A failure to mitigate?
257 Promptair contended that the Applicants had failed to mitigate their claimed loss in two respects:
(a) Kyren should have given it (Promptair) a reasonable opportunity to undertake the replacement of the AHUs, rather than engaging an alternate contractor (Frigrite) to do so at full commercial rates; and
(b) in relation to Kyren's claim for its own management, administration and Building Superintendent costs (for which Kyren seeks $200,300 (exclusive of GST)), Kyren should have required Lucid to undertake, at its expense, the work for which those costs related.
258 The Applicants accepted that Kyren had been required to give Promptair a reasonable opportunity to rectify the defects. In The Owners-Strata Plan No 76674 v Di Blasio Constructions Pty Ltd [2014] NSWSC 1067, Ball J stated the relevant principles as follows:
[44] In the case of building contracts, it is also generally accepted that the owner must give the builder a reasonable opportunity to rectify any defects. Often, of course, the building contract itself requires the owner to repair defects or sets out a procedure by which defects are to be made good … But, even if it does not, the owner is required to give the builder an opportunity to minimise the damages it must pay by rectifying the defects, except where its refusal to give the builder that opportunity is reasonable or where the builder has repudiated the contract by refusing to conduct any repairs … That obligation may be an aspect of the duty to mitigate, since it may be less expensive for the builder rather than a third party to rectify the defects, particularly if the builder is still on site. But the obligation is not simply an aspect of the duty to mitigate. The cost to the builder of undertaking the repairs is likely to be less than the amount that a third party would charge the owner for the same work. In that case, the owner is not mitigating its loss, but rather the builder's damages.
[45] The question of what is reasonable depends on all the circumstances of the particular case. One relevant factor is what attempts the builder has made to repair the defects in the past and whether, in the light of the builder's conduct, the owner has reasonably lost confidence in the willingness and ability of the builder to do the work …
[46] It is for the defendant to prove that the plaintiff has acted unreasonably. It is not for the plaintiff to prove that it acted reasonably …
(Citations omitted)
259 Promptair submitted that the Applicants had acted unreasonably in the present case in failing to give it the opportunity to undertake the removal and replacement of the AHUs. It submitted as follows:
(a) it had endeavoured to do all that it could to assist Lucid and Kyren to rectify the position between April 2013 and July 2014;
(b) its lack of success in these efforts was attributable to the impossibility of achieving the performance criteria contained in the First Specification. In particular, it had:
(i) supplied new fans at its own cost;
(ii) supplied 10 new coils at its own cost even though Mr Upton, its Project Manager, had been of the view that the coils were not the problem;
(iii) had agreed to supply new coils for all the 48 AHUs at its own cost. Mr Thornton had estimated the cost of replacing the coils, including labour, at $3,700 per coil; and
(iv) had undertaken testing and modifications as suggested from time to time by Lucid;
(c) Mr Thornton had deposed that following the receipt of Mr Samaras' email of 24 July 2014 indicating that Promptair should replace the AHUs, he had directed his "team" to prepare for the replacement of the AHUs at Promptair's cost by seeking quotes and technical data from AHU suppliers and preparing a program or works. Mr Stevens had informed Messrs Samaras, Kotzias, Dally and Lucid Personnel of the actions Promptair had taken but, at the same time, had cautioned that, realistically, 12 weeks was required for delivery irrespective of the selected brand of replacement AHUs;
(d) although Mr Stevens had provided to Mr Roach at Lucid the technical data for Temperzone and Carrier AHUs, Promptair had not been provided with a substantive response;
(e) Promptair and Lucid would have been able to proceed much more quickly had Lucid acknowledged the inconsistency in the First Specification, something which it did not do until Mr Stanton acknowledged it in the course of his cross-examination; and
(f) when Promptair received the Notice of Default, it had continued to cooperate. Counsel referred to this respect to the counter-proposal contained in MinterEllison's letter of 19 September 2014, referred to as "amendments" which were:
(i) Promptair being permitted to purchase the AHUs from Temperzone so as to be able to negotiate its own payment terms;
(ii) Promptair being released from any liability if the Temperzone AHUs did not perform to the required specification; and
(iii) Promptair meeting the cost of the work in the Third Specification but being permitted to "include such of these costs as are appropriate in its Notice of Variation claim".
Counsel also submitted that the reasonableness of Promptair's position is evident in MinterEllison's letter of 19 September 2014 to Mr Shubin indicating that the counter-proposal was not subject to Kyren's acceptance of its claim for a Contract Variation of $745,826 (excluding GST).
260 In the light of these matters, Promptair submitted that the Court should conclude that it had remained ready, willing and able at all times to cooperate with Kyren to replace the AHUs, including with the AHUs of greater capacity specified in the Third Specification and that it had been unreasonable of Kyren not to have permitted it to do so. It submitted that, if Kyren had accepted the counter-proposal in MinterEllison's letter of 19 September 2014, it would then have carried out the work and Kyren would have suffered no loss. In this circumstance, the Court should conclude that Kyren's failure to mitigate its loss was fatal to its claim for damages in its entirety.
261 Promptair submitted that, despite the correspondence being directed to it, Kyren had been determined on Frigrite undertaking the work. Its submission also seemed to be that Mr Shubin had a conflict of interest in his capacity as Project Director of Kyren, on the one hand, and Managing Director of Frigrite, on the other, given the prospect of, and later agreement for, Frigrite to carry out the work.
