NSWCA Confirms In The Absence Of Appropriate Evidence, Owners Can Refuse Builder Rectification

The NSW Court of Appeal has confirmed that an owners corporation does not have a positive obligation to allow a builder the opportunity to return to rectify defects unless the builder proves the factual foundation for that obligation.

In issue

• Whether the primary judge erred in failing to find that the referee had denied the appellants procedural fairness by relying on evidence contrary to an earlier ruling,
• whether the primary judge erred by failing to find that the referee had misapplied the legal principles relating to mitigation, in particular by not accepting that the respondent had a 'positive obligation' to afford the builder a reasonable opportunity to rectify alleged defects,
• whether the primary judge erred in failing to find that the referee had applied an outdated and superseded version of an Australian Standard to be applied to a bathroom drainage issue, and
• whether the primary judge erred by not rejecting that part of the referee's reports which took account of certain invoices.

The background

Ceerose Pty Ltd (Ceerose) and Prisand Investments Pty Ltd (Prisand) (collectively the appellants), were the respective builder and developer of a residential apartment building in Sydney, which was completed in 2014. As defects in building works emerged, the Owners Corporation of Strata Plan No 89074 (Owners) commenced proceedings alleging that the works did not comply with the requirements of the Home Building Act 1989 (NSW).

Ceerose and Prisand admitted the existence of some of the defects, however claimed that they had always been ready, willing and able to rectify any defects that emerged and further asserted that the Owners failed to mitigate their loss by not allowing them to rectify the defects. The Owners' position was it had lost confidence in Ceerose and did not wish to allow them an opportunity to repair the defects (Owners letter).

The matter was referred to a referee who issued experts reports on liability as well as the quantum of the rectification works (reports). On the mitigation issue, the referee determined that:

• the appellants bore the onus of proving that the decision by the Owners to deny them access to rectify the defects was unreasonable, and
• the Owners did not act unreasonably in losing confidence in the appellants and in thereby refusing them access to rectify.

The Owners sought to have the reports adopted by the NSW Supreme Court. The appellants opposed that on numerous grounds, the majority of which were rejected by the primary judge. Ultimately, the primary judge gave judgment for the Owners in the amount of approximately $1.95 million (exclusive of GST).

The decision on appeal

The appellants challenged the NSW Supreme Court's adoption of the reports, on four specific grounds.

Ground (1) - Procedural ambush

The appellants argued there was procedural unfairness and a 'procedural ambush' on the basis that the referee reversed his initial decision that the contents of the Owners letter could not be relied on to show the Owners' state of mind that they had lost faith in the ability and willingness of the appellants to carry out the rectification works.

His Honour held, in dismissing this ground, that no procedural unfairness was established and dismissed the appellants' arguments, stating at [43] that:

the oddity, if not absurdity, of the appellants' position is that they complain of the referee relying on what was said in letters sent by the respondent's solicitors, yet it was the appellants themselves who tendered those letters, and at the time they did so they did not seek any restriction on the use to which they could be put.

Ground (2) - Owners' failure to mitigate their loss

His Honour again, in dismissing the appeal on this ground, held that whilst the Owners bear the duty of establishing loss, the appellants bear the onus to prove facts going to a claim that the Owners had by their actions or omissions, failed to mitigate their loss. As the appellants did not prove that the Owners had any 'positive obligation' to allow them the opportunity to rectify the defects, the appellants' evidence was insufficient to displace their evidentiary or 'tactical' onus onto the Owners.

Ground (3) - Failure to apply correct Australian Standard

The appellants argued that the version of the Australian Standard (AS3740-2004) applicable at the time of construction should be used instead of the Australian Standard applicable at the time of proceedings, which was relied on by the Owners' expert. His Honour, in dismissing this ground, held that it was unnecessary to consider if incorrect standards were applied, as both the appellants' and Owners' experts had identified defects, and the varying standards only related to the manifestation of 'ponding' as one means to show whether the applicable Standard had been complied with. As the referee's decision depended on the identification of defects by both experts, their decision was not affected by the difference in the Standards.

Ground (4) - Failure to reject invoices issued after commencement of litigation

The appellants claimed that the primary judge erred in not rejecting parts of the reports which allowed damages for invoices issued by the mechanical services engineer and the strata manager after the commencement of the litigation. The appellants argued that as these invoices had been rendered after the commencement of litigation they should have been characterised as costs of litigation rather than damages. His Honour dismissed this argument and found no error in the conclusion of the judge at first instance, stating the fact that invoices which had been rendered after the commencement of litigation did not mean they could not be claimed as damages.

Implications

This case is a timely reminder that the owner of a property has no positive obligation to a builder to allow it to return to the property to rectify any alleged defects unless the builder proves the factual foundation for that obligation. As such, builders (and their insurers) have a heavy evidentiary burden to show an unreasonable failure to mitigate. Further, the decision reinforces the point that technical arguments about the applicability of different versions of Australian Standards are unlikely to significantly reduce damages, particularly where a defect exists under both versions of a standard.

Ceerose Pty Ltd v Owners - Strata Plan 890274 [2025] NSWCA 235

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