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Determining the proper damages assessment date in a construction dispute

by Website Administrator

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  1. What follows is not so much a case note (as readers of MTECC News often expect), but an explanation of a principle made topical from today’s high inflation.
  2. Determining the proper date of assessment for damages is important in times of high inflation affecting the construction sector, when the cost of performance increases substantially between commencing a proceeding and judgment being delivered; indeed, costs may increase substantially in the time between the signing of the contract, and the completion of the works agreed to (itself the cause of many disputes).
  3. Doing so in advance of trial is important, so that the case is argued correctly, according to law, and to ensure the necessary evidence is marshalled in-time for trial, noting that it is common in construction law cases that claims for damages are often “updated” shortly before trial.
  4. The common law position is that a party’s loss crystallises on a ‘once and for all’ basis: in other words, the loss arises simultaneous with the wrongdoing, such as a breach of contract or a tortious action (see generally, Halsbury’s Laws of Australia (Lexis Advance, online), ‘110 — Contract’’ VIII REMEDIES’ ‘(2) DAMAGES IN CONTRACT’ ‘(VI) Date for Assessment’ [110-11120] (‘General Rule’)).
  5. This is a familiar analysis to many practitioners, as it is the same analysis used in deciding a limitation of action (being when the damage occurred or was reasonably discoverable). If the wrongdoing is ongoing and leads to subsequent damage, that is said to give rise to a new cause of action, alternatively, a “continuing cause of action” (such as tortious nuisance).
  6. The position in contractual construction disputes is more complex and depends on if what is sought are completion or rectification damages: that distinction is not necessarily simple, particularly if the contract was terminated before completion, and the contractor would otherwise have had a right to attend to defects.
  7. The simplest case is when the contract is a dead letter: the contractor has been fully paid by the principal, and the latter has no contractual right or ability to call on the former to fulfil or correct their obligations, be that to rectify work done wrong or complete work not done in the first place. In other words, the Builder is undoubtedly in breach, and has no right to reattend to their work to bring it back into conformance.
  8. The applicable position there is summarised in Renown Corporation Pty Ltd v SEMF Pty Ltd [2022] NSWCA 233 by Brereton JA at paragraph 20, in which His Honour considered the few superior court decisions on the issue (including Oliver J’s speech in Radford v de Froberville [1977] 1 All ER 33), and held:

    From the cases to which I have referred the principle emerges that the proper measure of damages in a case such as the present is the reasonable costs of rectification, which will be the costs when they were actually incurred (if they have been incurred by the date of trial), so long as they are not unreasonable; or (if they have not been incurred already), the reasonable costs as proved as at the trial, unless it is established that by not conducting rectification works earlier the plaintiff has unreasonably failed to mitigate its loss.

    In a lesser cited passage of Radford v De Froberville [1978] 1 All ER 33, at pages 56-7, Oliver J commented as follows:

    [A]t least where damages are awarded in lieu of specific performance, an appropriate date of assessment may be the date of judgment, but if the function of an award is put the plaintiff in as good a position as if the contract had been performed, I do not see why, in principle, the same should not equally apply in an appropriate case of the breach of a contract which cannot be specifically performed. The practical difference, no doubt, in most cases lies in the duty to mitigate, for it is difficult to see how, assuming that it is reasonable for a plaintiff to seek specific performance, he can be under a duty to mitigate by acquiring equivalent property until he knows whether or not the court is going to give him his decree. That, of course, does not apply where the contract is one which cannot, as here, be specifically performed. In such a case, the plaintiff’s right to damages must be qualified by his duty to mitigate. The question then, it sit seems to me, comes down to one of the reasonableness of the steps actually taken by the plaintiff and, in my judgment, the proper approach is to assess the damages at the date of the hearing unless it can be said that the plaintiff ought reasonably to have mitigated by seeking an alternative performance at an earlier date, in which event the appropriate measure would seem to me to be the cost of the alternative performance at that date. It is accepted by all counsel that I do not have before me the material which will enable me to decide this question at the moment. I am told that there is a considerable correspondence which is not in evidence. There may have to be cross‐examination.

