**Fordham v P Hobson (Home Building) [2011] NSWCTTT 103 (17 March 2011)

Application for compensation for defective building works. Cross claim for unpaid money

The homeowners were represented by Mr J Carpenter of Messrs Blackwell Short Solicitors of Orange and Mr Shepherd instructed by Mr Finch represented the builder

Directions: various commencing 25 October 2007 with about a dozen mentions or directions hearings in 2008 and another 10 in 2009

Home Building Act 1989

Mitigation of loss; quantum of damages; estoppel; specifications.

Dewsash Pty Ltd t/as P Hobson is to pay James Fordham $8,000.00 immediately.

James Fordham is to pay Dewsash Pty Ltd t/as P Hobson $7,000.00immediately.

1. James Fordham is to pay the costs of Dewsash Pty Ltd as agreed or assessed.

4. Order 3 stayed for 21 days from the date of these reasons for the parties to file written submissions on costs.

This was an application by a homeowner for compensation in relation to building works carried out by the respondent builder at Bendick Murrell in the central west of NSW. In particular the homeowner complained that the concrete slab on which the dwelling was to stand was defective. Subsequently a cross claim was lodged by the builder for money he claimed to be owed.

In deciding the matter I had the benefit of detailed witness statements from Mr Fordham as applicant and Mr Hobson for the respondent company and I saw both of them cross examined on their evidence. Two engineers, Mr Andrew Simpson and Mr Robert Noonan, also gave evidence. Mr Simpson was cross examined at length on his report. Various documentary exhibits were also before me including the contract, plans and specifications, engineer's details for the slab and its subsequent augmentation, a file from Young Council, a geotechnical report on the site, sketches of levels together with an amount of correspondence passing between the parties and their legal representatives. I have given appropriate weight to each aspect of the evidence as it emerged before me.

After the hearing the parties made written submissions on the evidence and the conclusions I should draw from it.

The relevant facts, as I find them, are as follows. In 2000 and 2001 the applicant made preparations for the construction of a cavity brick cottage on rural land he owned at Bendick Murrell near Young in NSW. In about March 2002 he approached the respondent about constructing a home on the site in accordance with plans and specifications he already possessed.

After negotiations, which included the builder preparing two quotes, a contract in the standard HIA form was executed on 25 June 2002. There had been some delay in the builder obtaining homeowners warranty insurance and site work only commenced in November 2002. The contract provided for a price of some $187,000.00 with no deposit and a schedule of progress payments commencing with $50,000.00 when slab and underfloor plumbing were complete.

It is clear that the homeowner took a keen interest in all aspects of the works and was on site most days. An earthmoving contractor was engaged to excavate the footings for a concrete slab, the engineering detail for which had been obtained independently by the applicant.

As the slab excavation progressed in December 2002, Mr Fordham came to think that he needed to supplement the advice he was getting from the builder. He sought and obtained outside advice. As a result he insisted that Mr Hobson laid road base and remove all vegetable matter from the excavation. Mr Hobson on the other hand had been satisfied, from his building experience, with the natural ground as a substrate but acceded to the request. That was first of many approaches by Mr Fordham for Mr Hobson to adhere strictly to building practice and the plans and specifications for the job as they were understood by him.

There were complaints about service conduits passing through the excavation, questions about the depth of the concrete and so on. There was input from a builder friend of Mr Fordham, from an engineer in Sydney (a Mr Bradshaw), from the designer of the house and several visits from the council inspector. All this before the slab was poured and it was also at this stage that a local engineer Mr Andrew Simpson was engaged.

In March 2003 Mr Simpson inspected the works, took penetrometers' readings and approved the pour, making contemporaneous notes of his site inspection. He did recommend that vegetable matter be removed from the trenches and that strengthening be applied to the edge beams where sewer pipes passed through the concrete. Apparently not satisfied with Mr Simpson's inspection, Mr Hobson arranged for the Young Shire Council to visit the site. Their inspector, Mr Byles, found some organic matter under the granite fill. It was ordered that this be removed.

