ALUCRAFT PTY LTD v GROCON LTD (No 2) [1996] 2 VR 386

November 26, 2018

ALUCRAFT PTY LTD (IN LIQUIDATION) v GROCON LTD (No 2) [1996] 2 VR 386

SUPREME COURT OF VICTORIA

SMITH J

22 July 1993-15 February 1994, 22 April 1994

Headnotes

Damages — Contract — Building contract — Breach of sub-contract — Head contractor not required to rectify — Whether head contractor suffered loss — Measure of head contractor’s loss.

The plaintiff sub-contractor sued the defendant head contractor for the balance of the sum payable pursuant to the sub-contract under which the plaintiff agreed to supply and install aluminium and steel windows, doors, screens and glazing at a carpark and office building. The defendant counterclaimed for defective work to recover the cost of rectifying the steel surrounds placed around the windows. The plaintiff did not contest that the works were defective but disputed that the defendant had suffered any loss from the breach. The evidence showed that over four years had elapsed since the parties became aware of the breach; that no work had been done to rectify the defective work; that the proprietor appeared to have accepted the work, having issued a final certificate three years before the trial and since doing so had not complained about the work; that the defendant did not intend to initiate any rectification work and was not prepared to undertake to do so; and that there was a significant disproportion between the cost of rectification and the value of the work.

HELD, giving judgment on the claim and counterclaim: (1) Where a sub-contractor breaches its contract by producing a defective result, it fails to perform the service it contracted to provide for the head contractor. It also usually places the head contractor in breach of the head contract. Thus the head contractor does not receive the benefit contracted for and is exposed to a loss or the risk of a loss the extent of which will depend on subsequent events. Its damages are the higher of (a) the amount it paid for the defective work and (b) the cost of rectifying the defective work, discounted for the likelihood that it will not be called on to rectify.

Bellgrove v Eldridge (1954) 90 CLR 613; Director of War Service Homes v Harris [1968] Qd R 275; Tito v Waddell (No 2) [1977] 1 Ch 106; Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993] 3 WLR 408, referred to.

(2) In this case, although the proprietor had issued a final certificate three years beforehand, there remained a risk that it would call on the defendant to rectify the defective work. The risk was, however, remote and the rectification costs of $35,000 should be discounted to produce a damages figure of $5000. The same figure was arrived at on the alternative basis of assessing damages as the amount paid by the defendant for the defective works.

Per Smith J. The law does not support the award of restitutionary damages. If, however, restitutionary damages were to be awarded for the plaintiff’s financial advantage gained from its breach, they would be assessed at $2000.

Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361, referred to.

ACTION

This was the trial of an action, involving a claim and counterclaim in a building dispute. The facts are stated in the judgment. –

[1996] 2 VR 386 at 387

GJ FITZGERALD

BARRISTER-AT-LAW

DS Levin and IH Percy for the plaintiff.

TD Wood and RJ Manly for the defendant.

Cur ad vult.

Smith J

THE CONTRACT

On or about 25 October 1988 the plaintiff, Alucraft Pty Ltd (Alucraft), and the defendant, Grocon Ltd (Grocon), entered into a contract under which Alucraft was to supply and install aluminium and steel windows, doors, screens and glazing at a carpark and office building in Flinders Street, Melbourne. In particular, the contract required steel surrounds to be placed around the windows of the south side of the building. The agreed price was $230,790. Grocon was the head contractor. A company, 101 Collins Street Pty Ltd appears to have acted as the project manager.

It is common ground that the following documents formed part of the contract documentation:

(a) The document entitled “Information to Tenderers” and the General Conditions of sub-contract 114-128 Flinders Street carpark and offices (General Conditions).

(b) A site agreement entered into between Grocon and the Victorian Trades Hall Council.

(d) Architects and shop drawings.

(e) The tender from Alucraft to Grocon dated 3 August 1988.

(f) A facsimile transmission from Alucraft to Grocon dated 12 October 1988.

(g) A letter dated 25 October 1988 from Grocon to Alucraft awarding Alucraft the contract.

(h) Grocon’s purchase order no. 2302 and a letter from Alucraft to Grocon dated 7 November 1988 acknowledging Grocon’s letter of 25 October 1988.

ALUCRAFT‘S CLAIMS AND GROCON‘S CROSS-CLAIM

Alucraft achieved practical completion of the works. It was paid $200,000 by Grocon. Alucraft claims the balance of the contract sum. The entitlement to a formal judgment in at least that amount has not been contested. No set-off was raised by Grocon. Alucraft also alleges that Grocon as a result of its breaches of contract caused delay to Alucraft and further that it required Alucraft to work overtime. It claims damages for such delay and seeks payment for the overtime work. Alucraft also seeks the payment of four variations. There is a dispute as to one of those variations. Grocon has conceded Alucraft’s entitlement to payment of three variations valued at $6680. Alucraft claims $6233 for the variation in dispute. Grocon has cross-claimed in relation to alleged defective work by Alucraft.

[His Honour then considered Alucraft’s claims, rejecting the claims for delay and overtime and allowing the variation claim.]

