How to quantify damages in building contract breach cases

08/11/2016

In Bellgrove v Elridge [1954] HCA 36, the High Court considered an appeal on a building case. The builder had been the plaintiff and sued on a building contract for unpaid moneys after most of the work in building a house had been completed. The owner had filed a cross claim for damages against the builder for damages for departures from the specifications which resulted in the house being unstable. The builder had lost his claim and the owner had won her claim. The builder appealed on the issue of how the damages against him should be calculated.

The specifications had provided that a certain mix of cement was to be provided to make the foundations. The builder had not complied with the specifications and this had resulted in a finding that the foundations were unstable and needed to be replaced. The house had been erected on top of these unstable foundations. The trial judge had found that it was unreasonable to try to repair the foundations while keeping the house intact and this procedure was unlikely to succeed.

The court had to decide how the damages should be assessed and considered the following methods

  1. The builder submitted that the measure of damages should be the difference between the market value of the house and land after the contract breach and the market value of them it if the builder had complied with the specifications. The builder said that the house even after the damage had some value and this would be fair. The High Court noted that this is similar to the measure of damages in a sale of goods case. In sale of goods cases where the purchaser alleges a breach of warranty and claims for the loss, the measure is the difference between the market value of the goods as supplied and the value of the goods if there had been no breach. The court said the measure of damages for the sale of goods had no application in the present case. It gave the example where the specifications stated that the walls in rooms had to be one colour and they ended up being another colour. There would be no difference in value between the two if the sale of goods measure were to be used. However the owner should be entitled to the reasonable cost of rectifying the breach.
  2. The court in the result said that the proper measure of damages in a building case is the cost of rectifying the breaches, as long as this is reasonable. It adopted with approval a US statement , “the measure of the damages recoverable by the building owner for the breach of a building contract is, it is submitted, the difference between the contract price of the work or building contracted for and the cost of making the work or building conform to the contract with the addition in most cases of the amount of profits or earnings lost by the breach.”
  3. The court went on to state that the provision that the work undertaken must be necessary to produce conformity, but it also must be a reasonable course to adopt. If the work is unreasonable then it is as the Americans say “economic waste.”So if the specifications say that walls in a building should be second hand and the walls are new bricks, then it would not be reasonable to order that damages be paid in the amount to erect walls of second hand bricks.

In the case of Zeman v Bollard [2015] NSWCATCD 13, the tribunal (Member Harrowell) considered amongst many other issues in that case, the measure of damages in a building contract where the following events had taken place

  1. The builder had indicated he would no longer perform the contract
  2. The works were not in accordance with the contract
  3. The builder did not bring the works into conformity with the contract

The tribunal applied Bellgrove v Eldridge and said that the measure of damages was the reasonable cost to bring the works into conformance of the contract. In this case the cost of rectifying was $108,628.81. The tribunal said that the cost of rectifying was reasonable.

Please do not hesitate to contact Richard Watson, Building & Constructions Lawyer or his assistant Shereen Da Gloria if you are faced with a claim by a Builder seeking payment for unpaid fees for construction of a building where most of the work has been completed and you wish to have the matter resolved.

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