Can a builder recover damages from a subcontractor for defective work, in circumstances where the property owner has not brought a claim against the builder?

Written by Katie Vilsbaek

To establish the position, two cases will be considered:

1. Alucraft Pty Ltd (in liquidation) v Grocon Ltd (No. 2) 1996 2 VR 386; and
2. Cubic Metre Pty Ltd v C & E Critharis Constructions Pty Ltd [2020] NSWSC 479.

Alucraft Pty Ltd (in liquidation) v Grocon Ltd (No. 2) 1996 2 VR 386

In a cross-claim pursued by a builder against its subcontractor, it was accepted that the subcontractor’s work had been defective. However, the subcontractor argued that it should not be liable to the builder for those defects in circumstances where the owner had not brought any claim against the builder for them, and the builder had not rectified the work.

The Supreme Court of Victoria held that:

1. Where the work is defective, the builder does not receive the benefit contracted for and is exposed to a loss or the risk of a loss. It held that the damages were the higher of:
   • The amount it paid for the defective works (the subcontractor’s invoice); and
   • The cost of rectifying the defective work, discounted for the likelihood that it will not be called on to rectify.
2. Although the owner had issued a final certification three years before the case was heard, there remained a risk that the builder would be called on to rectify the defective work. However, that risk was remote, and resulted in the damages being discounted from $35,000.00 to $5,000.00.

Discussion

The question in the cross-claim was whether the builder could point to a loss resulting from the breach by the subcontractor, that would result in damages being awarded.

The subcontractor argued that the builder had not suffered a loss, as it had been paid the full contract price by the owner, and to pay the subcontractor the full contract price would leave the subcontractor in the same position it would have been in if the breach had not occurred. The subcontractor further pointed out that the builder had not attempted to rectify the defective work and led no evidence that it intended to. Further, there was no evidence that the owner was likely to call on the builder to rectify the defective work, three years after completion.

In considering the builder’s position, the Court, in obiter, discussed the “typical case” where a builder is required by the property owner to rectify the defective work. In that situation, the Court considered that an actual financial loss may be pointed to by the builder, being the reduction of profit or the increased loss represented by the costs of rectifying the defects.

The Court considered that generally cases will vary in the extent to which it is likely that the builder will be liable and noted that if the builder voluntarily rectified the defective work (without being required to by the property owner) the cost of rectification might be recoverable in appropriate circumstances (given this was not the case here, the Court did not elaborate on the point).

Cubic Metre Pty Ltd v C & E Critharis Constructions Pty Ltd [2020] NSWSC 479

In this case, the builder brought a claim against a subcontractor for defective works. At the time of being heard in the Supreme Court of New South Wales, rectification works had not been undertaken. The builder pleaded (in the Local Court) that it was “obliged to repair the defective sea wall pursuant to the Contract with the Owners, and has suffered a loss as a result of the Owners withholding monies due to the defective sea wall.” However, it also sought the costs to rectify the wall.

The Local Court found there was a breach of the subcontract and a statutory breach, related to the use of materials by the subcontractor. On that basis, it found that the builder suffered the loss of monies being held in retention by the property owner. However, on the question of rectification costs, the Court could not find that this was a loss to the builder (the rectification costs had not been incurred, and no evidence was presented that indicated an intention to incur rectification costs).

On appeal in the Supreme Court, the Court granted the subcontractor leave to appeal as it found the builder was not entitled to damages based on the retention monies, as the builder’s evidence in the Local Court had not been sufficient to show that the loss was suffered because of the breach by the subcontractor.

In relation to the builder’s appeal, it argued that the Local Court erred in refusing the claim for rectification costs. The Supreme Court found no error in the Local Court’s approach. A significant factor in the Supreme Court’s decision was the fact the owner was out of time to pursue any claim against the builder. Accordingly, the builder could not be required to rectify the defects, and therefore did not and could not suffer a loss.

Conclusion

The above cases show that a builder can recover damages from a subcontractor for defective work, even if the owner has not brought a claim against the builder. However, it will depend on various factors including the likelihood of the owner ultimately bringing a claim against the builder. The Courts will consider a number of case-specific factors, including:

1. The length of time that has passed between the defective works being undertaken and the claim being made;
2. Whether the rectification works have been undertaken and paid for by the builder;
3. Whether the head contract requires the builder to rectify the defective works;
4. The probability of the property owner requiring the builder to rectify the defective works; and
5. Whether there are any monies withheld by the property owner against the builder.

If you wish to discuss this decision, please contact Sindri Bergsson on 02 9044 3263 or any member of the Ligeti Partners team on 03 9947 4500.