Damages - Measure of damages - Defective design for foundation of house - Damage to fabric of house - Nature of loss - Purely economic - Liability of engineer in tort for purely economic loss

Damages - Measure of damages - Defective design of house - Whether plaintiffs entitled to cost of demolition and reinstatement of building

Bright v Samson & Duncan Enterprises Pty Ltd (1985) 1 NSWLR 346

Butler v Egg & Egg Pulp Marketing Board [1966] HCA 38; (1966) 114 CLR 185

Carosella v Ginos & Gilbert Pty Ltd (1981) 27 SASR 515

Carosella v Ginos & Gilbert Pty Ltd (1982) 47 ALR 761

March v E & M H Stramare Pty Ltd [1991] HCA 12; (1990-1991) 171 CLR 506

Paramattta City Council v Lutz (1988) 12 NSWLR 293

Perry v Sidney Phillips & Son [1982] 1 All ER 1005

Purkess v Crittenden [1965] HCA 34; (1965) 114 CLR 164

The Council of the City of Sydney v West [1965] HCA 68; (1965) 114 CLR 481

Young v Tomlinson [1979] 2 NZLR 441

In this action, the plaintiffs sue to recover damages which they have suffered because of the installation of defective footings in their house in the foothills of the Darling Range at 1 Gray Road, Gooseberry Hill.

The plaintiffs purchased their block in 1988. It was uncleared and unimproved, except for what appeared to be a partly formed gravel driveway. It is sloping land, the slope being from east to west, following the slope of the Darling Scarp. On the east side, the gradient is quite steep, tending to flatten out to the west and north.

The plaintiffs approached a builder, Mr Gordon Prunster, who traded under the style of Jandon Constructions and it is that firm which is the first defendant. He recommended an architect, Mr Erwin Beimel, who the plaintiffs engaged to draw up plans. A formal building contract was signed on 18 April 1989. It was a lump sum building contract whereby the first defendant agreed to build a house for the plaintiffs for a certain sum in accordance with the drawings, plans and specifications prepared by Mr Beimel. The design was for a split-level house to accommodate the sloping site.

By the time the contract was signed the first defendant had applied for the requisite local authority approval to commence development. The application was made in March 1989, the local authority being the Shire of Kalamunda. Mr Beimel's plans, which the first defendant lodged with the application, included a footings and slab design and the design of north/south sub-soil cut off drains, one at the high side of the house - the east side - and another parallel to it, but located beneath the house at the proposed change of levels. The Shire of Kalamunda granted approval on 4 April 1989, subject to certain conditions, including the condition that:

"Engineer's footing and slab detail to be forwarded to Council's building department upon completion of cutting the site. No sandfills shall be placed or footings dug until the details have been approved by Council's principal building surveyor."

The effect of this requisition was that Mr Beimel's footings and slab design was not approved and an engineer's design of the footings and slab had to be submitted.

The first defendant thereupon, without reference to the plaintiffs, engaged the second defendant to design the footings and slab. The engineer concerned with the design was the third defendant. He prepared a design, including a design of a single sub-soil drain to be installed at the high side of the house. The second defendant charged the first defendant for these services and was paid by the first defendant. The amount of the fees was then claimed by the first defendant as a variation under the building contract and included in the first progress payment made by the plaintiffs to the first defendant. The design of the slab and footings and sub-soil drain was submitted to the local authority by the first defendant and approved.

Some soils undergo a high degree of expansion with moisture and a high degree of shrinkage when they dry out. This reaction to variations in moisture content is often encountered with clays. Although some clays are not very reactive, others are highly reactive. Within the category of clays which are highly reactive is the clay obtained by the weathering of dolerite rock. Soils which have a low reactivity include kaolinitic clays derived from the weathering of granite.

There are bands of highly reactive clay on the plaintiffs' land, trending in a south-east, north-west orientation. The geological explanation for this is that the granitic-type rocks making up the Darling Range have been invaded along certain lines by dolerite dykes. The dykes vary in width from 10 millimetres to 600 metres and can be six kilometres or more long. The weathering of these dykes is what produces the bands of reactive clays. There are other materials on the slopes of the escarpment which might be described as a mixture of materials derived in part from dolerite and in part from more stable granite. This slope wash material, or colluvium, may also be highly reactive.

These conditions present a risk to buildings of rigid construction, such as a solid brick house. If it sits partly on stable non-reactive material and partly on highly reactive material, the differential movement in the ground can cause excessive cracking in the building.

Dolerite dykes are a common feature in the foothills of the Darling Range. The presence of reactive clays in the foothills was known to practising structural engineers in 1989 and earlier. The risk to brick buildings may be overcome by constructing raft-type footings which will be stiff enough to protect the superstructure against the movements in the underlying soil.

The Australian Standards Code for slabs and footings

The engineering profession has assisted in the development of codes which prescribe design standards as a guide for practising engineers. When the plaintiffs' footings and slab were being designed by the second defendant in early 1989, one of the relevant codes was the Australian Standard for Residential Slabs and Footings, AS2870.1-1988. That standard lists seven possible categories of so-called site classifications for the purposes of foundation design and included in these categories are the following categories:

The standards then provide a design criteria according to the classification of the site. Because of the presence on the plaintiffs' site of the bands of highly reactive clay, to which reference has been made, a prudent engineer would give the plaintiffs' site a classification between M and H, if he elected to use the code.

