The New South Wales Court of Appeal has recently upheld an owners corporation’s claim for defect rectification costs, finding that there was no failure to mitigate its loss by not giving the builder an opportunity to rectify its own defects. The decision provides important guidance for owners faced with a decision to engage others to complete defective works when in dispute with a builder.
In short, the case confirms that to establish a failure to mitigate defence the builder has the onus of proving that the owner acted unreasonably. The first instance and appeal judgments also identify factors to be considered in determining whether an owner has acted unreasonably in not giving the builder opportunity to rectify the defects.
The case concerned a mitigation of loss defence and did not concern any contractual terms between the parties governing the rectification of defects.
Ceerose Pty Ltd v The Owners – Strata Plan No 89074 [2025] NSWCA 235
Facts
The case concerned defects that emerged after the construction of a 16-storey apartment building in the centre of Sydney known as “The Eliza” in 2014 (namely, insufficient fall on tiles across 32 bathrooms and fire safety issues in mechanical services).
In 2016, the owners corporation (strata company) commenced proceedings [1] against the builder, Ceerose Pty Ltd (Ceerose), as well as the developer, claiming the cost of rectifying the defects under statutory warranties in s 18B of the Home Building Act 1989 (NSW). [2]
Ceerose and the developer argued that the owners corporation failed to mitigate its damage because it did not give them the opportunity to rectify the defects. This was in a context where the parties had engaged in lengthy settlement discussions following disagreement about rectification methodology which culminated in an “in principle” agreement in October 2018 for Ceerose to rectify the defects. The parties, however, had not finalised the agreement one year later and the defects remained unrectified.
On a number of occasions in 2018-2019, the owners corporation’s solicitors advised that it had lost confidence in Ceerose and was unwilling to grant access to the property to repair the defects.
Given that no resolution could be reached, the owners corporation incurred its own costs to rectify the defects which it claimed against Ceerose and the developer.
The Court referred the matter to a “referee” tasked with reviewing and considering the evidence and reporting to the Court. [3] The referee’s report on liability found that there was no failure by the owners corporation to mitigate its loss and that it was entitled to the rectification costs of circa $2 million. The builder and developer argued that the report on liability should not be adopted by the Court.
First instance decision
Rees J, in the first instance judgment, accepted the referee’s finding that the owner’s corporation was entitled to the rectification costs and there had been no failure to mitigate its loss. In doing so, her Honour provided useful guidance as to how the principles were to be applied.
After reviewing the authorities, Rees J found that whether an owner acts unreasonably generally depends upon a review of the events that have unfolded since the building work was initially undertaken, including when the defects were identified, subsequent negotiations, conduct during litigation and the extent to which the owner’s complaints are ultimately vindicated. [4]
Rees J also identified the following facts which may be relevant to the question:
- the extent and seriousness of the defects;
- the quality of any repairs effected by the builder;
- 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
- the efficacy or perceived futility of continuing to negotiate with the builder. [5]
In the Ceerose case, a year had passed since the in principle agreement had been reached, and the fact that the parties were unable to finalise their agreement over this protracted period suggested that the owners’ perception that no agreement would be reached in a timely manner was reasonable. [6]
The onus of proof was on Ceerose to show that the owner’s actions were unreasonable in refusing to provide access to rectify the defects. [7]
Appeal
The Court of Appeal upheld Rees J’s decision finding that Ceerose and the developer had not established any failure by the owners corporation to mitigate its loss.
Kirk JA (with whom Leeming and Ball JJA agreed) emphasised in his reasons that the onus will be on the builder to show that the owner’s actions were unreasonable and that there is no invariable requirement or “positive obligation” for the owner to give the opportunity to rectify defects. [8]
In making these findings the Court rejected Ceerose’s contention that, once the owners corporation refused access, that it was on the owners corporation to establish that its actions were reasonable. [9] This was found to be incorrect, as it is always for the builder to show that the owner’s actions were unreasonable. While refusing access was relevant, it was only one factor in considering all of the circumstances.
The Court also found against Ceerose on contentions it was denied procedural fairness, that the referee applied the wrong Australian Standards in his reports and that certain costs were not properly disclosed in the proceeding (although not the focus of this article).
