PRINCIPLES AS TO THE MEASURE OF DAMAGES
77 Tabcorp argued that there was no reason to disturb the primary judge's assessment of damages for the breach of either cl 2.13 itself, or that clause and one or more of cll 2.10, 2.11 or 2.12. It argued that the basis upon which the primary judge reached his assessment provided a true reflection of the reasonable cost of repair and restoration work needed to address its breaches of the lease. It also pointed to criticisms of the application of the rule in Joyner [1891] 2 QB 31 by academics and various Parliaments in enacting legislation such as s 133A of the Conveyancing Act (NSW). However, Tabcorp accepted that the policy of the Parliament of Victoria was reflected in its inaction on this issue, in contrast to other jurisdictions.
78 Nonetheless, Tabcorp argued that, in reliance on James [1950] 1 KB 9 and the decision of the House of Lords in Ruxley Electronics & Construction Ltd v Forsyth [1996] 1 AC 344, the intention of the injured landlord or plaintiff as to the use of any damages he, she or it receives, can be relevant to their quantification. Thus, in James [1950] 1 KB 9, the official referee had found that despite making a claim for damages for alterations to the heritage façade, the landlord in that case had no intention of actually effecting repairs for which damages were sought. The English Court of Appeal held that the plaintiff was only entitled to nominal, not substantial damages. Tabcorp relied in particular on what Lord Lloyd of Berwick had said in Ruxley [1996] AC 344 at 372C-D:
'… the courts are not normally concerned with what a plaintiff does with his damages. But it does not follow that intention is not relevant to reasonableness, at least in those cases where the plaintiff does not intend to reinstate.'
See also Dowding and Reynolds, Dilapidations: The Modern Law and Practice (3rd ed, Sweet & Maxwell, 2004) at [31-05]; cf: Alfred McAlpine Construction Ltd v Panatown Ltd [2001] 1 AC 518 at 549C-551G per Lord Jauncey of Tullichettle, cp: the dissenting views per Lord Goff of Chieveley at 589F-590H and per Lord Millett at 592F.
79 Their Lordships reviewed a number of authorities including Bellgrove v Eldridge (1954) 90 CLR 613 and Jacob & Youngs Inc v Kent 230 NY 239; 129 NE 889 (1921) in which the majority judgment of the Court of Appeals of the State of New York was delivered by Cardozo J. The House of Lords concluded that a relevant matter for the Court to take into account in quantifying damages, in a case where work as constructed did not completely meet the specifications but achieved the practical purpose for which it was built, was whether the plaintiff owner intended to use any damages awarded in reinstating the work. They held that the intention of the plaintiff not to use the award to reinstate, when as a practical matter the work as construed substantially served its purpose, could make it unreasonable to quantify the damages at the cost of reinstatement.
80 The underlying policy rationale for this reasoning seems to be that the owner can keep and use the technically defective, but practically useful, work and, at the same time, have the whole of the cost of its rectification in his or her pocket. Lord Jauncey of Tullichettle observed that damages are designed to compensate for an established loss and not to provide for a gratuitous benefit to the aggrieved party. It followed, he said, that the reasonableness of an award for damages was to be linked directly to the loss sustained: Ruxley [1996] AC at 357E-F. Thus, he held that if it were unreasonable in a particular case to award the cost of reinstatement, that must be because the loss sustained did not extend to the need to reinstate. A failure to achieve the precise contractual objective did not necessarily result in a loss which was occasioned by a total failure to comply with the contract. He said that such a result was recognised by the High Court's qualification of the rule for the award of damages in a building case expressed in Bellgrove 90 CLR at 617-618. He characterised this as providing that the quantification of damages to achieve conformity with a contract would be qualified by the requirement that the work to be undertaken was not only necessary to achieve conformity but was a reasonable course to adopt. Lord Lloyd of Berwick used similar reasoning: Ruxley [1996] AC at 366E-370B.
81 In Bellgrove 90 CLR at 618-619 Dixon CJ, Webb and Taylor JJ said that a building owner's right to undertake remedial works at the expense of a builder is not subject to any limit other than is to be found in the expressions 'necessary' and 'reasonable'. They observed that many examples could be given of remedial work which, though necessary to produce conformity, would not constitute a reasonable method of dealing with the situation. They held that:
'… in such cases the true measure of the building owner's loss will be the diminution in value, if any, produced by the departure from the plans and specifications or by the defective workmanship or materials.