These Australian Standards are not mandatory. They have no coercive effect. They are prepared by committees and submitted to the Council of the Standards Association of Australia for approval and are subject to revision from time to time. The committees which prepare them are made up of representatives of various bodies and associations. The committee responsible for the preparation of AS2870.1-1988 included representatives of the Association of Consulting Engineers Australia, the Institution of Engineers Australia, the Housing Industry Association, the Australian Institute of Building Surveyors and many other interested groups.

A reasonably knowledgeable and competent structural engineer practising in Western Australia in early 1989 would know of the risk of the occurrence of reactive clays and expansive materials in the foothills where this site was located and, with that in mind, would investigate to see on what soil types the foundations which he had been engaged to design would rest.

If a reasonably careful investigation had been made of the plaintiffs' site, the presence of colluvium and clays would have been discovered. This could easily have been done by trenching and soil sampling, at a cost of a few hundred dollars. That investigation would have revealed a band, some seven metres wide, of highly active clay mineral trending north-westerly across the block under the proposed house. A reasonably knowledgeable and competent engineer would have appreciated that seasonal changes in ground moisture might produce differential expansion and shrinkage in the soils under the foundations and that unless the footings were designed to protect the superstructure from these soil movements, the fabric of the house might be damaged.

It was never seriously disputed at trial, and, in fact, I find it abundantly proved, that the footings designed by the second and third defendants were inadequate and wrongly designed for the soil conditions on this site. The perimeter footings were a simple shallow concrete strip footing, 300 millimetres deep and 400 millimetres wide. There was a thickening of the slab under the internal brickwork which served as the internal footings. The internal footings were not linked to the perimeter footings and there was no tie between the slab and the perimeter footings. The design is adequate for footings in stable ground on the coastal sand plain. However, what was required for this site was a stiffened raft system, comprising a grid of cross-linked beams, joined with reinforcement. If the masonry was not articulated, which it was not in Mr Beimel's design, these beams should be at least 800 millimetres deep. The footings design departed substantially from the design criteria in AS2870.1-1988 for a site classified between M and H. The code laid down alternative design criteria, none of which were nearly satisfied by the defendants' design. Although the code has no coercive effect, a design which departs substantially from it is prima facie a faulty design: Bevan Investments Ltd v Blackhall & Struthers (No 2) (1973) 2 NZLR 45 at 66.

Building commenced in May 1989 and practical completion was achieved towards the end of December 1989. The plaintiffs commenced to live in the house in January 1990. About a year later, cracks began to appear in the internal brickwork. The plaintiffs were not greatly concerned, believing the cracks to be slight settlement cracks. However, cracks continued to develop and by June 1991 the plaintiffs had become quite concerned. On 21 June 1991, Mr Lyons wrote to the first defendant as follows:

"I regret that I have to advise you of cracks beginning to appear in the walls of our house.

While I appreciate that there is always an amount of 'settlement' cracks occurring in new homes, I believe that some of them go beyond this. In the last 6-8 weeks a number of large cracks have appeared and I would appreciate it if you could arrange to call and inspect them for yourself."

Mr Prunster visited the house and inspected the cracks and assured the plaintiffs there was no cause for concern.

By early 1992, it appeared to the plaintiffs that the existing cracks were widening and new cracks were appearing. The cracks were both vertical and horizontal. Mr Prunster made another visit in February 1992, this time with Mr Beimel, the architect, and following this visit Mr Prunster arranged for the worst of the cracks to be plastered over. Again, the plaintiffs were assured that the cracks were nothing to worry about. Towards the end of 1993 and early 1994, the plaintiffs began to appreciate that there was a serious problem. The cracks which had been patched and plastered in early 1992 had reappeared and other cracks had appeared. Mr Prunster visited again in May 1994 and indicated to the plaintiffs that he, too, was becoming concerned. Mr Prunster returned a short time later with an engineering consultant and they made an inspection and went away. Mr Lyons continued to press Mr Prunster and in October 1994 he and the engineering consultant and the third defendant attended the house and made a further inspection, and went away.

In November 1994, Mr Lyons was contacted by a member of Golder Associates who told Mr Lyons that he had been engaged by an insurance company to take soil samples. Soil samples were taken in Mr Lyons' presence.

By December 1994, the plaintiffs were becoming very anxious. On 12 December 1994, Mr Lyons wrote to the first defendant threatening to place the matter in the hands of solicitors unless the first defendant accepted liability for the condition of the house and made a proposal to repair it. Shortly after writing that letter, the plaintiffs were contacted by a consulting engineer who attended the house and inspected it in early January 1995. This engineer informed the plaintiffs that he had been engaged by an insurance company. A short time later, the plaintiffs were contacted by a draftsman who came to the house and measured the cracks and made diagrams of their location. There followed numerous telephone conversations and meetings, but the only remedial measures which were offered to the plaintiffs by the defendants, or their insurers, were in the nature of cosmetic patching. These proceedings were commenced in August 1995.