The next time Mr Fordham saw the works, the plastic membrane and steel reinforcement were in place ready for the pour. He ordered that the pour be delayed until inspected to his satisfaction and contacted Mr Bradshaw from Sydney who inspected the works to determine the final depth of concrete. He found that, at least at one point, the minimum depth was 85mm rather than 100mm as specified. He said this would be acceptable if concrete of compression strength 25MPa were used. Mr Hobson's evidence before me was that he readily agreed to this as he always used 25 MPa concrete. Thus after many inspections and rectifications the slab was poured on 13 May 2003. It should be noted at this stage that no other significant works ever proceeded on the job.

At about this time, on 27 April 2003, Mr Hobson presented Mr Fordham with an account for $36,000.00. The contract did not provide for a deposit and the first progress payment of $50,000.00 was said to be payable at the stage of "Floor slab complete" which (relevantly) included plumbing and electrical rough in. Although Mr Fordham might have been within his rights to make no payment until all works referrable to the first progress payment were substantially complete, on 28 April 2003 he paid $29,000.00. It will be noted this was $7,000.00 short of the amount sought by the builder.

Mr Fordham's concern with the job was such that in about March 2005 (years after the pour and last work on site) he retained Mr Alec Rendell, a building consultant, to review the construction thus far. The review was critical of the slab which can be crystallised into three points:

• there were no set downs for hob-less showers as alleged had been agreed
• the tie down bolts for the roof were not to specification and;
• vegetable matter was detected under the slab.

It seems that the non complying tie down bolts were the fault of the supplier. They could be remedied with little difficulty by sawing off the existing and replacing them. Similarly, the showers could be set down by scrabbling a small amount of concrete from the top of the slab with a concrete saw and chisel. Both of these courses of action were suggested in Mr Rendell's report.

That left the suspicion that there was vegetable matter under the slab, an issue which had been on Mr Fordham's mind since before the pour. He retained another engineer, Mr Noonan of Barnson's to inspect and assess. He reported that vegetable matter was present and that it compromised the slab to the point where demolition was recommended. Mr Simpson was called back and he embarked upon a detailed analysis of the position. He dug under the edge beams and found what he considered to be a small amount of soft organic material. It seems to have been common ground that organic material had been removed from the trenches at one stage but winds had since blown vegetable matter and sheep droppings back into the trenches. Unlike Mr Noonan, Mr Simpson's report commented on the calculated loads to be imposed on the slab and the reinforced concrete structure available to support it. His conclusion was that, even if compromised by soft material, the slab could support at least twice the anticipated load from a cavity brick dwelling such as that to be built for Mr Fordham.

Moreover, he analysed the movement in the slab from surveyor's datums over several years. He found the movement to be due to seasonal variations of soil moisture content and well within the displacement parameters. Actual movement was 1 to 9mm but such a slab was designed to accommodate movement of up to 40mm. His overall conclusion was that the slab as built was performing its design function appropriately. He was specifically cross examined on the question of 'doming' i.e. a condition where the edge beams in effect droop and forces concentrate on the centre. He considered this and assessed it as unlikely.

There was a clear conflict of opinion between Mr Simpson and Mr Noonan. It seems that there was some discussion between the two experts and they agreed on a rectification whereby a concrete topping would be put on the existing slab to:

• allow for a shower set down and to
• provide some stiffening of the overall structure.

I think it fair to say that Mr Noonan was more enthusiastic about the need for this than Mr Simpson. I discerned that Mr Simpson thought this unnecessary but in the end agreed on it in the end to carry the matter forward in a spirit of comity. I also mention that in cross examination Mr Fordham agreed that the engineers had agreed on the plan to strengthen the slab.

As it turned out all of this became of historical interest only as Mr Fordham had the slab broken up as a prelude to recommencing the job with a new builder and a new slab.

The witness statements show that over many months there were several attempts to recommence construction but they all broke down. I think it is fair to say that the sticking point was the disagreement over the outstanding $7,000.00. Mr Hobson insisted on it and Mr Fordham refused to pay it. It seems clear to me that, if they had agreed on that point, the work would have recommenced on the basis of the compromise plan agreed on by the engineers. On the view I have taken of the facts, the contract had been varied and $7,000.00 was properly payable.