GROCON‘S COUNTERCLAIM – ISSUES

Grocon brings a counterclaim to recover the cost of rectifying steel surrounds placed around the windows in the Flinders Street structure. –

[1996] 2 VR 386 at 388

The specification required that the steel surrounds be abrasive cleaned to Australian Standard 1627 class 3 before new paint was applied. It was common ground that the abrasive cleaning was not done satisfactorily because mill-scale was not removed from the steel. The result has been that the paint has lifted in places and the steel has rusted. There is an issue as to whether the specified four coats of paint with sanding between coats were applied but there is no issue now that the steel surrounds were defective and that, to address the mill-scale problem, the steel surrounds would have to be abrasive cleaned again and repainted. It is also not in issue that in supplying the steel surrounds without adequate preparation of the metal for painting, Alucraft was in breach of its contract.

The points in issue are:

(a) whether Grocon can point to a loss flowing from that breach; and

(b) if so, the measure of that loss.

Before dealing with those questions I should refer to a defence raised by Alucraft in its reply based upon the defects liability period provisions of the contract. Alucraft has pleaded that the contract provided that Alucraft would be responsible for: … making good with all possible speed (but in any event within sixty days after the notification of the defects) any defects arising from defective design materials or workmanship or from any act of the plaintiff or his servants or agents that may develop in the works.

Relying upon that pleading, Alucraft made a submission that if practical completion was achieved on 29 September 1989 or, for that matter, by 4 October 1989 at the latest, it was under no contractual obligation to remedy the steel surrounds because it did not receive any notification of the defects during the defects liability period but received it on 16 October 1990 when Mallesons Stephen Jaques wrote to Holding Redlich setting out a defects list for the contract.

I do not read the term (cl1.42) as one which will excuse Alucraft from breaches that may have given rise to defects but which are not the subject of a notification process during the defects liability period. The provision in the General Conditions is similar to that pleaded except that it does not contain a reference to a 60 day notification. That provision is contained in another set of general conditions of sub-contract, those used for the World Congress Centre contracts. What the clause does is impose an obligation upon the sub-contractor which operates during the defects liability period – an obligation to make good with all possible speed any defects during that period including those arising during that period – and authorises the builder if the sub-contractor fails to remedy the defects within a reasonable time to do the work itself at the sub-contractor’s risk and expense.

For completeness, however, in case there be some merit in the argument, I have considered the factual matters relied upon by Alucraft in support of its argument. Without going into the evidence in detail I am satisfied that practical completion was reached by 29 September 1989. Alucraft, however, is faced with the difficulty that it was advised of the defects in the surrounds on 3 October 1989 by Grocon. Alucraft’s argument must therefore fail because it was advised of the defects during the defects liability period. I turn then to the issues of whether Grocon has suffered a loss and, if so, what amount of compensation should be awarded. –

[1996] 2 VR 386 at 389

COUNTERCLAIM – GROCON‘S LOSS; PARTIES’ CONTENTIONS

Grocon’s primary position is that it suffered a loss in that it paid for or is being called upon to pay Alucraft for work done on the steel surrounds that did not comply with the specification. It argues that Grocon did not receive what it bargained for and that the measure of its damages is the cost of rectification.

Alucraft argues that Grocon has suffered no loss. It relies on the principle enunciated in the classic statement of Lord Blackburn in Livingstone v Rawyard Coal Co (1880) 5 App Cas 25 at 39, that the measure of damages is generally: … that sum of money which will put the party who has been injured, or who has suffered, in the same position as he would have been in if he had not sustained the wrong for which he is now getting his compensation or reparation.

Alucraft argues that Grocon, if the contract had been performed properly, would have paid Alucraft the full amount of the contract price and would have been paid its full entitlement by the proprietor. It has been paid its full entitlement by the proprietor and to pay Alucraft the full contract price will leave Grocon in the same position it would have been in if the breach had not occurred. Alucraft points to the fact that Grocon has not attempted to rectify the work and has led no evidence that it intends to do so. Grocon did not volunteer an undertaking to the court to carry out the rectification works. Alucraft referred during the hearing to the case of William Corey and Son Ltd v Wingate Investments (London) (Colmey) Ltd 17 BLR 109 dealing with that question. Alucraft also relies on the fact that Grocon has led no evidence of any demand or action taken by the proprietor to have rectification work done shortly prior to and after the granting of a final certificate by the proprietor. The final certificate was issued in favour of Grocon on 21 March 1991. Over three years have since elapsed and there is no evidence of any likelihood of the proprietor seeking to take any action about the matter. In those circumstances Alucraft submits that it cannot be demonstrated that Grocon has suffered a loss and to award damages to Grocon would be to place it in a better position than it would have been in if the contract had been performed.

I have not been able to identify and have not been referred to any reported cases directly in point.

As to the above general statement of principle it is more accurate Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 (Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 at 80, 98, 134, 148, 161) to rely upon the statement of Baron Parke in Robinson v Harman (1848) 154 ER 363; 1 Ex 850 Robinson v Harman (1848) 154 ER 363 at 365; 1 Ex 850 at 855: … that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed.

Lord Blackburn’s above formulation is wide enough to cover Baron Parke’s formulation ( McGregor on Damages, 15th ed, (1988), para727) but it aids the analysis of the issues to apply the latter.

Support is to be found in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Commonwealth v Amann, at 82, 136, for the proposition that a plaintiff is not to be placed in a better position by an award of damages that it would have been in if the contract had been performed. As to other aspects of the plaintiff’s argument, some support may be found in propositions put forward by Megarry VC in Tito v Waddell (No 2) [1977] 1 Ch 106 at 332. That case concerned claims arising out of the mining of phosphate on Ocean Island. The plaintiffs, among other things, sought damages –

[1996] 2 VR 386 at 390

for breach of an agreement to replant after mining. Several propositions were advanced by Megarry VC. They were advanced in the context of an alleged: … breach of a contract to do work on the land of another, whether to build, repair, replant or anything else.