Numerous photographs of the cracking have been tendered in evidence and I have seen a video of the cracking. I have also had the benefit of evidence from Mr Graham Glick and Mr James Van der Meer, two highly qualified civil engineers called by the plaintiffs, and from Mr Ray Gordon, a leading engineering geologist. Before his retirement from active practice, Mr Glick was a director of Halpern Glick Pty Ltd and is now a consultant to the firm Halpern Glick Maunsell. He is a Fellow of the Institution of Engineers Australia, a member of the Association of Consulting Engineers Australia and an associate member of the American Concrete Institution. He has specialised in the design, construction and supervision of industrial structures and in civil engineering work, including geomechanics and foundation design. He has had extensive experience in the investigation of and in giving advice on deterioration problems in commercial and residential building structures and in designing foundations in poor soils.

Mr Glick first attended the house in June 1996 on an engagement by the plaintiffs to inspect the damage and cracking and to prepare a report. He found that there was cracking throughout the house, mostly to the internal brickwork from the middle areas (the kitchen and living areas) to the north-western corner. He found that the north-west corner of the house was 40 millimetres lower than the south-east corner. He found that there was a slope across the kitchen-family room floor of in the order of 23 millimetres. He considered that these discrepancies were not due to bad levels during construction, but that there had been a relative movement between the north-east and south-west sections of the house since construction. He suspected the presence of expansive clays. He recommended that Mr Gordon be engaged to test the site for dolerite dykes.

Mr Gordon confirmed the presence of the seven metre wide dolerite dyke, to which reference has already been made. He thought there may also be a smaller dyke traversing the house site, leading off the main dyke.

In the light of that finding, it was Mr Glick's conclusion that the difference in levels and the excessive cracking in the walls was due to soil movement.

Mr Glick attended the site again in April 1998. He found there had been more movement between sections of the house. The south-east corner was 10 millimetres lower, relative to the north-east corner, than it had been in June 1996.

It may be important to mention that these measurements are not measurements of absolute settlement, but of differential movement. The difference of 40 millimetres between the north-west corner and the south-east corner did not necessarily mean that only the north-west corner had settled or that it had only settled 40 millimetres. Perhaps the whole house had settled, with the north-west section having settled 40 millimetres more than the south-east section. Perhaps the house had tilted, with the south-east corner rising and the north-west corner settling. Likewise, the 10 millimetre difference noted in May 1998 did not necessarily mean the south-east corner had dropped 10 millimetres since the earlier measurements. All that can be deduced is that movements had occurred which had changed the relative levels between these sections of the house.

Cracking was not the only damage. Mr Glick gave evidence that movement in the foundations had caused a rotation of some walls which had in turn caused the roof to move. The roof movement was in a westerly direction - "down the hill", as he put it.

Mr Glick was asked to explain why the internal walls are more extensively cracked than the external walls. His explanation was that the external brickwork is in smaller panels and, unlike the internal walls, the external leaf does not join into cross-walls. It is therefore more flexible.

Mr Van der Meer agreed with Mr Glick that the damage to the house was caused by soil movement. From the cracking patterns which he observed, he thought that the house had "broken its back" and had "split in two" (t/s 262, 312). By this he did not mean one section of the house had split completely away from the other. He meant, I think, that the foundations were no longer working as a single support unit. Instead, the north-western foundations were moving relative to the south-eastern foundations, suggesting that a "joint" had formed between the two sections. He obtained a history of gaps opening and closing with the seasons, which meant that the structure was continuously reacting to seasonal swelling and shrinkage of the soils.

The extent of the cracking is such that I do not attempt in this judgment to give a narrative description of each crack. I am satisfied that exhibit 2(a), prepared by the plaintiffs and headed "Schedule and Chronology of Damage to House at 1 Gray Road, Gooseberry Hill", is more or less up-to-date and complete. The schedule was completed in March 1998. Mr Lyons gave evidence, which I accept, that since it was completed the plaintiffs have noticed even more cracks. The schedule lists as many as 127 internal and 20 external cracks, although some of these may be extensions or different aspects of the same crack. Photographic evidence of some of these cracks has been produced and, as I have said, there is also video evidence. The cracks are vertical and horizontal. They do not merely follow mortar joints but also travel through bricks. They reveal displacement (changes in plane) in walls, and wall tilting. The cracks are distributed throughout the house at high and low levels. Whilst many of the cracks are narrow, many are bad. That is, many are both wide and long. There are cracks at junctions of walls and at junctions of walls and ceilings, at joins above door and window frames and horizontally across wall sections. The high level horizontal cracks indicate roof movement. Whilst speaking generally, it would be fair to say that most of the worst damage is to the north-west section of the building, no area seems to have escaped entirely. The area of least cracking is to the north-east, but even in that section there is some cracking. As appears from exhibit 2(a), there is extensive cornice cracking in both the bedrooms 3 and 4, as well as vertical and horizontal wall cracking. These bedrooms are at the north-east corner. The main bedroom is at the south-east. It has cracking at the junction of the ceiling and walls (cornice cracking) as well as wall cracking from the corners of the bedroom window to the ceiling. One of these cracks - from the left top window corner to the cornice - is shown in the photographs 4 and 4A at folio 272 of exhibit 1 and in photograph 4 of exhibit 3.

As well as wall cracking and roof movement, there are also signs of floor cracking. See photographs 16 and 19 at folios 129 and 130 of exhibit 1

In his report, exhibit 9, prepared in about June 1996 at para 6.1, Mr Gordon made the statement:

"The residence constructed at 1 Gray Road has broken up, and does not serve the purpose for which it was designed."

