so in a manner substantially inconsistent with the builder’s obligations. In that case, the builder has repudiated the contract. 

Whether an inference of repudiation should be drawn merely from the builder’s continued failure to perform obligations under the contract requires an evaluation of the delay from the owner’s standpoint. Would a reasonable person in the shoes of the owner clearly infer that the builder will not be bound by the contract, or will only fulfil the contract in a manner substantially inconsistent with the builder’s obligations under the contract? 

The owner’s dilemma

Repudiation is a serious matter and not lightly to be found or inferred by a court. Accordingly, in the heat of your battle with the builder on the work site, you may have to decide how the court (with the benefit of all the evidence, including cross-examination of witnesses and submissions from barristers) will assess the conduct of the builder and you. If you decide incorrectly, it could be very costly.

When assessing whether the builder repudiated the contract, the civil standard of proof is required – the balance of probabilities. Where the owner asserts that the builder repudiated the building contract, the onus of proof rests on the owner. The question is one of fact, involving the characterisation of the conduct to see whether it meets the requisite standard.

The owner’s duty to reduce the damage – ‘the duty to mitigate’.

Generally speaking, if you suffer loss because of a breach of contract you must act reasonably in relation to that loss for the loss to be recoverable. Importantly, you must take reasonable steps to reduce your loss, and you will not be entitled to recover losses attributable to your unreasonable conduct.

The duty to mitigate, however, is not the only example of the application of this general principle. Another is if your property is damaged or defective due to the builder’s breach, you generally will be entitled to recover the costs of restoring the property, except to the extent that it is unreasonable.

The question of what is reasonable depends on all the circumstances of your 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, you have reasonably lost confidence in the willingness and ability of the builder to do the work.

It is for the builder to prove that you acted unreasonably. It is not for the you to prove that you acted reasonably.

Where defective works are exposed to the elements over time, it is likely that some of the defect rectification costs are due to environmental factors. You should take steps to prevent or minimise the damage.

In the case of building contracts, it’s generally accepted that the owner must give the builder a reasonable opportunity to rectify any defects. You must allow the builder to minimise the damages they must pay by rectifying the defects, except where your refusal to give the builder that opportunity is reasonable. But, even if it does not, you are required to allow the builder to minimise the damages it must pay by rectifying the defects; except where the owner’s refusal to do so is reasonable, including where the builder has repudiated the contract by refusing to conduct any repairs.

An owner’s refusal may also be reasonable having regard to:

• the extent and seriousness of the defects;
• the quality of any repairs effected by the builder;
• whether the builder responded promptly to the owner’s complaints, took the complaints seriously and acted fairly;
• and, the efficacy or perceived futility of continuing to negotiate with the builder.

I recommend that you squarely inform the builder of your concerns about building defects at the time, and do it per the contract as a defect or dispute. If you are not going to allow the builder to rectify the defects, then have reports from suitable experts (a building consultant and engineer?) which indicate the extent and seriousness of the defects, to  support your submission that it was reasonable to not allow the builder to remedy the defects. In court, the builder bears the onus of proving you failed to mitigate the loss caused by the builder’s default.

How to navigate this minefield?

I have never had to navigate an actual minefield, but if I had to, I would like to do it while holding the hand of someone experienced in doing so.

I think that is also the best recommendation for navigating the building minefield. Find a calm, experienced, and considered solicitor who can explain to you the terms of the contract you don’t understand so that you are fully informed, can make good decisions, and can guide you in your dealings with the builder.