Megarry VC stated several propositions. In stating his second proposition, he commented that a loss of value if established can be recouped and then stated at 332: On the other hand, if the defendant has saved himself money, as by not doing what he has contracted to do, that does not of itself entitle the plaintiff to recover the saving as damages; for it by no means necessarily follows that what the defendant has saved the plaintiff has lost.

See also McHugh J in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Commonwealth v Amann, at 161. The third proposition advanced was:

[I]f the plaintiff can establish that his loss consists of or includes the cost of doing work which in breach of contract the defendant has failed to do, then he can recover as damages a sum equivalent to that cost. It is for the plaintiff to establish this: the essential question is what his loss is.

The fourth proposition at 332-3 advanced was:

[T]he plaintiff may establish that the cost of doing the work constitutes part or all of his loss in a variety of ways. The work may already have been done before he sues … Alternatively, he may be able to establish that the work will be done. This, I think, must depend on all the circumstances, and not merely on whether he sues for specific performance.

At an earlier point in his reasons, Megarry VC stated at 332:

[I]f the plaintiff has suffered little or no monetary loss in the reduction of value of his land, and he has no intention of applying any damages towards carrying out the work contracted for, or its equivalent, I cannot see why he should recover the cost of doing work which will never be done. It would be a mere pretence to say that this cost was a loss and so should be recoverable as damages.

In considering Alucraft’s submission, in the light of the facts of this case, the remarks of Lord Keith of Kinkel in GUS Property Management Ltd v Littlewoods Mail Order Stores Ltd 1982 SLT 533 at 538 might seem apposite: The claim to damages would disappear … into some legal black hole, so that the wrongdoer escaped scot-free.

Grocon, however, seeks compensatory damages. Those damages are not intended to punish the wrongdoer but to compensate the party injured.

Grocon attempted to rely on propositions advanced in several reported cases in support of its arguments. Firstly, it referred to the leading case of Bellgrove v Eldridge (1954) 90 CLR 613. In that case a builder sued for payment under a contract for the construction of a two storey brick house. The proprietor claimed damages in a cross-action concerning substantial departures from the specification which it was alleged resulted in grave instability in the building as erected. There was a major issue as to what remedial action was required and how damages should be quantified. The trial judge gave judgment for the cost of demolition and re-erection of the building in accordance with the plans and specifications together with other consequential losses. The builder had argued –

[1996] 2 VR 386 at 391

that the proper measure of damages was the difference between the value of the house as it stood and the value it would have borne if erected in accordance with the plans and specifications. The High Court said at 617: It is true that a difference in the values indicated may, in one sense, represent the respondent’s financial loss. But it is not in any real sense so represented. In assessing damages in cases which are concerned with the sale of goods the measure, prima facie, to be applied where defective goods have been tendered and accepted, is the difference between the value of the goods at the time of delivery and the value they would have had if they had conformed to the contract. But in such cases the plaintiff sues for damages for a breach of warranty with respect to marketable commodities and this is in no real sense the position in cases such as the present. In the present case, the respondent was entitled to have a building erected upon her land in accordance with the contract and the plans and specifications which form part of it, and her damage is the loss which she has sustained by the failure of the appellant to perform his obligation to her … ; her loss can, prima facie, be measured only by ascertaining the amount required to rectify the defects complained of and so give to her the equivalent of a building on her land which is substantially in accordance with the contract.

The court went on to refer to a passage in the 7th edition of Hudson on Building Contracts, (1996), which it said correctly stated the rule in the following terms at 617-18: 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.

The court then stated at 618 that there were qualifications and in particular that:

[N]ot only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt.

A little later a court said: As to what remedial work is both “necessary” and “reasonable” in any particular case is a question of fact.

Finally, the High Court dealt with the question of the possibility that the plaintiff might not demolish the house and erect another. It stated at 620: It was suggested during the course of argument that if the respondent retains her present judgment and it is satisfied, she may or may not demolish the existing house and re-erect another. If she does not, it is said, she will still have a house together with the cost of erecting another one. To our mind this circumstance is quite immaterial and is but one variation of a feature which so often presents itself in the assessment of damages in cases where they must be assessed once and for all.

Grocon relies on the above passages to support the propositions that the appropriate measure of damage is the cost of rectification and that it is immaterial whether the rectification will be carried out or not.

As to those propositions, it may be said that the High Court was not laying down a hard and fast rule as to the appropriate measure of damages. I refer to the qualifications quoted above. As to whether it is immaterial whether the rectification work will be done, the position of the cross claimant in Bellgrove v Eldridge differed from that of Grocon. The cross-claimant in Bellgrove v Eldridge was the owner of the property and had contracted with the builder to –

[1996] 2 VR 386 at 392

have a building constructed on it. The question before the court was the appropriate approach to quantification of the loss of the owner who had a proprietary interest in the finished product. That loss continued whether the rectification work was done. In the present case, Grocon did not have a proprietary interest in the finished product. It had an interest in the result produced by Alucraft not because it wished to enjoy the physical result itself but because Alucraft’s work was being used by it in the performance of the head contract. Its interest lay in the financial result which depended in part on whether and to what extent the rectification work was done or required.