I accept that description of the damage. I find that the house in its present condition is not reasonably habitable.

I also accept the evidence of Mr Glick that once wall cracks such as these have opened up, they may continue to widen. One reason for this is that debris, such as loose mortar, tends to drop into the cracks as they open. This debris blocks the reciprocal closing movement so that when the next opening movement occurs the cracks tend to open further. Mr Glick likened this to a ratchet effect.

The main questions are: who is legally responsible for the damage and what is the appropriate measure of damages?

As will be apparent from what has been said already, I find that the second and third defendants failed to design footings which were sufficient for this house on this site. I am satisfied that they made no or no adequate investigation of the site to ascertain the soil conditions, or if they did, they failed to exercise reasonable care to design the right footings for the soil conditions.

The damage to the house attributable to inadequate footings is, or represents, purely economic loss in the sense that it is economic loss not consequent on physical damage to a person or to property: Murphy v Brentwood District Council [1991] UKHL 2; [1991] 1 AC 398, per Lord Bridge at 479; Bryan v Maloney (1994) 182 CLR 609, especially at 617, 631. See also Sutherland Shire Council v Heyman [1985] HCA 41; (1985) 157 CLR 424 per Deane J at 512. However, there is no dispute that the relationship between the second and third defendants, in their capacity as design engineers in relation to the footings, and the plaintiffs, as owners of the house, was sufficiently proximate to give rise to a duty on the part of the second and third defendants to take reasonable care to avoid purely economic loss of the kind sustained by the plaintiffs in this case: Bryan v Maloney (supra) at 618-620.

I find that the second and third defendants breached that duty of care and are liable to the plaintiffs in damages for the economic loss they have sustained in consequence of the damage to the fabric of the house.

The plaintiffs' case against the first defendant builder is put on three grounds. In the first place, it is claimed that the builder was in breach of the express terms of the building contract. Secondly, it is pleaded that the builder failed to comply with an implied warranty imported into the building contract by s40(1) and (2) of the Fair Trading Act 1987 (WA). Thirdly, it is pleaded that the builder was negligent.

The express term of the contract which is mainly relied on is cl 1(a) which is in the following terms:

"The builder agrees to execute and complete for the owner the building work described in Item 3 of the Schedule ... upon the land ... in a proper and workmanlike manner and in accordance with the drawings, plans and specifications ... agreed between the parties and annexed hereto ... for the price and upon the terms and conditions herein appearing."

When a builder agrees to build a house according to drawings and plans presented to him by the owner, there is a question as to the builder's legal responsibility for the sufficiency of the design. Depending on the circumstances, as for example where the builder has agreed to do only the work described in documents provided by the owner, the builder may be held to have fully discharged his obligations by building the house in accordance with those documents: Cable (1956) Ltd v Hutcherson Bros Pty Ltd [1969] HCA 37; (1969) 123 CLR 143.

This is not that kind of case. The plaintiffs' (ie, Mr Beimel's) plans and specifications did not include what became the foundation design.

By reference to item 3 of the schedule in the contract, the express promise contained in cl 1(a) of the contract was to execute and complete the contract works "...in a proper and workmanlike manner...". In my opinion this obliged the first defendant to construct proper footings. It can hardly be contended that to construct a brick residence on insufficient footings is to execute and complete that work in a proper and workmanlike manner.

Another way to analyse this is to regard the foundation design itself as part of the contract works which the first defendant was bound by the contract to execute in a proper and workmanlike manner. Whilst design of the foundations was not initially part of the contract works to be undertaken by the first defendant, I think it became so. It became so when the first defendant elected to respond to the requirement of the Shire of Kalamunda by engaging the second defendant to prepare a design and by submitting that design to the Shire without reference to the plaintiffs or Mr Beimel; and by treating this exercise as a variation of the works. That is what happened, and the first defendant's right to deal with the requisition in that way (to treat it as a variation) is to be found in cl 3 of the contract. That clause obliges the builder to comply with "lawful orders and directions" relating to the works and entitles him to claim for a variation when the compliance involves "a variation of the construction documents or works ... ". Obviously, the Shire's requirement that an engineer's design be submitted was a lawful direction and, although it was open to the first defendant to refer the matter to the plaintiffs or to Mr Beimel for attention, the first defendant decided to comply with the direction himself and compliance with it by him was treated by all as a variation. In that way, design of the footings became part of the works.

Counsel for the first defendant, Mr Monaco, submitted that the first defendant had merely acted as agent for the plaintiffs to engage the second and third defendants to produce the slab and footings design. Therefore, the limit of the first defendant's contractual responsibility was to build to that design, which the first defendant had done. I do not accept the contention that the first defendant was agent for the plaintiffs to engage engineers to design the foundations. There is no evidence that the first defendant had express authority to do so. I was not referred to any clause in the contract that might be to that effect and the uncontradicted evidence of the plaintiffs was that they were not consulted in the matter. There was, therefore, no express authority in the first defendant to engage the second defendant on behalf of the plaintiffs to prepare a foundation design. I think it is impossible to imply any such authority. I was not referred to any principle of agency under which, in the circumstances of this case, the first defendant had the implied authority of the plaintiffs to engage the second defendant to provide these design services.

