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It pays to be creative – Owners SP 92450 v JKN Para 1 Pty Limited [2023] NSWCA 114

Gretel Wathen

27 October 2023

On 26 May 2023, the Court of Criminal Appeal handed down its decision in Owners SP 92450 v JKN Para 1 Pty Limited [2023] NSWCA 114.

This matter teaches a valuable lesson to those who wish to rectify defects using an alternative solution, rather than to incur the additional costs associated with replacing the entire defective item.

Facts and background

The respondent, being JKN Para 1 Pty Limited (JKN) was the owner/developer of the property known as “The Rise”, which is located in Parramatta (the Building).

JKN contracted with Toplace Pty Ltd to design and construct the Building.

On 13 May 2016, Vic Lilli & Partners (the Certifier) issued the interim occupation certificate.

On 18 May 2016, Fire & Rescue NSW (FRNSW) issued their Final Fire Safety report to the Certifier which, amongst other things, identified issues with the cladding installed on the exterior of the Building.

This external cladding was made up of aluminium composite panels (ACPs).

FRNSW recommended to the Certifier that the external cladding be certified as being compliant with a recognised fire protection listing for full scale tests.

Those tests were never carried out and, instead, on 10 March 2017 the Certifier issued the occupation certificate for the Building.

On 10 August 2018, the Commissioner for Fair Trading announced that ACPs which contained a core of greater than 30% polyethylene were prohibited for use as a building product due to the fire risk the material poses.

It was later discovered during the original proceeding that the external cladding installed on the Building contained a core made up of more than 35% polyethylene.

The Owners Corporation brought a claim for breach of statutory warranties under (amongst other provisions) s. 18(c) of the Home Building Act 1989 (NSW) against JKN.

Relevant provisions of the Home Building Act

1. 18B of the HBA provides:

(1) The following warranties by the holder of a contractor licence, or a person required to hold a contractor licence before entering into a contract, are implied in every contract to do residential building work—

            …

(c)        a warranty that the work will be done in accordance with, and will comply with, this or any other law,

            …

Reference to “any other law” includes the Environmental Planning and Assessment Act 1979 (NSW) and associated regulations which give legal effect to the Building Code of Australia.

Primary proceeding

In the primary proceeding, the Court found that JKN had not breached the HBA as the Owners failed to prove what alternative solution could have been applied then or indeed at the time of the hearing to rectify the issue of combustible cladding.

The Court below also found that the Owners had failed to prove that the cladding was combustible for the purposes of the 2013 version of the Building Code of Australia (BCA 2013).

The Owners appealed, arguing that the primary judge erred in finding no breach of s. 18(c) of the HBA and declining to award rectification damages.

Appeal

On appeal, both parties agreed that the ACPs did not comply with the BCA 2013.

Therefore, the Court only had to determine whether reinstatement damages were an appropriate remedy.

The Court cited the following cases, setting out when reinstatement damages are appropriate:

1. In Tabcorp Holdings Pty Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272, the High Court recognised the ruling principle for damages is that they are to place the suffering party in the same position as though the contract had been performed.
2. Elaborating on the above rule, the Court referenced Bellgrove v Eldridge (1954) 90 CLR 613 (Bellgrove), which provided that where the matter involves the construction of a building, that the prima facie measure of damages is the cost of reinstatement (rather than the cost of diminution of value of the defective building).
3. The High Court in Bellgrove continued to hold that the reinstatement method must be the “reasonable course to adopt”, otherwise reinstatement damages would be inappropriate.

The Court confirmed the onus of proof on each party, being:

1. The Owners, as the claimants, were to prove the loss suffered;
2. JKN, as the respondent, were to displace the prima facie rule that the damages were to be calculated considering the cost of reinstatement; and
3. that in doing so, JKN may also have the legal onus of proving functional equivalence of any alternative rectification method proposed.

JKN failed to prove that reinstatement was an inappropriate method of assessing damages as they failed to demonstrate a functional equivalence of the ACP currently installed on the building, nor did they identify an alternative solution that would satisfy the performance requirements of the BCA 2013.

The Court therefore made orders requiring JKN to pay the Owners $5 million in reinstatement fees, plus their costs of the appeal proceeding.

Key takeaways

For builders who are facing claims for defective works, it is important that you think about creative and cost effective ways which will help you rectify a defect.

This will save costs incurred in replacing the entire item, especially where you can find an alternative solution that reuses components of the existing defective item.

It pays to be creative – Owners SP 92450 v JKN Para 1 Pty Limited [2023] NSWCA 114

CONTACT US

For further information, please do not hesitate to contact Gretel Wathen on (02) 8239 6500.

This communication is sent by Kreisson Legal Pty Limited (ACN 113 986 824). This communication has been prepared for the general information of clients and professional associates of Kreisson Legal. You should not rely on the contents. It is not legal advice and should not be regarded as a substitute for legal advice. The contents may contain copyright.