The way the matter unfolded before me there was a cross claim by the builder for what he says is due under the contract, a variation of it or in the alternative on a quantum meruit. The builder's case was that he was not obliged to do work with payment outstanding and liability denied by the owner. As against this, Mr Fordham interpreted Mr. Hobson as abandoning the works and purported to terminate the contract. In addition he has a detailed claim seeking compensation exceeding $90,000.00 under various heads. These relate to removal of the slab poured by the respondent and reconstruction of the whole project under a new contract. On the homeowner's case all of this flows from the respondent's faulty workmanship on the original slab.

As the matter unfolded before me I found three issues requiring determination. One was whether the slab as built by Mr Hobson was amounted to a breach of the building contract, including the implied terms of s.18B Home Building Act 1989, another was whether Mr Fordham had mitigated his loss if there were a breach and the other was who had the right to terminate the contract. This last required me to interpret the building contract. In particular I had to characterise the circumstances where the builder rendered an account not in accordance with the contract, the homeowner agreed to pay most, but not all of it, and the builder accepted the payment but then pursued the disputed balance.

It is common ground that at about the time of the concrete pour Mr Hobson presented an invoice for $36,000.00. On the builder's evidence the reason for this was that, by agreement with Mr Fordham (who disputes it), the separate veranda slab was to be poured independently and towards the end of the job in accordance with his usual practice. Mr Fordham says that there never was such an agreement. Having heard both parties on the matter I accept the applicant's evidence and I am not satisfied that Mr Hobson ever mentioned separate slabs before issuing the invoice. Mr Hobson says that his account for $36,000.00 was calculated thus:

Mr Fordham seems to agree that the invoice for $36,000.00 was discussed on site with Mr Fordham at about the time of the pour. The builder says that there was an agreement that the homeowner would pay $29,000.00 forthwith and the $7,000.00 balance immediately after the slab pour. Mr Fordham denies the details of the agreement but does concede that there was pressure from Mr Hobson to make a payment or the work might be delayed or not proceed. The $7,000.00 seems to have been a sticking point as the amount has never been paid and little further work has been done on the site since.

Mr Fordham could have invoked the dispute settlement clause of the contract but did not and adhered to his decision to withhold payment. Mr Fordham's position is that the builder's is not entitled to the $7,000.00, could not cease work and was required to adhere to the progress payment schedule. Thus the builder's refusal to progress the works gives the owner a right to terminate the contract, which right he has exercised. On the other side, Mr Hobson says that the owner is required to pay the $7,000.00 as agreed and a refusal to do so entitles him to stop work until paid. I have found as a fact that the contract was varied by agreement and that the payment was to be made on completion of the slab, it follows that a refusal to pay indicated an unwillingness to be bound by the contract as varied and empowered Mr Hobson to stop work.

From the evidence as it emerged before me, I am satisfied that Mr Fordham agreed, or allowed Mr Hobson to imagine that he agreed, to the payment of the $36,000.00 in two instalments as alleged. It will be seen that Mr Fordham paid $29,000.00 of the $36,000.00 claimed. On the basis of the evidence in the statements and in the witness box together with the somewhat corroborative documentary evidence of invoices and the like, I find that there was an agreement of the kind alleged by Mr Hobson whereby Mr Fordham agreed to pay the further $7,000.00 on the pouring of the slab. I do not accept the invitation on the owner's legal team to see the payment by Mr Fordham as an ex gratia payment involving no variation to the contract.

This agreement was an alteration to the rights and responsibilities of the parties under the building contract. However, it was not put to me that the agreement was procured under duress so as to be unenforceable nor that it was a sort of contract not supported by consideration. As is usual, the building contract required formalities for variation including writing and it is not disputed that the verbal arrangement did not comply. I find that this was an informal variation to the contract the details of which were agreed by the parties. As a result, in the wake of such cases as Pavey & Matthews Pty Ltd v Paul [1987] HCA 5; (1987) 162 CLR 221 the builder cannot assert a right to payment under the contract itself but is entitled to rely on a quantum meruit. The underlying juristic rationale is that an owner would be unjustly enriched by gaining the benefit of the builder's work and materials for nothing. On the facts as I find them in this case, the owner has agreed to pay the builder the sum agreed on performance of certain work and the agreed sum was related to the value of that work.

I note that at least one count in the builder's claim was founded on an estoppel. In my opinion the part played by estoppel in this matter goes to the amount of the quantum meruit being the value of the work done. Because Mr Hobson acted to his detriment on the promise of Mr Fordham to pay the outstanding balance of $7,000.00 for the completion of house slab, I do not think he can be heard now to say that its value is other than $7,000.00 and that it is payable forthwith. Nevertheless Mr Fordham has refused point blank to make the payment and Mr Hobson seems to have insisted on it ever since.