(ii) The builder's liability under the Fair Trading Act

I would also uphold the plaintiffs' claim that there was an implied warranty of fitness under s40(2) of the Fair Trading Act. The plaintiffs were plainly consumers for the purposes of the subsection and the building services were plainly supplied in the course of the first defendant's business. The first defendant is not a "qualified architect or engineer" and did not provide services in that capacity. Hence, such design services as the first defendant did supply are not within the first exception contained in the subsection. It is, I think, beside the point that the first defendant engaged an engineer to produce the design. On a true analysis, it was the first defendant who provided the design to the plaintiffs. So far as appears, the first defendant did so, or purported to do so, as an extra to the works agreed on in the contract. As has been recounted, the first defendant charged for the new footings design as a variation to the building contract. There is no question that the first defendant knew the purpose for which the services were required, which was the construction of a domestic residence. Therefore, there was, by force of the subsection, an implied warranty that the services, that is, the building services incorporating the design services, would be reasonably fit for that purpose. I find that the circumstances do not show that the plaintiffs did not rely on the first defendant's skill and judgment as regards the house foundations. This point may have been arguable if the first defendant had simply constructed the footings designed by Mr Beimel. That is not what happened, as I have already said. Upon that design being, in effect, rejected by the local authority, the first defendant provided an alternative design without reference to Mr Beimel or to the plaintiffs. There is nothing wrong with that, but the first defendant cannot say the plaintiffs did not rely on the first defendant's skill and judgment in the provision of so much of the building services as incorporated that design, nor can the first defendant say that it was unreasonable for them to do so.

The plaintiffs do not plead an implied common law warranty that the building would be reasonably fit for its purpose. It is therefore unnecessary to say anything about this.

The plaintiffs claim the first defendant owed them a tortious duty of care to "carry out the works with reasonable competence and skill"; and breached that duty by failing to take reasonable care in respect to the footings design.

It was not disputed, and therefore can be accepted for the purposes of this judgment, that the first defendant did owe concurrent tortious and contractual duties to the plaintiffs. It is, of course, settled law that persons in a contractual relationship may owe tortious duties to each other: Donoghue v Stevenson [1932] AC 562 per Lord Macmillan at 610; Voli v Inglewood Shire Council[1963] HCA 15; (1963) 110 CLR 74, per Windeyer J at 84; Hawkins v Clayton (1988) 164 CLR 539, especially per Deane J at 575; Bryan v Maloney (supra) at 617-620; Esso Petroleum Co Ltd v Mardon [1976] EWCA Civ 4; [1976] QB 801 per Lord Denning at 818-820. The questions are: what was the content of the tortious duty and was there a breach of that duty? I am not persuaded that the content of the builder's duty in relation to the footings is as pleaded in the statement of claim, which really seeks to attribute to the builder all of the professional knowledge, skill and responsibilities of an engineer. For reasons which I have tried to state above, I am satisfied that there was a want of reasonable care on the part of the engineers (the second and third defendants) who designed these footings, but that conclusion is based on evidence as to what would be known to reasonably competent and informed structural engineers in early 1989 concerning the possibility of the presence at this site of adverse geophysical conditions, and evidence as to what a reasonably prudent and skilful engineer would do to investigate the site, and design for the expansive clay bands that would have been discovered on the site. I have no such evidence concerning builders. The Court must guard against the danger of concluding from the fact that the footings were wrong for this site, that there was a failure by the builder to take proper precautions. I have no evidence at all of what a competent and careful builder ought to have known or ought to have done in the particular circumstances of this case. In fact, the first defendant engaged professional engineers to design the footings and the design was approved by the local authority. So far as is known, the first defendant faithfully implemented that design. There is no evidence on which I am prepared to conclude that the first defendant was negligent in failing to do more. It is not a case like Batty v Metropolitan Property Realisation Ltd [1978] 1 AB 554, where the land had been acquired by a property developer and a decision taken between the property developer and the builder to build on the land in circumstances in which there were signs on surrounding land that ought to have put them on inquiry as to its suitability as a building site. In this case, the plaintiffs had chosen the block and engaged other consultants to design the house. There is no evidence that the first defendant gave the engineers wrong or inadequate instruction or anything of that kind. There is no evidence on which I am persuaded to find that a prudent builder would have taken steps independently of the structural engineer to investigate the site or to see that the design was adequate; or on which to base a conclusion that the first defendant ought to have appreciated that this design was inadequate. There is no evidence that the first defendant had special information about the site or knew that the second defendant had taken no or inadequate steps to investigate the site. It is not as if there is evidence that there were signs that would have alerted a prudent and reasonably competent builder to the possibility that the site was unsuitable for this type of construction, or that that fact was generally known to builders or was actually known to the first defendant. I do not uphold the plaintiffs' claim against the first defendant insofar as it is based on tort liability.

Damages: rectification, or demolition and rebuilding

I turn now to the issue of damages. In considering this issue, I accept that the plaintiffs selected this land intending that the house to be built on it would be their permanent family home.

