Chapter 10 Quantum of damages
Damages for defective work are generally the amount necessary to make the work conform with what the contractor was required to provide under the contract. In some circumstances the principal may recover:
- the cost of demolition and rebuilding work, if this work is reasonable and necessary; and
- necessary incidental costs, including lost rent or relocation costs and consultant fees.
However, if rectifying the defective work is an unreasonable course to adopt, then in very limited circumstances the principal may not be entitled to the cost of rectifying the defect but instead may recover:
- the extent of diminution in the value of the building; and
- the loss of enjoyment and inconvenience where there is no loss in the value of the building, but the principal is prevented from using and enjoying the building.
Ruxley Electronics & Construction Ltd v Forsyth  3 All ER 268
- The builder, Ruxley, undertook construction of a swimming pool adjoining the Forsyth home. The depth of the swimming pool at the deep end was to be 7 foot 6 inches.
- After the swimming pool was completed, Forsyth discovered that the deep end of the swimming pool had a depth of 6 foot 9 inches. The only way to rectify this defect was to rebuild the pool and Forsyth did not intend to do this.
- Forsyth refused to make the final payment for the pool on the grounds it was defective. Ruxley commenced proceedings against Forsyth.
- The court focused on reasonableness and that in circumstances where the cost of rebuilding is out of proportion with the benefit that will be obtained, the cost of rebuilding will not be awarded as damages.
- If the cost of rebuilding cannot be awarded as damages, the correct measure of damages is the difference in value (even if the difference in value is nil).
- In this case, the cost of rebuilding was wholly disproportionate with the benefit that would be obtained. As a result, Forsyth was not awarded the cost of rebuilding the swimming pool.
- The owner’s lack of intention to rebuild was also considered and relevant to reasonableness and the extent of loss which was sustained.
- Further, the court held that there was no difference in value and therefore only awarded a nominal amount of damages for general inconvenience and disturbance.
Tabcorp Holdings Ltd v Bowen Investments Pty Ltd  HCA 8
- The tenant, Tabcorp, undertook renovations to the foyer of a building owned by the landlord, Bowen, notwithstanding that the landlord and the landlord had withheld its consent. The actions of the tenant were in breach of a negative covenant in the lease agreement, which stated that the tenant would:
Not without the written approval of the Landlord first obtained (which consent shall not be unreasonably withheld or delayed) … make or permit to be made any substantial alteration or addition to the Demised Premises.
- At trial the judge determined an award of $34,820 in favour of the landlord. This comprised the difference between the value of the property with the old foyer and the value of the property with the new foyer constructed by the tenant.
- On appeal the Full Federal Court increased this amount to $1.38 million. The sum consisted of $580,000 for the cost of restoring the foyer to its original condition, with a further $800,000 for loss of rent during the proposed restoration phase.
- The tenant appealed to the High Court seeking a reversal of the Full Federal Court’s decision.
- The High court re-affirmed the principle from Robinson v Harman  1 Ex 850, that the appropriate measure of damage for breach of contract is the amount that places the innocent party in the same position as if the contract had been performed. The High Court also referred to its previous decision in Bellgrove v Eldridge (1954) 90 CLR 613, in which Dixon CJ, Webb and Taylor JJ observed that the ordinary measure of damages is the cost of the building work which is required to achieve conformity with the building contract. Therefore the court held that an innocent party will be entitled to rectification costs, other than in ‘fairly exceptional circumstances’.
- In spite of the tenant’s reliance on Ruxley Electronics & Construction Limited v Forsyth  3 All ER 801, on the above basis, the court found that the appropriate measure of damages was the loss sustained by the failure of the tenant to comply with the terms of the lease, which was the cost of restoring the foyer to its original condition (reinstatement damages).
Willshee v Westcourt considers the impact of the Tabcorp decision on the quantification of damages for defective building work and how aesthetic considerations may be accounted for in upholding a damages award.
Willshee v Westcourt Ltd  WASCA 87
This case considers the impact of the Tabcorp decision on the quantification of damages for defective building work and how aesthetic considerations may be accounted for in upholding a damages award.
- Mr Willshee retained a contractor, Westcourt, for the construction of his house, which included limestone cladding.. There was a term implied into the contract that the limestone used was to be of high quality. The contract did not contain any provisions regarding the aesthetic characteristics of the limestone
- Westcourt breached the contract by using inferior quality limestone in the external cladding of the house.
- Due to the limestone’s inferior quality, the exterior of the house began to deteriorate, however this did not affect the structural integrity of the house.
- The court considered the appropriate measure of damages; specifically, whether rectification costs should be awarded or whether Mr Willshee was only entitled to damages based on the diminution in value of the house.
- The court followed Tabcorp Holdings Ltd v Bowen Investments Pty Ltd  HCA 8 and found that Mr Willshee would not be entitled to rectification costs if it was ‘unreasonable’ to award them to him. However, the court held that the test of ‘unreasonableness’ would only be satisfied if evidence was available that established Mr Willshee was relying on a ‘technical breach of contract to secure an uncovenanted profit’. There was no such evidence presented by Westcourt.
- Mr Willshee was therefore awarded the amount of money that was required to put him in the position he would have been had his house been constructed using limestone of high quality, being the cost of replacing the limestone.
- Tranquility manufactured fibreglass swimming pools using a vinyl esther product supplied by Huntsman.
- Tranquility alleged that defects in the vinyl esther product caused blistering and black spots in the pools, and that the pools required replacement as the problem was not remediable in-situ.
- The court found that the product was defective, that the defective product caused the blistering and black spots, and that the problem would affect all pools manufactured using the product.
- The court had to consider whether pool owners were entitled to replacement of their defective pools, or some lesser rectification method.
- The court accepted the principles from Wilshee v Westcourt  WASCA 87 and, in particular, the High Court’s statement in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd  HCA 8 that the test of ‘unreasonableness’ is only to be satisfied in ‘fairly exceptional circumstances’.
- The court also referred, without objection, to Wheeler & Anor v Ecroplot Pty Ltd  NSWCA 61, in which the court followed Tabcorp but also stated that another example of ‘unreasonableness’ is a situation where the cost of the proposed rectification is ‘out of all proportion to the benefit to be obtained’. In Wheeler the court had held there was no such ‘radical disproportion’ nor other factor which would lead it to conclude that awarding rectification costs was unreasonable.
- In Tranquility the court stated that what was reasonable could only be determined in light of the particular facts. On the facts before it, the replacement of the pools was the only practicable (although expensive) way to appropriately compensate the pool owners.
Following the decision in Willshee, the test of ‘unreasonableness’ may be so narrow that it will only be satisfied if the innocent party is using a technical contractual breach to secure an uncovenanted profit. Although it was held by the House of Lords in Ruxley that the ‘unreasonableness’ test will be also be satisfied if the rectification costs are all out of proportion to the benefit to be obtained, the recent decisions in Tabcorp, Willshee, Wheeler and Tranquility suggest that to the extent tis test still applies, it will only be satisfied in ‘fairly exceptional circumstances’.
Updated February 2020