It follows from my findings that the builder is entitled to succeed on the cross claim for $7,000.00.

The way I see the case there is another major hurdle for the applicant on the claim as filed. He has chosen to break up a concrete slab which, as built, a structural engineer has agreed to certify as well able to fulfil its intended function. This being the case there is a real question about whether there was a breach of contract by the builder at all. The builder has constructed a slab which might not be strictly in accordance with the specification. However, the builder's expert says the work as executed was more than adequate for the job and meets all pertinent performance criteria. Section 18B implies into every building contract a term that the work should...

The following warranties by the holder of a contractor licence, or a person required to hold a contractor licence before entering into a contract, are implied in every contract to do residential building work:

(a) a warranty that the work will be performed in a proper and workmanlike manner and in accordance with the plans and specifications set out in the contract.

I think it is fair to say that it was common ground to applicant and respondent that the slab detail as prepared formed part of the contract specifications and the litigation was conducted on that basis.

If the works as built (here a slab) will do the job, the role of the details of the technical specifications becomes moot. It could be argued that if the works gain engineering approval they satisfy requirements under the contract and the statute. As a result there can be no breach of the contract. In this case Mr Simpson would have certified the slab as built and will certify the slab if augmented in accordance with the compromise agreed with the homeowner's engineer. I do not think I have to decide the question of breach of the contract because other aspects of the case are fatal to Mr Fordham's claim.

It is true that Mr Simpson was challenged in cross examination about his assessment of the slab and that Mr Noonan for the homeowner held a different view about it. Mr Simpson conceded or opined that some things -such as the quantity of vegetable material- were unknowable. However, as Mr Simpson points out in his main but undated report, the excavation for the slab was inspected before concrete pour by a council building inspector and two consulting engineers. He draws some conclusions about the volume of organic material being low from that. No doubt his conclusion is that the more extensive the organic material the more likely it would be discovered on inspection. He is entitled to draw such a common sense inference in arriving at his conclusion and he stands by his approval of the slab. It will be recalled that the engineers for the parties agreed on a compromise which involved upgrading the existing slab. I take the view from the evidence that the compromise so reached was binding on the parties. That must have been the intention of the parties in encouraging their experts to confer in the way they did. So although Mr Simpson was satisfied with the slab as built, the compromise solution now governs the rights and responsibilities of owner and builder. As the strengthening was a consequence of the way the builder constructed the slab, it must be that he is to bear the cost of the extra works.

Even if the slab as built does amount to a breach of the contract it is of little assistance to Mr Fordham. The problem for him would one of quantifying his loss. The line of cases of which Robinson v Harman [1848] EngR 135; (1848) 1 Exch 850 is only a small part state the relevant principle thus:

"The rule of the common law is, that where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed."

In the Tabcorp Holdings Ltd v Easdown [2009] HCA 8 in the High Court there is a discussion about damages and reasonableness:

"The (respondent on the appeal) stressed that in Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 this Court pointed out that there was a qualification to the rule it stated in regard to damages recoverable by a building owner for the breach of a building contract.... "The qualification ... is that, not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt."

The example which the Court gave of unreasonableness was from an obiter dictum in Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 thus:

"No one would doubt that where pursuant to a building contract calling for the erection of a house with cement rendered external walls of second-hand bricks, the builder has constructed the walls of new bricks of first quality the owner would not be entitled to the cost of demolishing the walls and re-erecting them in second-hand bricks."

That of course is an extreme case and one of amelioration. Here the issue is the reasonableness of rejecting an $8,000.00 repair for a $95,000.00 demolition and reconstruction. It is hard to see that such a course is reasonable on any test. I might observe at this point that the flaw in the Bellgrove case was substandard concrete foundations. Unlike the present case, it was not disputed that the foundations as installed could not be made good. The question on appeal was how to quantify the loss and the requirement that the wrong party act reasonably.

The homeowner could be put in the position of having a functional slab by applying the topping. The only evidence before me on the value of those works was Mr Simpson's estimate of $8,000.00. A breach, if there is one, in those circumstances it would sound in damages equal to the homeowner's loss according to law, here the $8,000.00 for the topping slab.