The principles enunciated in Bellgrove v Eldridge would apply in the event that the proprietor sued Grocon. In the present case, however, we are not concerned with the proprietor of the land for whom the building was to be erected. Grocon attempted to address this issue by relying upon the decision of the Queensland Full Court in Director of War Service Homes v Harris [1968] Qd R 275. This was again an action for damages brought by a building owner, the Director, against the builder. In this instance the builder had built a number of houses for the Director. They were completed in 1952. By May 1954 all the houses had been sold and were occupied by purchasers. They complained to the Director about defective workmanship. The builder refused to carry out the rectification work necessary and the Director engaged others to attend to the work at a cost of $1760. At the trial, the trial judge assessed the cost of rectification work at $650 but held that the cost of the remedial work was not a loss resulting from the breach of any contract with the builder but from a purely voluntary act as the Director was under no obligation at law to carry out the work.

The Full Court took the view that it was of no account that the building owner with whom the building contractor had contracted had subsequently sold the building before bringing the action. It stated at 278-9: When the builder, in breach of his contract, delivered to the building owner a building that did not conform to the specifications, the owner became entitled to recover damages according to the measure approved in Bellgrove v Eldridge. If the owner subsequently sold the building, or gave it away, to a third person that would not affect his accrued right against the builder for damages according to the same measure. The fact that the building had been sold might be one of the circumstances that would have to be considered in relation to the question whether it would be reasonable to effect the remedial work, but assuming that it would be reasonable to do the work the owner would still be entitled to recover as damages the cost of remedying the defects or deviations from the contract (assuming of course that the contract price had been paid). In assessing those damages it would not be relevant whether the owner was under a legal liability to remedy the defects, or whether he had made a profit or a loss on the sale of the building, for the builder has no concern with the details of any contract that the owner might make with a third party. There is a principle that in actions for non-delivery or breach of warranty under a contract for the sale of goods “the law does not take into account in estimating the damages anything that is accidental as between the plaintiff and the defendant, as for instance an intermediate contract entered into with a third party for the purchase or sale of the goods”. (Rodocanachi v Milburn (1886) 18 QBD 67 at 77). … and this principle (which has been applied to a contract for the sale of a lease, plant, buildings and stock, treated as realty …) should in my view be similarly applied to the case of a building contract. The owner of a defective building may decide to remedy the defects before he sells it so that he may obtain the highest possible price on the sale; he may sell subject to a condition that he will remedy the defects; or he may resolve to put the building in order after it has been sold because he feels morally, although he is not legally, bound to do so. These matters are nothing to do with the builder, whose liability to pay damages has already accrued. –

[1996] 2 VR 386 at 393

It may be said that the Full Court was not laying down a general rule in that it acknowledged that the fact that the building had been sold might be a circumstance relevant to the question of whether it would be reasonable to effect the remedial work. In addition, the case was again concerned with the liability of the builder to the proprietor and not the sub-contractor to the builder. The breach occurred and loss occurred prior to any sale of the properties. Further, unlike the present case, the rectification work had been carried out.

In relation to the reference to the law on contracts for the sale of goods, Grocon did not directly rely upon the principles developed in that branch of the law. It may be said that the impact of third party contracts is usually immaterial in assessing damages for breach of such contracts because of the special nature of such contracts and the way damages are measured for breach of such contracts – matters which distinguish them from building contracts: Rodocanachi v Milburn, supra; Williams Bros v EDT Agius, Ltd [1914] AC 510; Slater v Hoyle and Smith Ltd [1920] 2 KB 11 at 21ff. It has been acknowledged by the courts that the approach taken can result in over compensation and under compensation: Slater v Hoyle and Smith Ltd, at 24 per Scrutton LJ. Where the second branch of the rule in Hadley v Baxendale (1854) 9 Ex 341 applies a different approach to the assessment of damages may be open and contracts with third parties became relevant: Sutton, Sale of Goods, 3rd ed, at 436-41.

On the issue of whether it is necessary for the contracting party to prove a liability to a third party that suffers the loss in relation to the defective work, Grocon also relied upon the case of Linden Gardens Trust Ltd v Lenesta Sludge Disposals Ltd [1993] 3 WLR 408. In that case, the first plaintiff (described as “Corporation”) engaged the defendant (described as “McAlpine”) in 1974 to construct a development including shops, offices and flats. The building contract contained a clause preventing assignment of the contract without the consent of the contractor. On 25 March 1976 Corporation assigned to a related company, the second plaintiff (described as “Investments”) all its interests in the property and the full benefit of all contracts and engagements including the building contract. McAlpine did not consent to that assignment, its consent not having been sought. As a result the assignment of the building contract was ineffective. Five years later in 1981, it was found that part of the development was defective and remedial work costing 800,000 pounds was carried out by Investments.

It should be emphasised that before the date of any breach of the contract by McAlpine, Corporation had disposed of all its interests in the relevant property. Thus, at the date of breach of the building contract, Corporation, did not suffer any loss and was under no legal obligation to carry out any works of reinstatement.

The plaintiffs sued McAlpine for the cost of rectification. A central issue in the case was whether, assuming the assignment of the building contract was ineffective, Corporation, which no longer owned the property, could recover the cost of rectification works carried out by Investments after it, Corporation, had sold the property. The situation, therefore, was one where Corporation was seeking to recover damages representing the losses suffered by another – the person to whom the property had been transferred.