As to what remedial work is both "necessary" and "reasonable" in any particular case is a question of fact.' (emphasis added)
82 The words just emphasised refer to a different test to that provided by the rule in Joyner [1891] 2 QB 31 and Graham 67 CLR 568. They reflect a general measure of damages similar to the qualification of the rule in Joyner [1891] 2 QB 31 applied by a provision such as s 133A of the Conveyancing Act 1919 (NSW).
83 But in Bellgrove 90 CLR 613 the High Court proceeded on a distinct, and conceptually sounder, basis than the intention of the owner to limit the damages recoverable for defective work. They looked at whether the rectification work was objectively both necessary to produce conformity with the specifications and a reasonable expedient. Dixon CJ, Webb and Taylor JJ did not have regard to the subjective intention of the plaintiff to use any award. Rather, they held that if it were objectively reasonable to require the work, damages were payable. Dixon CJ, Webb and Taylor JJ said in Bellgrove 90 CLR at 620:
'It was suggested during the course of argument that if the respondent retains her present judgment and it is satisfied, she may or may not demolish the existing house and re-erect another. If she does not, it is said, she will still have a house together with the cost of erecting another one. To our mind this circumstance is quite immaterial and is but one variation of a feature which so often presents itself in the assessment of damages in cases where they must be assessed once and for all.' (emphasis added)
See too Carter & Harland's Contract Law in Australia (4th ed, Butterworths, 2002) at [2156]; Seddon & Ellinghaus, Cheshire & Fifoot's Law of Contract (8th Aust ed, Lexis Nexis, 2002) at [23.26], p 1001.
84 If a reasonable person would not require rectification or reinstatement because the work or cost necessary to bring about conformity with the specifications was out of all proportion to the disconformity, and if the work substantially served its purpose, then it would not be reasonable to use, as the measure of damage, the cost of reinstatement. This has nothing to do with the subjective purpose of a plaintiff in an action for breach of contract. Nor should it.
85 Where issues of personal taste affect a person's decision to specify work of a particular kind or quality to be performed as part of a contract, the other contracting party is not usually at liberty to depart from that specification in performing the work. That is why the Court held in Bellgrove 90 CLR at 617 that a builder who provided a building painted in quite a different colour to that specified in the contract would be liable for the cost of repainting.
86 Many actions for damages for breach or enforcement of rights under a contract involve cases in which a party will not use the amount recovered as any form of compensation. Thus, the rules for quantifying damages in cases of sales of goods or shares may give buyers or sellers windfalls because they depend on market prices on a particular day when the plaintiff, had the transaction actually occurred on that day, would have suffered a loss or made a profit according to how radically the market changed on the next day. In such cases it is still necessary and reasonable to award damages, even though the plaintiff may, in truth, not be compensated by such an award and, indeed, may receive a windfall. The use of a plaintiff's subjective intentions as to what will be done with the award as a criterion for assessing his or her entitlement to damages for a breach of contract will produce commercial uncertainty. The purpose of the law of contract is to enforce bargains, good or bad, according to their terms. It is not to enforce or ignore what the subjective views of a party might be.
87 In Director of War Service Homes v Harris [1968] Qd R 275 at 278-279 Gibbs J, with whom Stable and Hart JJ agreed, held that Bellgrove 90 CLR 613 established the applicable measure of damages which a building owner was entitled to recover when a builder, in breach of contract, delivered to the owner a building which did not conform to the specifications. Gibbs J said:
'If the owner subsequently sold the building, or gave it away, to a third person, that would not affect his accrued right against the builder to damages according to the same measure. The fact that the building had been sold might be one of the circumstances that would have to be considered in relation to the question whether it would be reasonable to effect the remedied work, but assuming that it would be reasonable to do the work the owner would still be entitled to recover as damages the cost of remedying the defects or deviations from the contract (assuming of course that the contract price had been paid). In assessing those damages it would not be relevant whether the owner was under a legal liability to remedy the defects, or whether he had made a profit or a loss on the sale of the building, for the builder has no concern with the details of any contract that the owner might make with a third party. There is a principle that in actions of non delivery or breach of warranty under a contract for the sale of goods "the law does not take into account in estimating the damages anything that is accidental as between the plaintiff and the defendant, as for instance an intermediate contract entered into with a third party for the purchase or sale of the goods" (Rodocanachi v Milburn (1886) 18 QBD 67 at 77: Williams Brothers v Ed T Agius Ltd [1914] AC 510; Slater v Hoyle [1920] 2 KB 11). And this principle (which has been applied to a contract for the sale of a lease, plant, buildings and stock, treated as Realty-Brading v F McNeill & Company Limited [1946] Ch 145) should in my view be similarly be applied to the case of a building contract.' (emphasis added)
88 Gibbs J then applied that principle. He held that the owner of the defective building had an accrued right to damages, the quantum of which was not affected by what the owner might decide to do in the future. I am of opinion that the principle stated by Gibbs J was correct and should be followed.