262 Some of the matters on which Promptair relies may be accepted. As the course of events which I set out at the commencement of these reasons indicates, Promptair did undertake a number of actions with a view to addressing the shortcomings in the performance of the air conditioning system in the Building and, in particular, in the AHUs. Mr Thornton had given the direction to his "team" which he claimed, and Mr Stevens did provide information to Lucid and Kyren as claimed.
263 However, I consider that a number of the matters on which Promptair relies are based on a selective viewing of the evidence.
264 It is appropriate to keep in mind that, for much of the period during which Promptair was behaving in the creditable way claimed by counsel, it knew (or can be taken to have known) of two matters:
(a) it had not supplied the Fläktwood AHUs for which it had been given approval; and
(b) the inconsistency in the First Specification. Mr Kärner had drawn its attention explicitly to the inconsistency and yet Promptair had chosen to submit technical data for approval on the basis that there could be compliance with the First Specification.
265 Promptair did not acknowledge the first of these matters to Lucid and Kyren until April 2014.
266 Accordingly, Promptair's conduct does not have the "innocent" character in this respect which counsel sought to portray.
267 Secondly, Promptair's submission that it had not received a substantive response to Mr Stevens' email of 30 July 2014, is not supported by the evidence, as Mr Samaras had responded the same day. The terms of his email indicate Mr Samaras' increasing concerns about the credibility of Promptair. These included, the fact that Promptair had indicated in August and September 2011 that Carrier did not make AHUs which satisfied the performance criteria but was now producing data for Carrier AHUs; and Promptair having supplied the inferior ESAC AHUs instead of the approved Fläktwood AHUs. Mr Stevens responded to Mr Samaras on 31 July 2014, defending Promptair's position. Mr Samaras' further response on 31 July 2014 including the following:
Your comments are [embarrassing] to Promptair and Peter [Thornton] should deal with [these] sort of responses!!!
You should go back and read the correspondence in regards to this matter as you are wasting my valuable time.
268 Then, on 12 August 2014, Mr Shubin in his capacity as Project Manager for Kyren, sent (on Kyren letterhead) the email to which I referred earlier. The letter required Promptair to replace the 48 AHUs with Temperzone AHUs in accordance with the Second Specification and in accordance with an attached work program. Contrary to Promptair's submissions concerning mitigation, Mr Thornton's response to that email cannot reasonably be regarded as evincing a spirit of helpfulness and cooperation. As noted earlier, Mr Thornton refused to accept Mr Shubin's authority to give the direction, despite having been told by Mr Samaras as recently as 26 July 2014 that Frigrite, of which Mr Shubin was the Managing Director, would be the Project Manager in his (Mr Samaras) absence on leave and that it had "full control to act for Kyren to mitigate all the events in regards to the Mechanical Outstanding matters".
269 Despite Mr Thornton's rejection of Mr Shubin's direction, Mr Samaras made a "last request" to Promptair on 18 August 2014 for it to reconsider its position. Mr Thornton's response on 20 August 2014 appeared to concede only that Promptair would install one Temperzone AHU for testing and, if that was satisfactory, would purchase the remaining 47 AHUs. However, Promptair did not commit to that course. It left uncertain how things would progress. Furthermore, in his letter to Lucid of 21 August 2014, Mr Thornton said that Promptair was puzzled by the Second Specification. The questions he asked indicated that Promptair intended to pursue the issue of whether the First Specification had been capable of being achieved. In a letter to Mr Shubin of 21 August 2014, Mr Thornton raised the same issue. In addition, Mr Thornton queried the need for replacement of the AHUs. In particular, his letter made plain that, even if the Temperzone AHU was satisfactory, Promptair did not commit to replacing the remaining AHUs.
270 It is noteworthy that Mr Thornton continued to wish to agitate the inconsistency issue, even though Promptair had been aware of it at the time of seeking the approval of the AHUs and had not sought any Variation to the Contract on its account. Instead, Promptair had sought approval of the data relating to the ESAC AHUs on the basis that they would meet the required performance criteria.
271 The fact that the MinterEllison letter of 19 September 2014 had made it clear that Promptair's counter-proposal was not subject to Kyren's acceptance of the variation claim of $745,826 excluding GST appears to be a matter of little consequence. Acceptance of Promptair's counter-proposal would have required Kyren to agree that Promptair would be entitled to include the cost of the removal and replacement of the AHUs, and their supply, in a notice of Variation claim. That is to say, Promptair sought Kyren to commit to means by which Kyren would, or may, be responsible ultimately for the payment of the work. That being so, Promptair's submission that, had Kyren accepted the counter-proposal, it would have suffered no loss lacks merit.
272 In my opinion, it is understandable that in September 2014, Kyren wished to proceed with dispatch. More than 20 months had elapsed since the completion of construction in January 2013. As Mr Samaras had pointed out repeatedly to Promptair, considerable time, energy and effort had been expended in attempts to overcome the shortcomings in the air conditioning in the Building. The summer of 2014-2015 was imminent and, given the lead times for the supply of replacement AHUs, it was reasonable, in my opinion, for Kyren to take the view that time had become critical. There were no indications that Promptair was willing to act with the alacrity which the situation demanded, and indeed there were indications that it would not. I consider it understandable that Kyren wished to take control of the progress of work, especially in the light of the opportunities it had given to Promptair to take the action itself. It had given Promptair multiple warnings that it may do so and that, in that event, it would look to Promptair to make good the costs.
273 In all these circumstances, I consider that Promptair has not established that Kyren failed to take reasonable action to mitigate its own loss and, in turn, the loss of Promptair. This basis for defence of the damages claim fails.