The principal judgment of the House of Lords was given by Lord Browne-Wilkinson. His Lordship referred to authority on this issue such as The Albazero [1977] AC 774 and ruled in favour of Corporation for the following reasons at 430: –

[1996] 2 VR 386 at 394

In my judgment the present case falls within the rationale of the exceptions to the general rule that a plaintiff can only recover damages for his own loss. The contract was for a large development of property which, to the knowledge of both Corporation and McAlpine, was going to be occupied, and possibly purchased, by third parties and not by Corporation itself. Therefore it could be foreseen that damage caused by a breach would cause loss to a later owner and not merely to the original contracting party, Corporation. As in contracts for the carriage of goods by land, there would be no automatic vesting in the occupier or owners of the property for the time being who sustained the loss of any right of suit against McAlpine. On the contrary, McAlpine had specifically contracted that the rights of action under the building contract could not without McAlpine’s consent be transferred to third parties who became owners or occupiers and might suffer loss. In such a case, it seems to me proper, as in the case of the carriage of goods by land, to treat the parties as having entered into the contract on the footing that Corporation would be entitled to enforce contractual rights for the benefit of those who suffered from defective performance but who, under the terms of the contract, could not acquire any right to hold McAlpine liable for breach. It is truly a case in which the rule provides “a remedy where no other would be available to a person sustaining loss which under a rational legal system ought to be compensated by the person who has caused it”.

In the present case it could not be said that Alucraft and Grocon could be treated as having entered into their contract on the footing that Grocon would be entitled to enforce contractual rights for the benefit of the proprietor.

In discussing the issues, his Lordship considered cases relevant to the question whether the assessment of damages is affected by the fact that the party wronged by the breach of contract is no longer the owner of the property concerned and in fact managed to sell it without loss. He referred to contracts for the sale of goods where the purchaser is entitled to sue for damages for defective goods assessed by reference to the difference between contract price and market price irrespective of whether the purchaser has managed to sell the goods to a third party without loss. He also referred to the fact that, in a contract to provide goods or services, if the breach is discovered before payment of the contract price, the price can be abated by the cost of making good the defects. His Lordship referred to Mondel v Steel (1841) 8 M and W 858; 151 ER 1288 (in relation to the sale of goods) and Gilbert-Ashe (Northern) Ltd v Modern Engineering (Bristol) Ltd [1974] AC 689 (in relation to building contracts). I note that Grocon at no time sought to rely on those principles.

After referring to authorities enabling a contracting party to recover damages not only for his or her defective meal or holiday but also that of guests or family, his Lordship stated at 428: There is therefore much to be said for drawing a distinction between cases where the ownership of goods or property is relevant to prove that the plaintiff has suffered loss through the breach of a contract other than a contract to supply those goods or property and the measure of damages in a supply contract where the contractual obligation itself requires the provision of those goods or services.

His Lordship was reluctant to express a concluded view on the matter and decided the issue relying upon the principles referred to above which he said applied to that case.

The cases to which Grocon has referred concern the situation of a proprietor or ex-proprietor of the property on which building works were carried out. When they entered into the building contracts they were contracting to achieve a certain physical result on their property and that physical result was not achieved. Their ownership of the property was relevant to their loss. It is understandable, –

[1996] 2 VR 386 at 395

therefore, that damages would be assessed by reference, prima facie, to the cost of remedying the defective work. It is also understandable that, in that situation, the question of whether the rectification work would be done was seen to be immaterial in Bellgrove v Eldridge. In the present case, Grocon had no interest in the property. The benefit the parties expected Grocon to derive from the sub-contract was the performance of the sub-contract and the performance, in part, of the head contract for which it would be appropriately remunerated. In identifying the contractual benefit that was to be derived from the performance of the sub-contract, it would be artificial and unrealistic to ignore that fact.

The decisions relied upon by Grocon point to the need to identify the loss that accrued when the breach took place. Once that loss is identified and characterised, the above decisions suggest that, depending on the circumstances, its assessment and the recovery of damages may not be affected by subsequent acts of the party wronged.

COUNTERCLAIM – GROCON‘S LOSS – ISSUES

Where a sub-contractor breaches its contract by producing a defective result, it fails to perform the service it contracted to provide for the head contractor. It also usually places the head contractor in breach of the head contract. Thus the head contractor does not receive the benefit contracted for and is exposed to a loss or the risk of loss the extent of which will depend upon subsequent events. At the time of the sub-contractor’s breach, the head contractor would normally be in the situation that it is unclear what the precise nature and extent of its loss will be.

As to compensation for the benefit not received, the head contractor may have paid the sub-contractor before the defects are discovered, in which case it can point to a loss of at least the amount paid for the work that was defective. Damages awarded on that basis would be classified as “reliance damages”. To award damages on that basis would not place the head contractor in a better position than it would have been in if the contract had been performed; for the damages will compensate the head contractor for the immediate benefit that due performance would have brought: “[T]he wasted expenditure represents `an alternative measure of gains prevented’ (per Deane J in Commonwealth v Amann Aviation Pty Ltd, at 128, citing Corbin on Contracts, vol 5, (1964), at 192).”