There is a further point and, on the view that I take of the matter as a whole, it is lethal to most of the homeowner's claim irrespective of the outcome of any other fact or point of law in dispute. It goes to mitigation rather than quantification of damages. The homeowner has chosen to ignore a far cheaper design solution (the topping slab) which was agreed between experts for the parties. Whether or not Mr Fordham is bound by his expert's compromise, he has failed to mitigate his loss. I am satisfied from the evidence that Mr Fordham was approached about the rectification compromise agreed between Messrs Simpson and Noonan but rejected it in favour of demolition.

In those circumstances it is not open to the innocent party on a breach of contract to select any remedial course of action he chooses. It is well established law that there is a duty upon a plaintiff to take all reasonable steps to mitigate the loss caused by the breach of contract and it debars him from claiming compensation for any part of the damage which is due to his neglect to do so. See British Westinghouse Electric and Manufacturing Co v Underground Electric Railway of London [1912] AC 673. The innocent party must select the cheapest solution reasonably available and reasonable availability is a question of fact. In this case the preferred remedy would be augmentation of the slab as agreed between the experts rather than its demolition. To decline to do so in the circumstances of this case is to refuse to act reasonably.

If it could be established that the homeowner validly terminated the contract for some breach by the builder (which is neither conceded by the builder nor found by me) the common law is supplemented clause 36.2 of the contract requires that:

(the owner) ...must take all reasonable steps to minimise the cost of completing building works

I do not see how this can be interpreted in the present case as other than obliging Mr Fordham to proceed with the topping slab. Even if the engineers' compromise is not binding on him he can reject it only if it is an unreasonable course of action. It is true that Mr Noonan withdrew his approval of this solution even though he had agreed to with Mr. Simpson. However, no technical justification for resiling from his previous opinion was offered. I was left with the possibility that Mr Noonan had succumbed to pressure from Mr Fordham rather than found some new evidence or discovered an error in calculations. As a result I give little weight to Mr Noonan's present position when measuring reasonableness. Meanwhile it seems that Mr Simpson had designed the topping and was ready, willing and able to certify it. If the matter had proceeded on the basis of a "battle of the experts" rather than accepting their joint solution, I would have preferred the evidence of Mr Simpson over that of Mr. Noonan.

Mr Fordham informed the Tribunal that he was intending to continue with the construction as an owner builder. In summary, he, in my view unreasonably, refused to proceed with the topping slab and ordered demolition of the existing slab. One reason cited by Mr Noonan for turning his back on the solution agreed with Mr Simpson was the small difference in cost. As it turns out, Mr Simpson's estimate of the cost rectification was the only one before me. He indicated the cost at about $8,000.00 and I accept that estimate. The claim by the applicant for demolition and reconstruction was (as pleaded) $91,000.00 in round figures and notice was given before the nearing that the claim would be increased by another $3,700.00. The owner's submissions did deal with quantum but it was not easy for me to discern whether the claim has now been reduced. In any event the hearing was conducted on the basis that the applicant's claim was in the order of $95,000.00.

As I see the situation, Mr Fordham refused to proceed with the $8,000.00 solution whereby Mr Simpson would certify the slab. Instead he opted to pursue a $95,000.00 solution and to send Mr Hobson the bill. The obligation to mitigate loss is specifically provided for in the contract as set out above and well established at common law. In the circumstances of the present case I am well satisfied that Mr Fordham has not acted reasonably in rejecting the topping slab and has failed to mitigate his loss which would otherwise be $8,000.00.

Although the amount awarded to the homeowner slightly exceeds that awarded to the builder, the builder has achieved complete success on his claim whereas the owner has only been awarded a small fraction of his. Prima facie, the appropriate outcome would seem to be that the builder should have an order for costs. However, the parties may file written submissions.

Dewsash Pty Ltd t/as P Hobson is to pay James Fordham $8,000.00 immediately.

James Fordham is to pay Dewsash Pty Ltd t/as P Hobson $7,000.00 immediately.

1. James Fordham is to pay the costs of Dewsash Pty Ltd as agreed or assessed.

4. Order 3 stayed for 21 days from the date of these reasons for the parties to file written submissions on costs.