Bata v Pathik & Ors [2026] VSCA 138

Isobel Carmody  |  Joan Wu  |  Harley Stephens

Key takeouts

A ‘show cause’ letter stating an owner’s intention to terminate a building contract does not, without more, bring the contract to an end. A further step communicating the decision to terminate is required, even where the contract is silent as to the form that further step must take.

Where neither party treats the contract as on foot, the better view is that the contract has been discharged by inferred agreement, rather than by ‘abandonment’ as a distinct doctrine. Unless there is a clear intention to the contrary, the court will infer that the abandonment of the contract operates prospectively and does not extinguish accrued rights (ie to damages for breach).

When claiming damages for diminution in value, the ‘counterfactual’, being the hypothetical scenario under which it is assumed that the contractual obligations were carried out without breach, must be internally consistent. An owner cannot recover a capital loss assessed at a later date while also claiming interest and holding costs that are only explicable on an earlier counterfactual sale date.

Background

Amitabh Pathik (owner) owned land in Seaford and entered into a domestic building contract with Mark Bata (builder) for the construction of 2 double-storey townhouses. The builder entered into a separate agreement that purported to assign all obligations under the building contract to an unlicensed third party, Chris Dimitriou, and his company ReThink Pty Ltd. The builder thereafter was not involved in supervising or carrying out the works.

In February 2021, it was discovered that a townhouse had been built 3 metres out of position, prompting a stop work order. On 10 August 2021, the owner’s solicitors sent a letter detailing extensive defects and breaches, stating that, unless the builder showed cause within 14 days, the owner would terminate the contract.

The owner sold the property unsubdivided and incomplete in October 2022 for $900,000. The trial judge found the builder had breached the building contract and awarded the owner $1,493,986 in damages. The builder sought leave to appeal on 4 grounds:

Ground 4: that the primary judge erred in not making any findings in respect of the owner’s claims against the second and third defendants.

Ground 1: that the contract had not been terminated under a letter dated 10 August 2021, contrary to the primary judge’s finding;

Ground 2: that the owner had failed to properly mitigate his losses, contrary to the primary judge’s finding;

Ground 3: that the primary judge’s award of damages for diminution of value based on a ‘reference point’ of May 2022 was erroneous; and

Decision

The Victorian Court of Appeal granted leave to appeal on grounds 1 and 3, dismissed ground 1, allowed the appeal on ground 3, and refused leave to appeal on grounds 2 and 4.

Termination by notice

The court held that the 10 August 2021 letter was insufficient to terminate the contract. Clause 14.4 allowed the owner to give notice of an ‘intention to terminate’ unless the builder remedied breaches within 14 days. However, that intention had to be converted into a decision to terminate by a further communication to the builder. The court noted this conclusion was consistent with the general approach of courts to construe the drafting providing for termination events as conferring a right to terminate, rather than as automatically ending the contract.

The court also rejected the trial judge’s alternative reliance on Shepherd v Felt & Textiles of Australia Ltd (1931) 45 CLR 359, which concerns reliance on the wrong ground for an otherwise operative termination. Here, the issue was not the identification of the wrong breach, but the failure to take a legally necessary additional step.

Termination by abandonment

Despite the error regarding the letter referred to above, the court found that the building contract had been terminated no later than the date of trial. No work had been carried out since February 2021, the building permit had lapsed, the owner had sold the property, and neither party was treating the contract as on foot. The court confirmed the test in Singh v Ozzie Homes Building & Construction Pty Ltd [2026] VSCA 25 that ‘where it is plain from the conduct of parties to a contract that neither intends that the contract should be further performed, the parties will be regarded as having so conducted themselves as to abandon or abrogate the contract’. The court held that the better view is that the contract has been discharged by inferred agreement, rather than ‘abandonment’ as a distinct doctrine. Unless there is a clear intention to the contrary, the court will make this inference prospectively without prejudice to the owner’s accrued entitlement to damages. The appeal on this ground was therefore dismissed.

Mitigation

The court refused leave to appeal on ground 2, finding no error in the trial judge’s conclusion that the owner acted reasonably in selling the property in its incomplete state. The builder’s evidence that he had always planned to rectify and was simply deprived of the opportunity of doing so was not credible and the owner had understandably ignored such ’empty promises’. The owner’s financial position meant he could not fund further works and was not required to risk financial ruin.

Damages counterfactual

The court allowed the appeal on ground 3. The court found that the trial judge erred by assessing the capital loss by reference to a hypothetical sale in May 2022 while also awarding interest and outgoings incurred between May 2019 and May 2022. These heads of loss were premised on incompatible counterfactuals. The loss must be calculated on the owner’s pleaded case: a hypothetical sale in May 2019, yielding a capital loss plus interest and outgoings, less the allowance for settlements with other defendants. The parties were directed to be heard on the recalculation.ross negligence on that basis could not be established. As to rates, the expert’s interpretation of the relevant clauses was not erroneous, and in any event was stated as an additional rather than primary reason for his determination.