The next question to be considered is whether compensation in that form is sufficient to place Grocon in “the same situation, as if the contract had been performed”. Grocon submits that it is not and that compensation should be assessed on the basis of the cost of rectifying the defective work. Such an approach could be justified on the basis that the benefit contracted for was the due performance of the sub-contract works which were part of the works of the head contract, and, thus, as expected by both parties, the due performance of that part of the head contract. As a result, it would be material in determining compensation for the loss of the benefit of due performance of the sub-contract to consider whether it would be necessary for Grocon to rectify the work in due performance of the head contract. In the typical case, where the head contractor is required by the proprietor to rectify the work, this will be demonstrated. The head contractor may point to a financial loss being the reduction of its profit or an increased loss represented by the cost of rectification of the faulty work. The risk of loss will have crystallised into an actual loss at that stage: Bwllfa and Merthyr Dare Steam Collieries (1891) v Pontypridd Waterworks Co [1903] AC –

[1996] 2 VR 386 at 396

426 at 431. The head contractor could not in that situation, recover, in addition to the cost of rectification, any money paid to the sub-contractor for the defective work because that would improve its position as a result of the breach. It would presumably, however, not have to elect between the alternatives: Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Commonwealth v Amann, at 85, 137, 155, 162.

On the evidence in this case, however, the proprietor appears to have accepted the work notwithstanding the defects and, while it remains at risk, I am not persuaded that Grocon will be required to rectify the work by the proprietor. It, therefore, cannot demonstrate that Alucraft’s breach of the sub-contract has resulted in it having to rectify the work in due performance of the head contract.

If, however, as submitted by Grocon, the correct approach is to apply Bellgrove v Eldridge – that is that, prima facie, the cost of rectification is the measure of damage for the lost benefit – it is necessary to consider whether it would be reasonable to assess damages on the basis of the work being rectified.

I am not persuaded that it would be reasonable to assess damages in this way bearing in mind that:

* over four years have elapsed since all parties became aware of the breach;

* no work has been done to rectify the defective work;

* the proprietor appears to have accepted the work, issued a final certificate three years ago and, since doing so, not complained about the work;

* Grocon does not intend to initiate any rectification work and is not prepared to undertake to do so;

* there is a significant disproportion between the cost of rectification and the value of the work (see below). This aspect of the loss of the benefit (due performance of the head contract) is best addressed by consideration of the other loss identified – the potential liability to the proprietor for breach of the head contract.

Cases will vary in the extent to which it is likely that the head contractor will be so liable. In some cases the head contractor may receive a final certificate which has the effect of depriving the proprietor of any further right of action against the head contractor. The builder’s loss then would be restricted to the sums, if any, paid by it for the defective work. If it voluntarily rectified the work, the cost of the rectification might in appropriate circumstances also be recoverable, but that alternative does not arise for consideration in this case.

The present case, is one where it may be said that the risk of the proprietor seeking rectification or compensation for the breach arose when the breach occurred and, for reasons that I will discuss, remains. In that situation Grocon may be said to have suffered a loss in that:

(a) it has not received the immediate benefit that it contracted for and has paid, or is being called upon by Alucraft to pay, for defective work that deprived it of that immediate benefit;

(b) it has been and remains exposed to the risk of being called upon by the proprietor to rectify Alucraft’s defective work or pay for its rectification.

I am satisfied that damages awarded on either basis would satisfy the rules concerning remoteness of damages.

It is necessary to assess damages on both bases. Grocon should then be awarded the higher amount by way of damages as that is its loss. To award damages on both bases would place Grocon in a better position than it would –

[1996] 2 VR 386 at 397

have been in if the contract had been performed. I will consider first the assessment based upon the risk of loss because it has the potential to provide a higher award of damages.

As noted above, I have not been referred to and have not identified any authority that is directly in point. It is clear, however, that damages can be awarded for the loss of a chance to benefit resulting from a breach of a contract: Chaplin v Hicks [1911] 2 KB 786; Nikolaou v Papasavas, Phillips and Co (1989) 166 CLR 394. In principle, the risk of future detriment should also be compensable by an award of damages. The right to recover damages to compensate for the risk of a future detriment in appropriate circumstances was acknowledged by Deane J in Commonwealth v Amann Aviation Pty Ltd (1991) 174 CLR 64 Commonwealth v Amann, at 119 and see category (ii) at 120.

In assessing a lost chance to benefit it is necessary to explore risks and opportunities. What is involved in this instance is a similar exercise. It is relevant to examine what happened after the breach was discovered and to consider subsequent events to see what light they shed on the nature and extent of the risk of future loss.

COUNTERCLAIM – ASSESSMENT OF THE RISK OF LOSS

The problem with the steel surrounds was clearly known to Grocon by 8 August 1989 when Mr Read wrote to Mr Stephens raising the question. At that time he stated that all the trims (the surrounds) were fixed in place and sealed and that the only short-term solution might be to attempt to touch them up. He expressed concern about the rust-free life of the components. On about 23 August 1989 the architect forwarded to Grocon a list of defects and omissions which included reference to the fact that on the steel covers the paint was peeling or chipped and referred to some other minor defects in relation to them.

On 8 September 1989 Mr Read wrote to 101 Collins Street Pty Ltd, the project manager for the proprietors, concerning the architect’s defects list and in particular, these relating to the window surrounds. He complained that the list had been received approximately two weeks after the bulk of the scaffolding had been removed. He stated that prior to the removal of the scaffolding he had requested the architect to inspect the works, which he did, and any defects at that time were noted on the architect’s site memorandum. He stated that he recalled the architect saying how pleased he was with the facade during that inspection. He therefore saw the service of the list as “somewhat suspicious and vindictive considering that we had all works inspected prior to pulling down the scaffold”.