Putting to one side for the moment the limitation of liability clause in the building contract, it was not suggested that as between the defendants there should be a different approach to the assessment of damages. As against the first defendant in contract, the plaintiffs are entitled to damages based on the cost of obtaining a house which is in conformity with the building contract; that is, a house constructed in a proper and workmanlike manner: Bellgrove v Eldridge [1954] HCA 36; (1954) 90 CLR 613 at 617-619. As against the second and third defendants in tort, the plaintiffs are entitled to damages in a sum which, so far as money can do so, will put them in the same position as they would have been in if these defendants had not been negligent: Anns v Merton London Borough Council [1977] UKHL 4; [1977] 2 WLR 1024; Evans v Balog (1976) 1 NSWLR 36. In the circumstances of this case, the measure of the damages in both instances will be the same; namely, the cost of the work necessary to remedy the defects. As the defects are in the foundations and comprise wrongly designed footings, the question is whether the building should be demolished and rebuilt on proper footings. Subject to reasonableness, that would appear, prima facie, to be the proper basis on which to assess damages. The evidence is that these footings cannot be repaired or underpinned without risking further damage. See especially Mr Van der Meer's evidence at transcript 284, 312. Hence, subject to reasonableness, the only way the plaintiff can obtain a house with proper foundations is to demolish this structure and install proper footings and rebuild the house.

The qualification to the rule that the owner is entitled to recover as damages the cost of remedying the defects and bringing the works into conformity with the building contract, even where this would involve demolition and reconstruction, is that "not only must the work undertaken be necessary to produce conformity, but that also, it must be a reasonable course to adopt". Belgrove v Eldridge (supra) at 618.

In this case, the defendants submit that it is not reasonable to demolish this house and rebuild it on a proper foundation. This is because, so the defendants submit, the cracks can be repaired and, although the foundations cannot, steps can be taken to minimise further soil movement and protect the house against any movement that might still occur. On the other hand, the plaintiffs claim that the damage is so bad and so extensive and is of such a nature that it cannot be repaired in a way that will bring the house to a reasonable standard, and anyway the effectiveness of the remedial measures is uncertain.

I accept the evidence of Mr Van der Meer that the existing footings have broken into two sections in the sense described earlier in this judgment. I find that the footings cannot now do their job even to the limited extent that their inadequate design may have allowed. Because they cannot be repaired, it seems to me that if demolition is to be avoided, it must appear that the soils beneath the house can be stabilised and that structural measures can reasonably be taken to protect the house against the risk of continuing instability in case the stabilising methods are not wholly effective.

The first question therefore is whether and to what extent the soils beneath the existing footings can be stabilised. There has been some stabilisation spontaneously occurring. The experts are agreed that the soil beneath the house, especially at the centre, is less active than it was. This is probably because the umbrella effect of the house itself has allowed the expansive clays beneath it to dry out somewhat and (at least in places) to have a more even moisture content summer to winter. There are still changes and so there is still movement, although not to the same extent as in the first few years after construction. The remaining soil instability cannot be precisely quantified, but I find that there is still an unacceptable degree of movement continuing throughout the structure, sufficient to cause fresh cracking and to cause existing cracks to open and close and to produce measurable differences in levels between sections of the house. I base that finding on the plaintiffs' evidence, which I accept, in the form of exhibit 2(a) (the schedule of cracking observations as at March 1998) and Mr Lyons' testimony that new cracks are still appearing and old cracks are still moving with the seasons. I also base the finding on Mr Glick's evidence that between June 1996 and April 1998 there was a differential movement of up to 10 millimetres between sections of the house.

As I understood the evidence of Mr Gordon and Mr Van der Meer, all that can be done to attempt to eliminate this remaining instability is to install more cut-off drains. Mr Gordon thought there should be drains on three sides and if that was done the soil under the house should eventually stabilise unless there was an ingress of water from an unknown source. He did not elaborate on this, but I think he meant that the cut-off drains would only cut off surface water from, for example, rainfall and may not be effective to stop sub-surface ingress. I take his evidence to be that the purpose of cut-off drains is to divert surface water, not to divert underground water. There is no positive evidence of the presence of underground water sources, such as springs, on or near this site, but there is evidence which I shall mention in a moment that the north-south cut-off drain which was installed when the house was built is not working. Assuming the new cut-off drains will work, Mr Gordon thought it might take up to three years for the soils to stabilise and that no attempt should be made to effect repairs to the fabric of the house until that time had elapsed.

