It's an unfortunate reality. A homeowner engages a builder to construct or renovate a home. A developer engages a builder to construct one or more homes, and then sells them. In either case, the owner/purchaser is susceptible to having to deal with defective building works.
Sometimes the relationship can sour, and it can become both tedious and frustrating for both the owner and the builder to continue working together in circumstances where the areas of disagreement between them seemingly cannot be resolved. That dynamic can be exacerbated by delays, with or without the added complication of COVID restrictions.
Can an owner throw in the towel and engage a new builder to rectify defective workmanship? If so, when?
Building contracts generally provide for a "defect liability period". Such contracts give an owner a right to require a builder to rectify defective works. The period will vary from contract to contract - it can be 3, or 12, or even 24 months. The defect liability clause may prescribe the process by which the clause is enlivened, including the manner in which notification is to be given to the builder, and what the notification must contain.
Such a clause can be complemented by other clauses in the contract which allow the owner to retain a certain percentage of the contract price until the defects have been rectified.
From the builder's perspective, this contractual framework can be beneficial in that it will invariably be cheaper for the builder to rectify any defective works rather than the alternative scenario in which the owner engages a new builder, and pays a premium for the rectification works (which is typically 20-30% of the original cost), and then chases the previous builder for that premium, or seeks to offset that money against any outstanding amounts payable to the previous builder.1
Homeowners need to be aware that any failure to follow the contractual procedures for the rectification of defects can leave them at risk of being in breach of contract. Owners should consider whether the contract obliges them to give the builder an opportunity to rectify defects, or whether they have a right to engage a new builder and hold the previous builder responsible for any additional costs.
Likewise, a builder who does not satisfactorily follow the contractual procedures for defect rectification can be exposed to the risk of a claim for breach of contract and possibly termination. In that event, there may be a need to hold off from engaging a new builder if the defective works are to be the subject of a VCAT claim, unless the rectification works are urgent.
A less common situation arises outside of the framework of the defects liability period, such as for example where the defects emerge after the expiration of that period, or where the contract does not contain a defects liability clause.
As a general proposition, an owner must take all reasonable steps to mitigate the loss flowing from any defective works resulting in a breach of contract by the builder.3 Unsurprisingly, each case will depend on its facts.
In Woodlands4, the English Court of Appeal upheld a decision from the Southampton County Court in which the owners recovered no loss in respect of the relevant defects as a result of their failure to mitigate in circumstances where:
- the owners were aware of the defects;
- the owners failed to notify the builder of those defects;
- the builder had the resources to remedy the defects;
- the builder was not given the opportunity to return to the site to rectify those defects; and
- the builder was denied the opportunity to request his own subcontractors return to the site to rectify the defects.4
In contrast however, circumstances may arise where an owner can reasonably refuse a builder an opportunity to rectify defective works. In such a case, the owner may not be in breach of any obligation to mitigate.
In Ryan5, the Victorian Civil and Administrative Tribunal found that the owners were reasonable in refusing to allow a builder to rectify where the builder refused to admit most of the defects until well into the trial. Quoting from VCAT's decision in Oliver, "a builder who fails to undertake rectification work promptly, or who is unwilling to do the necessary scope of works, is less likely to succeed when submitting that it should have been given an opportunity to repair".6 In that case, VCAT was not satisfied that the owner's failure to invite the builder to repair amounted to a failure to mitigate in circumstances where:
- the builder's offer came far too late;
- it was far from clear that the builder was offering to do everything the experts agreed should be done;
- it was by no means clear that the builder had time to undertake the repairs;
- the builder allowed his domestic building registration to lapse after he received the owner's letter of demand.7
In Avonwood8, a liquidator argued the owners failed to mitigate their loss in engaging a new builder after their first builder went into provisional liquidation. The liquidator maintained the owners should have allowed the builder, through the liquidator, to complete the building contract, which would have cost the owners no more than the original contract price. VCAT held that in the face of the failure by the liquidator to provide specific undertakings as to dates of completion and the meeting of any consequential costs such as renting alternative accommodation and the storage of fittings and effects, the owners had not acted unreasonably, were entitled to make their own arrangements, and had not failed to mitigate their loss.9
In summary, owners and builders should look to the contract to determine the appropriate mechanism for addressing defective works. If the contractual provisions have been rendered obsolete because of the effluxion of time, or otherwise do not exist, owners should provide a builder with an opportunity to rectify at first instance. Not doing so will expose them to the risk of an argument by any appropriately advised builder that they have failed to mitigate their loss if they look to the builder to recover any additional costs they incur. Likewise, builders need to be responsive and vigilant when given an opportunity to rectify, to avoid outcomes like those in the Ryan and Oliver decisions.
1 See Oliver & Jasmine Investments P/L v. White  VCAT 740 at para 94
2 Ibid, at para 91, citing Johnson v. Perez (1988) 166 CLR 351 @ 357;  HCA 64, Avonwood Homes Pty Ltd (in liq) v. Jaffer & Anor  VCAT 443 @ paras 7.5 & 7.6. See also, in different contexts, Pansuriya v. Black Cabs Combined Pty Ltd  VCAT 1490 @ paras 42-43 and Callaghan v. O'Brien  VCAT 101 @ paras 45-46
3 Woodlands Oak Ltd v. Conwell and Anor  EWCA Civ 254
4 Ibid, @ paras 23-25
5 Ryan v. EJ Lowe trading as Urban Builders  VCAT 2031
6 Oliver & Jasmine Investments Pty Ltd v. White  VCAT 740 @ para 95
7 Ibid, @ paras 101-102
8 Avonwood Homes Pty Ltd (in liq) v. Jaffer & Anor  VCAT 443
9 Ibid, para 7.13. See also para 7.15, and as to damages, para 7.31
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.