What is mitigation?

In the context of construction disputes, “mitigation” refers to the obligation of a person suffering loss to not act unreasonably in allowing loss they suffer to worsen and result in additional loss.[1]  It is not about whether there was some better or ideal way in hindsight[2], but whether what was done was reasonable.  The obligation is not overly burdensome and does not require the person suffering loss to go out of their way and against self-interest to avoid loss, merely to have acted reasonably in seeking to prevent themselves suffering avoidable losses.[3]

For example, if the owner of a building is having significant water ingress issues due to defective roof waterproofing installed by their builder, the loss directly caused by the builder is a recoverable loss for the owner.  But if that owner sat on their hands and allowed the water ingress to worsen or cause consequential damage resulting in a greater loss e.g. internal damage of floors, walls, and furniture etc., the failure to avoid that additional loss is a failure to mitigate.

The mitigation obligation will be shaped heavily by any contractual agreement between the parties and override general law principles.[4]

Avoidable losses are not recoverable

In that example, an owner failing to avoid losses that can be avoided by taking reasonable action is exposed to the risk that a court or tribunal may decide the owner themselves caused that additional, avoidable loss and will not be able to recover it.  This is the case even where the original cause of the loss is the builder or one of its subcontractors.

The reason for this is that the compensation principle only requires that the owner is restored (by rectification works or money in our example) to the position they would have been had the builder not performed defective works.[5]  Avoidable loss caused by an owner’s inaction is not caused by the builder, only consequent upon it.

Further, the person who claims the other has failed to mitigate loss is required to prove that failure.[6]  In our example, the builder bears the obligation of persuading the court or tribunal that some parts of the ongoing loss suffered due to the water ingress followed from the owner’s failure to take reasonable steps to halt the water ingress.

Costs of reasonable steps to avoid loss are recoverable

Fortunately, the costs of actions taken by an owner to prevent the suffering of avoidable loss are compensable.  However, such losses must not be too remote which refers to excluding recovery of losses that would not typically arise or would not have been foreseen by the parties at the time of entering their agreement due to the breach.[7]

Recovery is possible even where the costs of the reasonable steps exceed the likely cost of the avoided loss (with the bulding having to prove steps were unreasonable).[8]  For clarity, it is not necessary for the reasonable actions taken to have actually succeeded in avoiding the loss for the costs to be recoverable.

Mitigating by allowing the original builder access to rectify

With those general points in mind, this article considers a specific type of mitigation scenario which is an owner’s obligation to allow the original builder to return to rectify defective or non-compliant work before engaging a third party to take over and then claim monetary compensation.  This obligation can exist in the contract between the parties, in statute[9], and otherwise at common law[10].

Determining whether or not an owner has acted reasonably is assessed against the factual circumstances of the dispute.  Helpfully, Justice Rees in Ceerose[11] distilled four key facts that will be relevant in determining the question:

1. the extent and seriousness of the defects;
2. the quality of any repairs effected by the builder;
3. the builder’s engagement with the owner in respect of the suggested defects and proposed method of rectification, in short, has the builder responded in a timely manner, taken the complaints seriously and acted fairly; and
4. the efficacy or perceived futility of continuing to negotiate with the builder.

In this mitigation scenario, given the obligation to prove the failure falls on the builder and the standard of what is reasonable conduct for the owner is not high, it will typically be difficult to establish a failure to mitigate with the owner being precluded from recovering the avoidable loss.  Justice Rees in Ceerose remarked on this when considering recent decisions on this specific mitigation scenario.[12]

Economic advantages to both owner and builder of rectification

The advantages to an owner of mitigating their loss by allowing the original builder to return include:

1. Ordinarily, the original builder will undertake this work at no cost to the owner given contractual and statutory obligations[13] to do so.
2. If certain defects or non-compliant works are worsening over time, urgent and proactive action by an owner to allow a builder access will generally be a reasonable step to mitigate avoidable loss. As mentioned above, losses that could have been reasonably avoided will not be recoverable by an owner given the true cause of those losses is the failure to avoid them.

Builder’s often prefer returning for the simple fact it is generally cheaper than paying the equivalent amount in money to an owner.  This is because a knowledgable builder will have contractual rights to compel subcontractors to rectify issues in their work at no cost, or, if there is a cost, that cost is less in the original builder’s hands compared with a fresh third party builder (which will include contigencies for the cost of unknowns involved in remedial work).[14]

Provided the rectification work is performed in good faith and correctly, the parties’ interests are aligned in this scenario and resolution is achieved without protracted litigation and accompanying costs.

If you’re an owner in a situation where your losses may worsen and you need advice on what steps you can take, or you’re a builder dealing with an owner that is refusing access which is worsening any issues you may have originally caused, please contact our team on (02) 9030 7400 or at [email protected].

 

[1] The Owners – Strata Plan No 89074 v Ceerose Pty Ltd [2024] NSWSC 1494 (Ceerose) at [38]-[39] per Rees J and the references therein.

[2] Banco de Portugal v Waterlow and Sons Ltd [1932] AC 452 at [506].

[3] Karacominakis v Big Country Developments Pty Ltd [2000] NSWCA 313 at [187] per Giles JA.

[4] Ceerose at [37] per Rees J.

[5] Robinson v Harman (1848) 1 Ex 850.

[6] Ceerose at [40] per Rees J and the references therein.  See also section 18BA(3) of the Home Building Act 1989 (NSW).

[7] Wingecarribee Shire Council v Lehman Brothers Australia Ltd (in liq) (2012) [2012] FCA 1028 at [988] per Rares J.

[8] Arsalan v Rixon Nguyen v Cassim [2021] HCA 40 at [32] per Kiefel CJ, Gageler, Keane, Edelman and Steward JJ.

[9] For example, section 18BA(3) of the Home Building Act 1989 (NSW).

[10] See generally Ceerose at [53] per Rees J.

[11] Ceerose at [51] per Rees J.

[12] Ceerose at [48]-[50] per Rees J.

[13] For example, in a claim for breach of the statutory warranties contained in section 18B of the Home Building Act 1989 (NSW) or the statutory duty of care contained in section 37 of the Design and Building Practitioners Act 2020 (NSW).

[14] See also Ceerose at [41]-[43] per Rees J and the references therein.