In the decision of the Supreme Court of New South Wales in The Owners – Strata Plan No 89074 v Ceerose Pty Ltd [2024] NSWSC 1494, Rees J considered whether an owner acted reasonably in mitigating its loss by denying the builder access to undertake defect rectification works.

The Owners engaged Ceerose to build a 16-storey residential building in Sydney.  The Owners later commenced proceedings against Ceerose for breaches of statutory warranties under the Home Building Act 1989 (NSW) seeking damages for defect rectification.  In defence, Ceerose contended the owner did not permit access for Ceerose to rectify any defects and failed to mitigate its loss.  The NSW Supreme Court made an order under r 20.17 of the Uniform Civil Procedure Rules 2005 (NSW) (the UCPR) referring the whole of the proceedings to a referee to consider the evidence and determine the issues.

The referee provided the Court two reports, one in respect of liability, the second concerning quantum, both finding in the Owners’ favour.  The Owners sought the Court’s acceptance of the referee’s findings of fact and judgment in the amount of $1,962,883.  The Court noted that as referees are not officers of the Court, their reports have no legal consequence unless and until they are adopted by the Court under r 20.24(1) of the UCPR.

Ceerose opposed the Court adopting the reports on multiple grounds, including:

• the referee should have found that no loss was recoverable as the Owners failed to mitigate the loss by unreasonably refusing Ceerose access to perform remedial works; and
• the referee failed to apply the Australian Standards in force at the time of the contract in respect of the defect rectification, not the more recent standards.

Rees J referred to the approach to be taken in adopting or rejecting a referee’s report, noting that in the interests of a just and quick resolution, generally the Court will not interfere with the referee’s findings of fact.  The Court noted that when considering the facts of this case, the protracted proceedings and the quantum of amounts in dispute, the overall interests of justice would be served by the Court adopting the referee’s reports in their entirety.

In the judgment, Rees J noted that it is generally accepted in the context of building and engineering contracts, that an owner must give the builder an opportunity to rectify defects to minimise the damages it must pay, except where the owner has reasonable grounds to refuse.  The Court clarified that although it is often said that an owner has a duty to mitigate loss, this is misleading as the relevant authorities establish that an owner has no positive duty to mitigate but rather a duty to not act unreasonably in relation to loss mitigation.

Rees J considered the following factors as relevant in determining, as a question of fact, whether or not an owner has acted reasonably in mitigating its loss and dealing with the builder:

• the extent and seriousness of the defects;
• the quality of any repairs effected by the builder;
• the builder’s proposed method of rectification, timely response and acting fairly; and
• the futility of continued negotiations.

The Court held that when considering the facts and the protracted timeline of events that unfolded since the defective work was identified, it agreed with the referee’s conclusion that Ceerose had been afforded a reasonable opportunity to rectify the defects.  Further, Ceerose had failed to keep the Owners properly informed of their progress or attend to the work in a timely manner.

Although Ceerose argued that the evidentiary onus of proof shifted to the Owners to demonstrate they had acted reasonably in denying Ceerose access to rectify the defects, the Court noted the referee was not bound by the rules of evidence.  The Court confirmed that where it is argued that a plaintiff should have taken steps to mitigate loss, the defendant generally bears the onus of proof.  Therefore, the onus of proof was not on the Owners to prove the reasonableness of their actions.

Ultimately, the Court considered that all the circumstances “painted a cohesive picture” of the Owners having lost confidence in Ceerose to attend to the defect rectification in a timely manner or at all.  The Owners, therefore, did not act unreasonably in refusing Ceerose access to the property to carry out rectification works.

Whilst the scope of the duty to act reasonably will depend on the individual circumstances of each case, the Court’s decision provides some useful guidance on the key principles courts will apply in assessing whether or not an owner has acted unreasonably in denying the builder an opportunity to rectify defects.

The decision can be found here.