The preferred outcome: The Supreme Court considers the limits of s.48MA
Typically in residential building defects disputes, the owner has lost faith in the builder and will seek an award of damages representing the cost of rectification, whereas the builder, if the defects are found, will argue that a work order is appropriate, allowing it to rectify the defects itself (at lesser cost). The introduction of section 48MA of the Home Building Act 1989 (NSW) (Act) elevated the issue of a work order to a consideration which the Court or Tribunal is to have regard to as the preferred outcome.
Given the powers of the Tribunal under section 48O of the Act to make work orders and the availability of renewal proceedings in the Tribunal, section 48MA (the so-called preferred outcome) has always sat better, in conceptual and practical terms, with proceedings in the Tribunal.
In the recent decision of Ippolito v Cesco  NSWSC 561, the NSW Supreme Court considered, among other issues, the application of section 48MA to proceedings before the Court.
On 13 July 2011, the owner entered into a contract with the builder for the construction of a dual occupancy residential development in Willoughby (Development). Work on the Development commenced in September 2011.
Notice of practical completion of the first house was issued on 10 April 2014, and on 10 September 2014 the second house reached practical completion. The owner and his family occupied the first house since completion. The owner’s parents occupied the second house for around three years after its completion and thereafter the second house was rented.
The owner’s principal complaint related to water ingress, which, despite the builder’s prompt attempts to fix, continued. A report was prepared to which the builder responded. A demand was made to rectify the defects, temporary repairs were made by another builder to make the second house habitable for rental. The owner entered into rectification contracts based on the reports and additional defects were discovered during the course of rectification works.
In addition to the cost of rectification of the defects, there was a claim for lost rent and alternative accommodation.
Application of section 48MA
Section 48MA of the Act provides that a Court or Tribunal determining a building claim involving an allegation of defective residential building work or specialist building work by a party to the proceedings (Responsible Party) is to have regard to the principle that rectification of the defective work by the Responsible Party is the preferred outcome.
In considering this section of the Act, the Court noted that it was common ground that the section does not give the Court power to order the Responsible Party to undertake rectification work. Section 48O(1)(a) gives the Tribunal power to order that one party to the proceedings pay to the other a sum of money. Section 48O(1)(c)(i) gives the Tribunal power to order a party to proceedings to do any specified work or perform any specified service. In that context, the Court found that section 48MA was to be understood as saying that in deciding whether to make a monetary order or an order that certain work be performed, the Tribunal should give preference to orders of the latter type.
While the Court does have power to order specific performance of a building contract, there is normally a reluctance to do so because of the difficulties in formulating an appropriate order and the expectation that the order will require continual supervision by the Court. It is also generally accepted that an owner has an obligation to give a builder a reasonable opportunity to repair defective work, which is often explained as part of the owner’s obligation to mitigate his or her loss. However, the Court found that it was unclear whether and how section 48MA was intended to modify these principles.
The builder submitted that the Court could give effect to the principle stated in section 48MA of the Act in one of four ways:
The Court rejected each path.
In relation to the builder’s first submission, the Court found that clause M of the contract was concerned with bringing the building works to completion. Clause M14 provided that the contractor must rectify defects which were notified by the architect or which were apparent to the contractor from observation during the defects liability period. No relevant instruction was given by the architect, and there was no evidence that any of the defects that it was now said that the builder should rectify were apparent to him by observation. The Court held that therefore, there was no basis for ordering specific performance of clause M14.
A further difficulty with an order for specific performance is that it ignored the nature of the owner’s claim, which was a claim for damages for breach of contract. The Court held that the owner was entitled to that relief as of right if he could make out that claim, and that section 48MA should not be interpreted as seeking to alter the position, as that would constitute a fundamental change in the law. At most, section 48MA should be interpreted as requiring the Court to give preference to a remedy of specific performance where one was sought.
The Court found that similar problems existed with the other alternatives proposed by the builder. The builder’s submission presupposed that he had a right to rectify defects and that he should be given an opportunity to exercise that right. But the Court held that was not the case. Rather, the owner had a right to claim damages for breach of contract and to an award of damages if that claim was made out. The Court held that it did not have discretion to refuse or delay that right, nor was it appropriate for the Court to refer the matter to the Tribunal when the matter has been heard in the Court and the owner had otherwise made out the facts that entitled him to the relief that he claimed.
The Court found that there was no basis on which it could substitute a remedy which the owner did not seek (a mandatory injunction) for one that he had sought. Further, the Court stated that it was difficult to see that a mandatory injunction would be granted, even if one were sought. The builder sought a restorative mandatory injunction, the purpose of which is to restore the injured party to the position that party was in before the wrongful conduct occurred. However, in this case, there was no question of restoration to a former position in order to undo the consequences of unlawful conduct. The Court held that the order that the builder sought was an order for specific performance of an obligation to rectify which did not exist.
The claim for alternative accommodation and lost rent
The Court held that both claims failed. In relation to the alternative accommodation claim, the Court found that there was no evidence that the owner and his family would need to move out of the first house while the rectification work was undertaken, as the inconvenience was not so great that it would be reasonable for them to move out. Similarly, the Court found that there was no evidence that the tenant would move out during the rectification work, although it was possible that he could seek a reduction in rent while work is carried out. However, the Court noted that during previous rectification works, the tenant did not move out or seek a reduction in rent. In any event, the Court held that a claim for lost rent could not be recoverable as damages because at the time the contract was entered into it was anticipated that the second house would be occupied by the owner’s parents, and it was not anticipated that it would be rented out. A claim for lost rent was not one that flowed naturally from the builder’s breach or one that ought reasonably to have been within the builder’s contemplation at the time the Contract was entered into so as to fall within the principles stated in Hadley v Baxendale (1854) 9 Exch 341.
Section 48MA has long been resented by owners, who will be encouraged by this decision, where possible (having regard to section 48K), to bring defects claims in the Courts, rather than the Tribunal and to narrowly draft the relief sought.
Authors: Christine Jones & Rebecca Weakley
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D Constructions Pty Ltd v Walsh  NSWCATAP 91
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RESTITUTION – whether restitution on the basis of a quantum meruit available where there is an enforceable contract and rights have accrued under that contract
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The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this newsletter is accurate at the date it is received or that it will continue to be accurate in the future.
Published by Christine Jones, Rebecca Weakley