89 However, since then, a number of appellate decisions in Australia has examined the application of the principle in Bellgrove 90 CLR 613 in a variety of situations, principally in building contracts. The Court of Appeal of the Supreme Court of New South Wales in Hyder Consulting (Australia) Pty Ltd v Wilh Wilhemsen Agency Pty Ltd [2001] NSWCA 313 decided that the actual cost of the replacement work should be awarded. This result was unsurprising. There, the trial judge had applied a theoretical cost for rectifying defective building work in proceedings taken against an architect who did not pass on instructions to the civil engineer as to the strength required for a pavement which was constructed. However, the actual cost of the rectification work was in evidence and was significantly less than a quote which the trial judge had applied. Meagher JA held that the actual cost should be discounted for betterment, but the majority, Sheller and Giles JJA disagreed.
90 Giles JA delivered the leading judgment, with which Sheller JA agreed: Hyder [2001] NSWCA 313 at [25]. Giles JA discerned a principle that if rectification work had not been carried out, then a theoretical cost had to be found, because damages must be assessed once and for all, and must be awarded even though the rectification work might not be carried out: Hyder [2001] NSWCA 313 at [99]. He added that previously in Central Coast Leagues Club Limited v Gosford City Council (unreported, Sup Ct, NSW, 9 June 1998) he had held that no damages should be awarded if it were found that the rectification work would never be carried out. He said that Harris [1968] Qd R 275 and De Cesare v Deluxe Motors Pty Limited (1996) 67 SASR 28 (a decision of the Full Court of the Supreme Court of South Australia) were distinguishable on the ground that the actual cost of rectification was not known in either case. He also said that, in Harris [1968] Qd R 275, it had been held that the reasonable cost of rectification '… could still be the measure of the former building owners' losses': Hyder [2001] NSWCA 313 at [99]-[100] (emphasis added).
91 However, in Harris [1968] Qd R 275, the actual cost of rectification work had been paid by the Director of War Service Homesafter he had sold the properties to purchasers who had complained about the building defects. Hyder [2001] NSWCA 313 was, in fact, a case very similar to Harris [1968] Qd R 275 on the facts, because the building work had been rectified in each case. In the Queensland case the property had been sold, but the original building owner was held to be entitled to recover. As Meagher JA pointed out in Hyder [2001] NSWCA 313 at [19] the ratio of Bellgrove 90 CLR at 617-618 was that:
'… where the price of rectification is ascertained, that price cannot be discounted because of the fact that the plaintiff will not, or might not, spend all the money on the rectification in question.'