Conclusion / comment
The first instance and appeal decisions both provide helpful guidance with how the principles of mitigation of loss will be applied in the context of the rectification of defects. These principles may, in some cases, require an owner to give the builder an opportunity to carry out rectification works prior to engaging others. It will, however, be for the builder to prove that the owner acted unreasonably if it is to make out a defence that the owner failed to mitigate its loss.
The case also highlights that whether an owner is acting unreasonably will depend upon the individual facts of the case. This brings in a wide set of factors that may be relevant to determine whether the owner should give the builder access to rectify to mitigate its loss.
The factors that can be gleaned from the judgments include the following:
- The seriousness of the defects [10] and whether the builder’s work is “systemically” defective; [11]
- Whether builder has made any attempts to rectify the works already and whether those attempts have been effective; [12]
- The cost of having the builder rectify the defects as compared to the cost of having another contractor carry out rectification works;
- Whether the builder is already on site working on the project (in which case it will generally be cheaper for the builder to rectify their own defects as opposed to engaging others); [13]
- The fact that an alternative contractor may wish to perform the remedial work on the basis it is performed from scratch at greater cost, as opposed to rectifying the work already done; [14]
- The builder’s engagement with the owner in respect of the suggested defects and proposed method of rectification, including whether the builder has responded in a timely manner, taken the complaints seriously and acted fairly; [15]
- Whether the builder’s conduct is tantamount to a refusal to repair or take responsibility for repairing the defects; [16]
- Where the builder does not propose a workable scope of works and adopts an unnecessarily aggressive approach;[17]
- The efficacy or perceived futility of continuing to negotiate with the builder. [18]
Finally, although the case did not concern this issue, [19] the other important consideration will be any terms of the construction contract that may govern the rectification of defects. These can typically be found under the defects liability period provisions, which may require a principal to notify the builder of any defects and direct them to carry out rectification works as a sole and exclusive remedy. These provisions not only empower the principal to direct rectification works, but also protect the builder from damages claims where a principal does not give them the opportunity to carry out those works before engaging others. Where such terms apply, the party for whom the work is undertaken should ensure they follow the process.
[1] Initially in the New South Wales Civil and Administrative Tribunal, following which the matter was transferred to the Supreme Court of New South Wales in 2017. The matter was then continually adjourned until orders for filing of pleadings and evidence were made in August 2019.
[2] Although the claim was brought under these statutory warranties, it was accepted by the parties that the common law principles relating to mitigation apply: Ceerose Pty Ltd v The Owners – Strata Plan No 89074 [2025] NSWCA 235 (Ceerose Appeal).
[3] The Court could make orders to refer the matter to a referee to prepare a report which may be adopted by the Court under rule 20.14(1) of the Uniform Civil Procedure Rules 2005 (NSW). This process can facilitate a just, quick and cheap resolution of the issues in a building case given the relative speed with which a referee can hear the case, the relative flexibility and informality of the referee procedure, the fact that the Court can gain the benefit of the referee’s technical expertise and that it will not require the judge to personally review large numbers of disputed items in detail: The Owners – Strata Plan No 89074 v Ceerose Pty Ltd [2024] NSWSC 1494 (Ceerose First Instance) at [4] – [5]. In Western Australia, referees can be appointed under Order 35 rule 9 of the Rules of the Supreme Court 1971 (WA).
[4] Ceerose First Instance at [51].
[5] Ibid.
[6] Ceerose First Instance at [67].
[7] Ceerose First Instance at [73].
[8] Ceerose Appeal at [32] – [34].
[9] Ceerose Appeal at [35] – [40].
[10] Ceerose First Instance at [51].
[11] Ceerose First Instance at [49], citing Owners Strata Plan 78465 v M D Constructions Pty ltd [2016] NSWSC 162.
[12] Ibid.
[13] Ceerose First Instance at [43], citing Cassidy v Engwirda Construction Co (No 2) [1968] Qd R 159, 166.
[14] Ceerose First Instance at [42] and Ceerose Appeal at [32], citing Julian Bailey, Construction Law: Volume II (1st ed, 2011, Routledge) at 1131, [14.109].
[15] Ceerose First Instance at [51].
[16] Ibid.
[17] Ceerose First Instance at [50], citing Owners Strata Plan 89041 v Galyan Pty Ltd [2019] NSWSC 619.
[18] Ceerose First Instance at [51].
[19] The owners corporation claimed under statutory warranties under s 18B of the Home Building Act 1989 (NSW). The construction contracts were between Ceerose and the developer: Ceerose First Instance at [15].