Mr Van der Meer thought an east-west cut-off drain should be installed south of the house across the driveway and past the west of the house, that an impervious membrane should be placed under the soil between the drain and the house and that the area should be paved. This would divert surface water from rainfall into the drain and should allow the moisture content of the soil beneath the house to reach an equilibrium within 18 months or two years. I do not think Mr Van der Meer was very confident that the cut-off drain would actually work. This is not really surprising. As I have noted, there has always been a cut-off drain along the eastern side of the house and it does not seem to have been very effective. In the light of the recorded damage to the sections of the structure that might be expected to have been protected from damage by that drain, it is not possible to be at all confident that it has worked. I would have thought that if that drain was effective as a stabilising measure, it should at least have allowed the north-east section to stabilise and therefore to cease moving long since. If I have correctly understood how cut-off drains are supposed to function, one would not expect new cracks still to be appearing in sections of the house immediately down hill from the existing cut-off drain, that is, in the vicinity of bedrooms three and four in this house; or for that matter in the vicinity of the bathroom or laundry. Nor would one expect old cracks in this area to be still deteriorating. Yet it is apparent from exhibit 2(a) that this has happened. Mr Gordon doubted that this north-south cut-off drain along the eastern edge of the house was working and I think it is evident from the history and location of damage that his doubts are well-founded. Why it is not working (if it is not) was not established and Mr Gordon's opinion on that question was not invited. It was put to Mr Lyons in cross-examination that he had damaged the pipe in the drain, or blocked it, by driving a star picket through it. Mr Lyons denied any knowledge of having done so. He was cross-examined on the basis that there would be affirmative expert evidence led on behalf of the defendants that the cut-off drain had been damaged or blocked in that manner, the purpose of this cross-examination no doubt being to lay the ground for an inference that the reason the drain was not effective was that the plaintiffs had prevented it from working. Implicit in this, of course, is the proposition that the drain is indeed not working as a stabilising factor. Mr Lyons remained firm in his evidence that he had no knowledge that any damage had been done to the drain, and denied that he had taken part in any investigation about damage to or blockage of the drain. In the end, the defendants did not lead any evidence on the subject.

I find that there is a cut-off drain along the eastern edge of the house. There is no evidence it is damaged or blocked. The damage that has nevertheless occurred to the north-east corner and along the northern section of the house and the fact that some of this damage is quite recent establishes that the drain is not completely effective as a stabilising technique.

Getting back to Mr Van der Meer's evidence, he did not consider any rectification work should be attempted until it was demonstrated that the installation of his recommended cut-off drain along the southern edge of the building had in fact stabilised the soil in that area, that is, the southern aspect and south-east corner of the site (t/s 323). I do not understand Mr Van der Meer's evidence to be that this delay in the commencement of rectification work was merely to allow the soil time to stabilise. He seemed to me to be trying to say that he would want to be satisfied that the cut-off drain was in fact working as a stabilising technique. I think his evidence is to be understood as being to the effect that there was a real risk (not just a fanciful risk) that the drain may not be effective or wholly effective. I think this is made clear in Mr Van der Meer's evidence to the effect that he simply did not know whether the stabilisation method above described would prevent further cracking (t/s 323). Furthermore, I understand his evidence to be that even if it should appear after 18 months or two years' observations that the soil had stabilised, it would be prudent nonetheless in the rectification work to introduce into the masonry walls both jointing and steel reinforcement. Mr Van der Meer prepared a plan showing the jointing and steel reinforcing which he thought was necessary to protect the fabric of the house even after the cut-off drain had been installed and enough time had passed to allow it to achieve its maximum effect. This is exhibit 16. It involves dividing the house into several structurally independent segments which might move relatively to each other. This could be achieved by, in effect, disconnecting the superstructure at certain points (I think seven in all) by inserting vertical gaps in the masonry, the idea being that at the gaps there could be free movement between one segment and the other. The gaps would be filled with a flexible sealant. At strategic locations full height steel columns would be inserted to prevent movement parallel to the joint, whilst allowing movement perpendicular to the joint. The joints would be visible and, depending on exact design detail, the steel columns or parts of them may also be visible. This would be so if the columns could not all be completely located in cavity walls. The object of these construction techniques is, broadly speaking, to form a series of joints and restraints so that the anticipated vertical movement in the structure by reason of the defective foundation can be both limited and controlled to happen at certain places specially prepared to cope with vertical movement.

I must say all this seems a very unsatisfactory set of solutions. No doubt it could all be done for less than the cost of demolishing the house and re-erecting it on proper foundations. But in the light of the experience with the existing cut-off drain, there is not much reason to be confident that additional cut-off drains will eliminate all soil movement under this house. Even if, after 18 months (Mr Gordon would wait three years), the cut-off drain or drains appeared to work, there would remain a risk of some continuing movement and, in the event of continuing movement, vertical cracking might still occur notwithstanding the installation of jointing throughout the house. (See Mr Van der Meer's evidence at t/s 328). Vertical cracking may occur between joint locations. Furthermore, jointing in the walls does not prevent the problem of wall tilting encountered in this structure or the horizontal cracking that is the consequence of wall tilting. So much was accepted by Mr Van der Meer (t/s 331). Nor am I able to see how it would prevent wall rotation and the problems which Mr Glick described as being associated with that form of movement. Mr Van der Meer also pointed out that the house was located in "a designated seismic zone" and that a worrying consequence of the amount of jointing that would be required is that the structure of the house would be weakened and the house would become (as he put it at t/s 329) "vulnerable to virtually total collapse under an earthquake ... So you might be living in what we call a pack of cards."

