Key Takeaways

The decision in this case provides clarity in defect disputes: owners are not obliged to allow builders to perform rectification work, and the burden of proving unreasonable refusal lies entirely with the builder. For builders and developers, the ruling highlights the evidentiary hurdles they face when relying upon mitigation defences and that they will only succeed if they can demonstrate that an owner’s refusal was objectively unreasonable.

• Owners Corporations can refuse access if they have legitimate reasons, such as loss of confidence, without breaching mitigation obligations. Evidence of the loss of confidence will need to be served
• Builders/developers must carefully document offers to rectify and prove that an owner’s refusal to allow rectification was unreasonable if they wish to rely on a mitigation defence
• Builders should avoid assuming that mitigation arguments will succeed unless they can demonstrate clear unreasonableness in the owner’s conduct.

Introduction

The NSW Court of Appeal in Ceerose recently confirmed that Owners Corporations do not have a ‘positive obligation’ to allow builders back on site to rectify defects.

This is despite the principle that ‘rectification of the defective work by the responsible party is the preferred outcome’ under s48MA of the Home Building Act (NSW) (which was not mentioned in either the Supreme Court judgment or on appeal).

The Court of Appeal determined that the burden rests squarely on the builder to prove that an owner acted unreasonably in refusing access to rectify and that the onus is not ‘tactical’ or ‘shifting’ from the builder to the Owners Corporation if the builder remains willing to rectify defects.

A genuine loss of confidence in the builder can justify refusal, and the ‘failure to mitigate’ defence will not succeed unless the builder can demonstrate that the refusal was unreasonable in the circumstances.

Background to the Case

The case arose from a dispute over building defects in a residential development constructed by Ceerose Pty Ltd (the builder). The works were completed in 2014. The Owners Corporation pursued Ceerose for damages for defective works under statutory warranties in the Home Building Act 1989 (NSW), first in the NSW Civil and Administrative Tribunal (NCAT) in 2016 and then in the NSW Supreme Court in 2017. There was a prolonged delay caused by settlement discussions, followed by service of pleadings and evidence. The discussions and evidence involved plans to undertake ‘urgent’ and ‘non-urgent’ rectification works.

However, by late 2019, the Owners’ solicitors had informed Ceerose, in numerous communications, that the Owners had lost confidence in Ceerose’s ability or desire to complete the rectification works. Ceerose argued that the Owners had failed to mitigate their loss by refusing to allow Ceerose to carry out rectification works, given its willingness to complete the works.

Key Legal Issues

• Failure to mitigate defence: Builders often argue that owners should allow them to fix defects, thereby reducing damages
• Burden of proof: The Court held that the onus remains with the builder to prove the Owners’ refusal was unreasonable
• Loss of confidence: The Court recognised that a genuine loss of confidence in the builder’s ability to perform rectification works can justify refusal
• No positive obligation: Owners Corporations are not required to provide builders with opportunities to rectify defects; they must only avoid acting unreasonably in refusing access to carry out rectification work.

Court’s Reasoning

The Court rejected Ceerose’s argument that the burden shifted to the Owners to prove their refusal was unreasonable, since Ceerose remained willing to complete the rectification works.

Instead, the onus was on Ceerose to establish that the refusal by the Owners was unreasonable in the circumstances.

The Court emphasised that mitigation principles do not impose a duty on plaintiffs to accept rectification offers from defendants, particularly if confidence in the builder has been lost (and regardless of whether the builder considered that the work could be completed for less cost compared to other builders).

Kirk JA said at paragraph [28]:

It has long been established that even though a plaintiff bears the duty of establishing loss, the onus is on the defendant to prove facts going to a claim that the plaintiff failed to mitigate the loss: e.g, Bagnall v National Tobacco Corporation of Australia Ltd (1934) 34 SR (NSW) 421 at 430 (Jordan CJ). The High Court said this in Arsalan v Rixon (2021) 274 CLR 606 [2021] HCA 40:

[32] Where a plaintiff acts in an attempt to reduce a loss, the onus shifts to the defendant to show that the acts actually taken by the plaintiff were unreasonable acts of mitigation. Unless the plaintiff’s actions are shown to be unreasonable, costs that are incurred in an attempt to mitigate loss caused by wrongdoing become, themselves, a head of damage that can be recovered. Even if the costs incurred by the plaintiff are greater than the loss that was attempted to be mitigated, those costs will be recoverable other than to the extent that they are shown to be unreasonable.

The Court cautioned against an invocation of a “shifting” or “tactical onus” when pleading a ‘failure to mitigate’ defence.

Further information / assistance regarding the issues raised in this article is available from the authors, Megan Palmer, Partner, and Maia Hughes, Lawyer, or your usual contact at Moray & Agnew.