92 Most recently in Westpoint Management Ltd v Chocolate Factory Apartments Ltd [2007] NSWCA 253, Giles JA, with whom McColl and Campbell JJA agreed (at [112] and [113]), accepted a criticism of his reasoning in Hyder [2001] NSWCA 313 subsequently made by Hodgson JA in Scott Carver v SAS Trustee Corporation [2005] NSWCA 462 (from which special leave to appeal was refused on the ground that no challenge had been made to Bellgrove 90 CLR 613; see Ace Ceramics Pty Limited v SAS Trustee Corporation [2006] HCA Trans 325). Giles JA noted that in Hyder [2001] NSWCA 313 at [99] he had referred to his earlier decision in Central Coast Leagues Club as holding that if it were found that rectification work would never be carried out, no damages should be awarded. In Chocolate Factory [2007] NSWCA 253 at [62], he accepted the reservations expressed by Hodgson JA in SAS Trustee [2005] NSWCA 462 at [40]-[44] and agreed that what he said in Central Coast Leagues Club was apt to mislead. Giles JA revised his earlier view saying that it is necessary to ask why the rectification work would never be carried out. He held that if rectification work would not be carried out because of supervening events and it was established that the plaintiff had not been deprived of the benefit of the performance of the contract, it would suffer nocompensable loss. Giles JA said that the plaintiff's intention to carry out the rectification work was not of significance in itself. He said in Chocolate Factory [2007] NSWCA 253 at [60]:
'The significance will lie in why the plaintiff intends or does not intend to carry out the rectification work, for the light it sheds on whether the rectification is necessary and reasonable. Putting the same point not in terms of intention, but of whether or not the plaintiff will carry out the rectification work, whether the plaintiff will do so will have significance for the same reason, and not through the bald question of whether or not the plaintiff will carry out the rectification work. That question is immaterial, see Bellgrove v Eldridge.'
93 In my opinion that reasoning is contrary to the decision in Bellgrove 90 CLR 613. A plaintiff whose walls were painted the wrong colour would suffer a loss, equating to the cost of repainting. The fact that the plaintiff may not wish to spend that money because he or she had changed their mind about the attractiveness of the colour, or subsequently sold the house, does not affect the fact that the work was performed in breach of contract and, in order to make good the breach, rectification was both reasonable and necessary. The necessity which the rule in Bellgrove 90 CLR 613 addresses goes to the question of bringing the work into conformity with the contractual promise. Reasonableness goes to whether the performance provided, defective as it was, ought be corrected having regard to the objective intentions of the parties discerned from their contract. Hence the example in Bellgrove 90 CLR at 618 of it being unreasonable to require rebuilding where the specification was for second-hand bricks and new ones were used. Doyle CJ captured the applicable principle neatly in De Cesare 67 SASR at 32 saying:
'… the owner who chooses to make do with defective contractual performance is entitled still to an appropriate award of damages because that is the measure of what the plaintiff has lost.'
94 Most recently, in UI International Pty Ltd v Interworks Architects Pty Ltd [2007] QCA 402 the Court of Appeal of the Supreme Court of Queensland looked once again at this question. Keane JA, with whom Holmes JA agreed, delivered the leading judgment. The case involved an appeal against a striking out of certain paragraphs of a statement of claim. There, UI International had developed and sold most of a major residential, retail and office development project. After construction was completed, the development was subdivided into a number of community title schemes. Most of the lots in the schemes had been sold. No loss was claimed on the basis that UI International had not received full market value for lots that it had sold, or that any lots it retained were worth less than full market value by reason of the alleged defects. Rather, UI International claimed that it was entitled to damages against the builder and others on the basis that the project as constructed failed to meet its 'development objective'. That 'development objective' was defined in the statement of claim to be a development erected on the land which was reasonably fit for its intended purpose, namely a good quality marketable mixed purpose commercial, retail, and residential complex. The Queensland Court of Appeal held that it was not arguable to assert that the defendants had not constructed a good quality marketable project when the lots in it were sold or were worth no less than they would have been had the alleged defects not been present.
95 In UI International [2007] QCA 402 at [89], Keane JA said that the Court must ask what amount of money is necessary to put the plaintiff in the position it would have been in had the project been marketable as promised in accordance with the fundamental principle of assessment of damages for breach of contract. In the factual context of that case, he held that the answer was the amount of money which reflected the difference between actual realisable value in the market and the realisable value the project should have had. On the pleaded case there, he said that difference was nil. Keane JA distinguished Bellgrove 90 CLR 613 saying that it stood in marked contrast to cases where a plaintiff's expectation interest under the contract was in the marketability of the development. In cases like that, Keane JA said that the plaintiff's expectation interest could be fully vindicated by an award of damages which reflected the diminished value of the asset as an article of commerce in comparison with the article which should have been produced: UI International [2007] QCA 402 at [88]. Keane JA followed what Gibbs J had said in Harris [1968] Qd R at 278-279 (UI International [2007] QCA 402 at [94], see too at [93]), saying:
'The private intentions of one party must not be confused with the contractual intentions of the parties enshrined in the contract'.