Both Mr Glick and Mr Van der Meer were pressed under cross-examination to agree that all the wall cracks could be repaired, either by raking out and replacing mortar joints or, where necessary, by breaking out and replacing sections of brickwork. Whilst this may be so, that form of remediation would not correct the lean or tilt in those walls that do now tilt. There are at least two which do, they being the wall between the family room and the laundry and the long north-south passage wall. Nor do I understand how it could relieve the stresses under which the uncracked sections of the structure may now be placed. As I understand the evidence, cracking occurs only when the forces created by movement exceed the tensile strength of the masonry. I do not understand this to mean that uncracked areas of this house are not under movement stress or that the cracking which has occurred has relieved all the stress. That there is no cracking at a certain place may mean no more than that at that place the forces created by movement in the foundations are presently less at those locations than the tensile strength of the masonry. It would seem to follow from this that uncracked areas may now be vulnerable to the slightest further movement. Take the case of the external leaf. It is not suggested the external leaf has not been placed under stress. Yet the external leaf has not cracked to nearly the same extent as the internal walls. I accept Mr Glick's explanation for this, which is that for a number of reasons the external leaf is more flexible than the internal walls. It seems to me to be implicit in this evidence, and anyway obvious from the difference in levels between sections of the house, that the external leaf is flexed. The question of how much flexion is left and what degree of further movement might be sufficient to cause the external leaf to begin to fail and how extensive that failure might be once it started was not gone into in evidence and I will resist the temptation to speculate. Suffice it to say that the fact that it is possible to repair the cracks that have appeared so far is, on the evidence, by no means decisive of the question whether demolition and reconstruction is unreasonable.

It does not seem to be in dispute that the discrepancies in the levels that are now present between the sections of the house are beyond normal tolerances. The north-west section is 40 millimetres lower than it should be relative to the south-east section. There is a slope of 23 millimetres across the family room floor. These discrepancies cannot be recovered. The evidence is that any attempt to jack up one section is likely to cause more damage of one kind or another. If the family room floor was re-laid to eliminate the slope, there would be a step or ridge or some form of discrepancy in the levels between that floor and adjoining elements.

Under these circumstances, including that this house is the plaintiffs' family home, I am satisfied that the proper measure of damages is the cost of demolition and reconstruction. It is reasonable for the plaintiffs to have a house built on proper foundations rather than to put up with a house which is patched in the manner suggested by the defendants and which, even then, may be prone to failure. The only evidence I have about this cost is the uncontradicted evidence of the quantity surveyor, Mr Peacock, who estimated that to demolish and replace the residence in September 1998 (less than two months hence) would be $273,000.00. I see no reason not to accept this figure for the purposes of an assessment as at this date.

The plaintiffs also claim an amount to compensate them for emotional distress, for the cost of furniture removal and for the cost of alternative accommodation during the demolition and construction period.

The evidence as to emotional distress and loss of enjoyment of life is rather vague and unsupported by medical evidence, but satisfies me that both plaintiffs have been anxious and distressed to some degree for an extended period. I will award the sum of $1,000.00 under this head to each plaintiff; that is, a total of $2,000.00. As there was no attempt to argue that the case came within the principles laid down in Baltic Shipping Co v Dillon [1993] HCA 4; (1992) 176 CLR 344, this head of damage is not recoverable in the action against the first defendants for breach of contract and is, therefore, awarded against the second and third defendants only.

I accept that the cost of furniture removal is a proper head of claim against all defendants and I accept the evidence (exhibit 20) that the plaintiffs will incur removal costs of at least $2,550.00 and I award that sum under this head.

I accept that the cost of reasonable alternative accommodation is a proper head of claim against all defendants. There is no direct evidence of the time it will take to demolish and rebuild. Allowing two weeks for demolition and by reference to the building contract at folio 16 of exhibit 1 (in which a period of 150 days was agreed as the original construction period), I would assess accommodation costs on the basis that the plaintiffs will require at least 24 weeks of alternative accommodation. I do not take time to discuss in detail the evidence concerning the reasonable cost of alternative accommodation. I will allow it at the rate of $150.00 per week, rather than the rate of $180.00 per week claimed. Under this head therefore the award will be $3,600.00.

The first defendant claims a contractual limitation of its liability. Clause 23 of the contract is in the following terms:

"Notwithstanding anything herein contained to the contrary the builder shall not be liable to the owner in respect of any claim whatsoever arising hereunder or out of this contract or in any way connected with the works or the execution thereof in a sum in excess of the contract price. In any event the builder shall not be liable to the owner in any way whatsoever for any claim or proceedings in respect of injury or damage to such of the owners' fittings, finishes, fixtures or any other item, matter or thing which do not form part of the construction documents."

This clause must be construed according to its natural and ordinary meaning, read in the light of the contract as a whole: Darlington Futures Ltd v Delco Australia Pty Ltd [1986] HCA 82; (1986) 161 CLR 500.

In my opinion, the plaintiffs' claim against the first defendant arises out of the contract and is connected with the works and "the execution thereof" and I see no reason not to hold that it is covered by the limitation provision in cl 23. The first defendant's liability is, accordingly, limited to the contract price; that is, (as adjusted) $132,214.00.

For the sake of completeness, I should note that it was not contended on behalf of the defendants that damages assessed on the basis of Mr Peacock's evidence of the cost of demolition and reconstruction should be reduced on account of betterment. The defendants did not call any evidence to make out a case of betterment on the basis that more money would be spent on better foundations in rebuilding than provided for in the costings for the original contract. For a discussion of this subject see Harbutt's Plasticine Ltd v Wayne Tank & Pumps Co Ltd [1970] 1 QB 447 at 473, 4750476.

There are contribution proceedings, but I was informed by counsel for the defendants that I need not be concerned with them.

I will hear argument as to the form of judgment in light of my decision that the first defendant is entitled to limit its liability.