He said that it was now almost impossible to even view the alleged defects let alone perform any work on them. He said that at that stage Grocon proposed to inspect and rectify only the facade items that were obviously “necessary and/or accessible”. He asked the architect to advise if this approach was acceptable. It appears that Alucraft carried out painting repairs to the steel fronts and steel surrounds.

On 26 September 1990 Ove Arup and Partners, structural engineers, reported upon a defects inspection of the carpark structure. It listed the defects and the rectification required. The report was not confined to structural matters. Mr Read conceded that no defects listed related to work on the surrounds.

On 29 September 1989 the City of Melbourne issued a Certificate of Occupancy. By letter dated 3 October 1989, Alucraft sought confirmation of practical completion as at 29 September 1989 stating that it had commenced to rectify all defects requirements in accordance with the architect’s defects list. In –

[1996] 2 VR 386 at 398

its response, a fax of 3 October 1989, Grocon referred to the architect refusing to issue a certificate of practical completion and listing several items, which it said needed attention in addition to the general paint rectification to external steel work of Flinders Street windows.

In early October 1989, the parties negotiated about the question whether Alucraft should provide an additional sum for security to cover the cost of rectification works. They did not reach agreement. Alucraft maintained that they formed “part of defects rectification”: letter 6 October 1989.

On 27 October 1989, Grocon received a certificate of practical completion from 101 Collins Street Pty Ltd. This marked the commencement of the 12 month defects liability period. The certificate was stated to be subject to the completion of certain defects. There was no evidence before me as to what those defects were. They were supposed to be attached to the document. They have not been produced.

In November and December 1989, Alucraft and Grocon were dealing with claims made by Alucraft. Grocon’s responses are contained in a letter of 8 December 1989 in which it again sought the provision of funds to cover the cost of “repair works that may be needed to external steel trims to the window …” I infer that at that time it was not clear whether the work would be required.

The head contract provided the following terms about the defect liability period:

Cl6.11

If at any time during the defects liability period referred to in cl9.11 any faults, omissions, shrinkages or other defects in the Works are apparent then:

6.11.01

The Project Manager may issue an instruction to the builder during the defects liability period which shall state in what respect there are defects in the Works and may state a reasonable time within which the Builder shall complete the making good of those defects;

…

6.11.05

If any defect is not made good within the time specified in the instruction referred to in para6.11.01 the proprietor may have the defect made good by others under the provisions of cl5.06

…

6.11.07

Notwithstanding the foregoing provisions of this cl6.11 any such defects due to materials and/or workmanship not being in accordance with this Agreement may be dealt with in accordance with cl10.28.

The time for making good defects in the defects liability period was set out in cl9.12 which provided:

Subject to the provisions of cl6.11 and cl10.28 the Builder shall complete the making good of all defects within one month of the end of the Defects Liability Period or such other longer period as may be notified in writing by the Project Manager as acceptable.

Cl10 dealt with payment and adjustment of the contract sum. CL10.28 provided:

Subject to agreement between the Proprietor and the Builder as to the amount of any appropriate adjustment to be made to the Contract Sum the Project Manager may instruct the Builder not to make good any defective work or do any work not done in –

[1996] 2 VR 386 at 399

accordance with this agreement and the amount of the adjustments so agreed shall thereupon be deducted from the contract sum.

There is no evidence that any such deduction was made by the proprietor.

By fax of 8 February 1990 Mr Read requested Alucraft to adjust the glass doors. This was done. There was no reference to the steel surrounds.

On 16 October 1990, 10 days before the expiration of the head contract defects liability period, Mallesons Stephen Jaques wrote on behalf of Grocon to the solicitors representing Alucraft enclosing a copy of a letter which it said it had received on 4 October 1990 from the proprietor. The letter contained a defects list. It listed a number of defects including peeled or chipped paint on the steel surrounds. Grocon was required to make good the defects within one month of the expiry of the defects liability period on 26 October 1990. Holding Redlich replied on 18 October 1990 for Alucraft stating that it would rectify defects in accordance with its contractual responsibilities.

On 28 February 1991 101 Collins Street Pty Ltd sent by fax to Mr Read a list of defects. They were described in the covering fax as: These are the only outstanding defects that are on our list for completion.

The defects listed did not include the steel surrounds. Presumably all defects were then either attended to or not being pursued because on 21 March 1991 a final certificate was issued in favour of Grocon. By fax dated 27 March 1991 Mr Read forwarded to Grocon’s head office a copy of the final certificate with a letter from 101 Collins Street releasing a security guarantee and a builder’s liability guarantee.

It is reasonable to infer that at that point the proprietor was indicating that it accepted the works including that done by Alucraft. In the absence of evidence from Grocon that any deduction was made for the defective surrounds, it is reasonable to infer that none was made.

