Lost opportunity: can owners refuse a builder access to rectify defects

A decision of the New South Wales Court of Appeal has addressed an important question in residential construction disputes: must an owner give a builder an opportunity to rectify defects before claiming the cost of rectification?

In Ceerose Pty Ltd (Ceerose) v The Owners – Strata Plan No 89074 (Owners), the Court of Appeal held that there is no positive obligation for an owner to provide a builder the opportunity to rectify and that refusal of access will not necessarily amount to a failure to mitigate loss.

However the Court of Appeal did not directly address the interaction of the common law with relevant statutory provisions. 

Background

Ceerose constructed a Sydney apartment building known as The Eliza, which was completed in 2014.
The Owners commenced proceedings alleging numerous defects that breached statutory warranties under the Home Building Act 1989 (NSW) (HBA).

After the proceedings commenced there were discussions regarding completion of urgent works by Ceerose and an “in principle” settlement was reached for Ceerose to undertake a list of rectification work, but a full year passed without final agreement.

Between 2018 and 2019, the Owners repeatedly communicated that they had lost confidence in Ceerose and would not allow further rectification attempts.

Supreme Court

In the Supreme Court, a court‑appointed referee was tasked with reporting on liability and the amount of damages. 

Although Ceerose conceded some defects, it argued that it had always been ready, willing and able to carry out rectification and that the Owners acted unreasonably by refusing access for that purpose. The Owners had therefore “failed to mitigate its loss, reasonably or otherwise, such that any avoidable loss cannot be recovered”.

The referee found that:

1.  Ceerose bore the onus of proving unreasonableness in the OC’s refusal to allow access; and

2.  the OC’s loss of confidence in Ceerose made their refusal reasonable.

Justice Rees agreed with the referee that “the fact that the owner refused access does not, of itself, shift the onus of proof from the builder to the owner to prove the reasonableness of that decision” and entered judgment against Ceerose.

The appeal

On appeal, Ceerose argued that the Owners had a “positive obligation” to provide Ceerose with a reasonable opportunity to rectify defects and that once it demonstrated that it was willing and able to undertake rectification, the evidentiary burden shifted to the Owners to justify refusal.

The Court of Appeal rejected this argument.

At common law (and it seems under s18BA of the HBA), the onus is on the defendant (here, the builder) to prove a failure to mitigate. This includes the obligation to establish that the plaintiff acted unreasonably.

There is no special common law rule applicable to building contracts that an owner must invariably give the builder a chance to rectify. It may be reasonable in some circumstances to offer that opportunity, but it is not a “positive obligation”.

On the facts, the Owners' loss of confidence was genuine and reasonable and supported by evidence and the builder failed to prove unreasonableness. The appeal was dismissed.

Interaction with the Home Building Act

Curiously and importantly, although the dispute arose under the statutory warranty regime, neither party relied on key provisions of the HBA, particularly sections 18BA (mitigation and access obligations) and 48MA (preference for rectification).

Section 18BA – Mitigation and Access

Section 18BA codifies the duty to mitigate in breach of statutory warranty claims. It provides that an owner has a duty to mitigate their loss and “must not unreasonably refuse” the builder such access to rectify as the builder “may reasonably require for the purpose of or in connection with rectifying the breach (the duty to allow reasonable access)”. 

Is that a positive duty (the "duty to allow reasonable access") of the kind the Court of Appeal rejected? 

Because the parties proceeded on the assumption that common law principles relating to mitigation applied in Ceerose, unaffected by this provision, the Court applied the common law approach without considering whether s18BA(3)(b) might impose a more structured duty to provide access.

The section also confirms that the onus of proving failure to mitigate remains on the builder – mirroring what the Court of Appeal reaffirmed as being the common law.

Section 48MA – Preferred Remedy of Rectification

Section 48MA instructs courts and tribunals determining a building claim involving an allegation of defective residential building work to regard rectification by the builder as the preferred outcome. 

The section does not impose a pre‑litigation obligation on owners, but does s48MA create an implicit expectation of access to rectify? Because the HBA states that rectification is the preferred outcome for court or tribunal proceedings and because mitigation requires reasonable steps to minimise loss, giving the builder access might be thought to be the default position, and s48MA could influence what is considered “reasonable” conduct in mitigation.

Again, this section of the HBA was not raised by either party or considered by the Court.  Had section 48MA been argued, Ceerose may have contended that the statutory preference for rectification should weigh against an owner’s refusal to provide access. The Court may not have accepted this argument, but they would have had to engage with it.

Key takeaways

At common law, owners have no positive obligation to allow a builder the opportunity to undertake rectification works and builders have no automatic right to return to rectify defects.

Instead, the onus is on the builder to prove any alleged failure to mitigate loss by refusal of that opportunity. 

Consistent with long standing common law principles, this requires the builder to establish that the owner acted unreasonably in refusing access. A genuine and well documented loss of confidence in the builder may justify an owner’s decision to refuse rectification opportunities. 

While sections 18BA and 48MA of the HBA may influence future decisions concerning breaches of the statutory warranties implied in contracts to undertake residential building work, until directly tested the traditional common law approach regarding mitigation confirmed in Ceerose continues to apply. 

Authors: David Creais and Barbara Farhat

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.