  9. Where the contract is a dead letter, it does not matter if the costs are to complete or rectify: the judgment date is the date for assessment of damages , unless the principal has ‘unreasonably failed to mitigate’ (if ‘mitigate’ is the appropriate term, as the loss suffered will be unchanged, as opposed to the liability of the contractor for that loss).
  10. Whether a party has had an opportunity to mitigate depends on the circumstances of the individual case.
  11. An earlier decision of the Court of Appeal of England and Wales, not mentioned in Renown or Radford, may answer the question: Mertens v Home Freeholds Co [1921] 2 KB 526 (Mertens), which Justice James Edelman in McGregor on Damages (Sweet & Maxwell, 2021, 21st ed), at page 895, described as the ‘leading’ and ‘only’ case on the ‘normal measure of damages where a building is not built or completely built.’
  12. McGregor summarises Mertens as follows:

    “The defendant contracted to build a house for the claimant and was to begin work immediately after possession of the site was given to him. The defendant worked well for a month, but then deliberately failed to proceed with due dispatch in the knowledge that a government embargo on building without licence was to be imposed. Had he worked according to the contract, the roof could have been on the house before the embargo scended. Two or three years later the claimant completed the work himself, when building was again permitted but when costs had risen. It was held that the proper measure of damages was the cost to the claimant of completion in a reasonable manner at the earliest moment that he was allowed to proceed with building, less the amount he would have had to pay the defendant had the defendant completed the house as far as the roofing-in at the time agreed by the terms of the contract… [Mertens] is also authority for taking the cost of completion as at the time when it became once again legal to build, although between breach and the removal of the government embargo on building two or three years afterwards costs had risen substantially… This rule is, however, subject to the general principles of mitigation so that, in the words of Lord Sterndale: the building owner must set to work to build his house at a reasonable time and in a reasonable manner, and is not entitled to delay for several years and then, if prices have gone up, charge the defaulting builder with the increased price” (Mertens at 535-6 (Lord Sterndale MR) [Counsel’s underline].

    The phrase ‘earliest moment possible’ comes from Younger LJ’s speech (Mertens at 544).

  13. Lord Sterndale MR also made the following comment (Mertens at 536 per Lord Sterndale MR):

    “a man is not entitled to gamble on the chance of getting the work done cheaper, and then when it proves to be dearer turn round and charge the defaulter with the enhanced price. That is not what the plaintiff did here. He did his best to begin at once to complete the building of the house. He was not able to complete it, because he was not allowed to do so under the Defence of the Realm Regulations.”

  14. The absence of subsequent reference to Mertens (outside McGregor) may suggest that its time has passed, and perhaps that it was a somewhat naïve view of the ease with which a contractor can be found to complete a home, or the likelihood that a principal can secure an contractor ready, willing, and able to complete the works for the outstanding balance of the contract (which may be inadequate in a front-loaded contract): that is probably a question for the evidence.
  15. Our reading is that if the principal still has a balance of funds, and those funds are adequate to complete the works, he or she ought to ensure the works are to be recommenced in a timely a manner. Whether the principal ought to go further and expend other funds available to them (which might otherwise be devoted to other profitable activities) is not something addressed.
  16. It should not, however, be thought these principles apply to all cases of defective works: if the contractor would, but-for the principal’s wrongful termination of a contract, have had a contractual right to attend to any identified defects, the position is that the damages assessment date is on or about the date of the wrongful termination, such that the cost to rectify is the cost that the contractor would have incurred, rather than what the principal will need to incur: see Pearce & High Ltd v Baxter & Anor [1999] EWCA Civ 789 at paragraph 19 (Evans LJ).
  17. This principle is applicable whenever wrongful termination interferes with an agreed defects liability period, and effectively “sets off” the increased costs to the principal through the contractor’s “opportunity loss”. In its application numerous times by the Victorian Civil and Administrative Tribunal, it has meant a principal only recovers the base cost of rectification, without allowance for overheads, margin, or taxation obligations (in other words, the costs the contractor would have incurred had it performed the works). It also means the damages assessment date is the date of wrongful termination, not the trial date.
  18. These considerations are often overlooked until shortly before a trial. We hope that readers take this note as guidance to do otherwise.


Jeremy Twigg KC and Joel Silver

Liability limited by a scheme approved under professional standards legislation

 

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