The provision of the head contract dealing with the effect of a final certificate was in the following terms: Unless notice in writing of a dispute or difference is given pursuant to cl13.01 by either the proprietor or the builder before the Final Certificate has been issued or not later than fifteen (15) days after the issue thereof the Final Certificate shall be evidence in any proceedings arising out of this Agreement … that the works have been completed in accordance with the terms of this Agreement to the reasonable satisfaction of the Project Manager and that any necessary effect has been given to all the terms of this Agreement which require an adjustment to be made of contract sum, except in the case of … 11.12.02 any defect (including omission) in the works or any part thereof which was not apparent at the end of the defects liability period referred to in cl9.11 or in respect of any part of the works for which a second defects liability period has been fixed pursuant to para6.11.06 …

There is no evidence to suggest that the proprietor has shown any interest in having the steel surround work rectified after 4 October 1990. Prior to the issue of the final certificate it did not seek further rectification of it. The events that I have described above bear all the hallmarks of the proprietor having agreed to the issue of a final certificate and having agreed to accept the steel surrounds. Over four years have now elapsed since the problem was first discovered and it must, in all the circumstances, be seen as an extremely remote possibility that it will now seek to have them rectified at Grocon’s cost.

The proprietor may well have taken the view that it is not entitled to do so although strictly speaking this may not be so. The final certificate does not have –

[1996] 2 VR 386 at 400

conclusive effect. The relevant clause does not purport to make the final certificate conclusive evidence of compliance with the contract but does create a situation in which the builder may be able to raise an estoppel. The certificate would make it more difficult for the proprietor to complain about work not being satisfactory even if there be some breach of the specification. Nonetheless, it does not in its terms bar any action and the only matter that may bar an action will be expiration of the Limitation of Actions Act period. Thus, a risk remains for Grocon. In all the circumstances, however, it appears to me that any risk of the proprietor seeking compensation from or rectification by Grocon is very remote.

COUNTERCLAIM – COMPENSATION FOR THE RISK OF LOSS

To arrive at an appropriate figure for compensation, for the risk of being called upon to do the rectification work or compensate the proprietor, it is necessary to form a view as to an appropriate cost of rectification of the work.

[His Honour then assessed the cost of rectification of the work at $35,000.]

It is then necessary to discount that figure in light of the risk of Grocon being called upon to rectify the surrounds or pay for their rectification. As I have indicated, I regard the risk faced by Grocon to be very remote and in all the circumstances consider that a figure of $5000 would adequately represent reasonable compensation having regard to that risk.

In this, as in all the damages assessments involved in the six cases, I am conscious of the fact that the damages must be awarded once and for all and due regard must be had to all contingencies. I am also conscious of the need to strike an appropriate balance so as not to enrich the party aggrieved but not to award damages that are too low.

COUNTERCLAIM – COMPENSATION FOR MONEY PAID

It is necessary to assess damages on the alternative basis that Grocon had suffered loss in the form of moneys paid or to be paid for the defective work. This would differ from the cost of rectification. It would merely cover payment to Alucraft for the work done and materials used by it in preparing and painting the surrounds but failing to do so in the agreed manner. Having regard to the figures referred to by the experts for the cost of removing the paint and abrasing the surface and repainting, an amount of $5000 would fairly represent the cost of that original work.

COUNTERCLAIM – COMPENSATION – RETURN OF PROFIT

Another way in which the question of damages might be approached is to assess whatever financial advantage may have been gained by Alucraft in not complying with the specification in the first place – in other words, awarding damages to Grocon based upon the profit made by Alucraft from the breach. As the law stands at present, however, the authorities do not support such a restitutionary approach. The issue was recently discussed in Surrey County Council v Bredero Homes Ltd [1993] 1 WLR 1361 (particularly at 1369, in the reasons of Steyn LJ). In that case the vendor of land sought to recover damages for breach of covenant by the purchaser. The covenant in question provided for the purchaser to commence the development of the land transferred in accordance with the planning permission that had been issued for 72 detached bungalows to be erected on the land. Subsequently the purchaser applied for and –

[1996] 2 VR 386 at 401

obtained permission for the construction of 77 houses and not 72 houses. The Court of Appeal rejected the claim for damages based on the benefit obtained from the breach.

The inability of the common law to provide damages in that form has been the subject of criticism from learned authors such as Professor Birks “Profits of Breach of Contract” (1993) 109 LQR, Case Note, at 518 and the articles and cases there cited; see also P Birks, “Restitutionary Damages for Breach of Contract: `Snepp and the Fusion of Law and Equity'”, 1987, LMCLQ 421; EA Farnsworth, “Your Loss or my Gain?, The Dilemma of the Disgorgement Principle in Breach of Contract” (1985) 94 Yale LJ 1339; see also Friedmann, Case Note (1988) 104 LQR 383 dealing with the decision of the Supreme Court of Israel in Adras Ltd v Harlow and Jones GmbH in which the majority of the Supreme Court allowed the wronged party to recover the profits made by the wrongdoer.

If that approach be the correct approach, however, the saving that would appear to have been made on the evidence by Alucraft is the cost of the time saved on blasting the surface and time saved in painting. The cost saved was likely to be of the order of $2000.

CONCLUSIONS

Alucraft has made out its entitlement to recover the contract sum of $230,790 together with the sum of $12,913 for variations. It has received from Grocon $200,000 so that it will be entitled to judgment on its claim in the sum of $43,703.

Grocon has made out an entitlement to damages which I have assessed at $5000.

I will hear further submissions before making final orders.

Order

Orders accordingly.

Solicitors for the plaintiff: Holding Redlich.

Solicitors for the defendant: Mallesons Stephen Jaques.