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In brief - Damages correspond to cost of making work conform to specifications

The Supreme Court of NSW has found that a capping layer and a layer of fill which were placed on a development site in NSW departed substantially from specification because the project manager failed to take reasonable steps to ensure that a consultant supervised the works.

Assessment of damages for breaches of quality obligations in engineering projects

In the case Bannister & Hunter v Transition Resort Holdings (No.2) [2013] NSWSC 1943, the Supreme Court of NSW recently confirmed the principles to be adopted in assessing damages for breaches of quality obligations in engineering projects.

In doing so, it dealt with the troubling and recurring issues of reasonableness in the method and cost of rectification and whether damages should be reduced or negated by a subsequent sale of the property affected. The court also considered the meaning of "reasonable steps" to be taken by a project manager in ensuring the performance by a consultant of its obligations.

Planned development of independent living facilities on land near Newcastle

In about mid-2006, Transition Resort Holdings Pty Ltd ("Transition") commenced the development of approximately 18 hectares of land at Fern Bay, north of Newcastle. Transition wished to develop it into a large number of lots to provide low cost independent living facilities for older members of the community.

The site required a lot of work to make it suitable for Transition's purposes. Amongst other things, it was necessary that the site be trimmed, that a "capping layer" of relatively impenetrable material (such as clay) be placed and compacted, that a further layer of fill be placed over the capping layer and this layer itself compacted. The upper layer of fill comprised material known as Virgin Excavated Natural Material (VENM).

Developer enters into contract with project manager and geotechnical services company

Transition entered into a contract with Bannister & Hunter Pty Ltd ("BH") to provide design and project management services. It also entered into a contract with Coffey Geotechnics ("Coffey") to provide environmental and geotechnical services which included the provision of "level 1 supervision" of earthworks, that is, the importation, spreading and compaction of fill.

Particles in capping layer exceed maximum size set out in project specifications

In addition to the provision of level 1 services, Coffey performed a number of other services, relevantly:

• It advised that, once trimmed, the site should be capped with a 500mm layer of clay together with an upper layer "of at least 1000mm" or "about 1.5 metres of fill".

• It provided a "preliminary construction advice" of 3 May 2007 which set out the "earthworks methodology" to be adopted. That document specified, among other things, a minimum capping layer of 500mm depth and an overlying minimum VENM layer of 1500mm depth.

• It produced a draft and then final filling control plan and quality system which specified that the capping layer should not contain "particles" larger than 100mm in size. His Honour observed that it was common ground between the parties that the maximum particle size in the VENM layer would be 200mm.

Unfortunately, the redevelopment did not progress smoothly. One of the major problems was that the fill did not comply with either the Coffey specifications or AS3798 because of the extent of large rocks and boulders within the fill material.

Court finds that project manager failed to take reasonable steps to monitor progress of works

In proceedings in the Supreme Court of NSW, BH claimed for outstanding fees. Transition cross-claimed against BH for breach of contractual obligations of project management and contract supervision. Transition argued that BH was required to ensure that Coffey carried out, properly and effectively, its obligation to supervise and test the importation, spreading and compaction of fill.

The court found that BH failed to perform its obligation to take reasonable steps to ensure that Coffey did what it had contracted to do and provided the services that it had contracted to provide. McDougall J observed that reasonable steps meant that someone from BH would go to the site regularly, not infrequently, to observe for himself what was being done.

His Honour held that a weekly visit to the site during the importation, spreading and compaction of fill would have enabled BH, amongst other thing, to ascertain that a Coffey representative was on the site and was supervising the works and would have provided BH with an opportunity to look for oversized particles in the fill.

In concluding that BH breached its contractual obligation of contractual supervision, McDougall J stated that if BH took any steps, which he was not prepared to find that it did, the steps were "utterly inadequate". Thus the court found that Transition was entitled to recover damages.

Damages tied to cost of rectification of engineering works

In considering the question of rectification, the court had to consider what damages Transition was entitled to recover and whether the fact that Transition had sold the land and had no interest in the land or its ongoing development impacted Transition's entitlement to recover those damages.

McDougall J observed that the general rule stated by the High Court of Australia in Bellgrove v Eldridge (1954) 90 CLR 613 at [617] in relation to a contract for the performance of building work, also applied for the performance of engineering work. The principle provides that where the builder departs substantially from the specifications, the proprietor's damages are not limited to any diminution in value of the building, but rather, are the cost of making the work conform to the specifications (and potentially other consequential losses).

The court also confirmed the qualification to the rule, namely, that the work undertaken must be necessary to produce conformity and that this must be a reasonable course to adopt (Bellgrove at [618]).

Departure from specifications undetected because of project manager's lack of supervision

Based on the evidence at trial, his Honour was satisfied that BH's breach of contract in failing to inspect regularly, or sufficiently frequently, or to use appropriate diligence and care in supervising the work of Coffey, meant that the presence of large rocks and boulders within the fill was undetected.

His Honour found that the presence of large rocks and boulders amounted to a substantial departure from the specifications and that "there can be no question but that rectification work is necessary to produce compliance with the contract". In looking at the concept of necessity, his Honour held that the concept focuses on the relationship between the defects or omissions in the work, and what is proposed by way of rectification. That is, the rectification must be necessary, in the sense that it is needed to bring the building, or other works, into conformity with the contract.

Alternative methods of rectification of defective works

His Honour observed that the basic method of rectification would require the VENM layer to be ripped up, crushed and relaid. During the course of the trial, an alternative method of rectification was canvassed, which involved putting up with the deficiencies in the fill and using heavier earthmoving equipment to carry out the trenching works.

His Honour determined that it is not reasonable for a principal to be required to accept, in lieu of compliance with the contract, the risk of extra costs and inconvenience that were presently unassessable. The court then explored the concept of reasonableness and concluded that the concept is assessed by reference to the particular contract in respect of which damages for breach are sought and not at large. That is, the cost of rectification will be unreasonable only if it is wholly disproportionate to achievement of the contractual objective.

Project manager argues against award of damages because developer had sold the land

The project manager argued that it was significant that Transition had sold the land and had no further interest in it or in its redevelopment. (The court noted that there was no evidence, and Transition did not argue, that the sale price of the land was affected by the extent to which the VENM layer did not comply with the specification.)

BH argued that if the court awarded Transition damages for the cost of rectification works, it would give Transition "an uncovenanted profit", an argument accepted in an English case by Oliver J in Radford v De Froberville [1997] 1 WLR 1262 at [1270].

McDougall J rejected this argument on the basis that the limited cases to which Oliver J was referring to did not apply in this instance. That is, Oliver J was referring to cases where a plaintiff seeks to recover the cost of rectification for a breach that is purely technical which of itself did not sound in substantial damage.

Instead, McDougall J preferred the approach in De Cesare v Deluxe Motors Pty Ltd (1996) 67 SASR 28 at [35], which held that "the fact of sale does not suggest in any way that a claim for the cost of the necessary remedial work is unreasonable". His Honour, Justice McDougall held that Transition was not precluded from receiving damages based on the cost of rectification of the defects in the VENM layer.

Basis for calculating damages is cost of rectification

This case affirmed several significant principles of law:

• The obligation of project management and contract supervision involves a duty that one must take reasonable steps to ensure subcontracts adhere to the terms of their contract with the principal. McDougall J found that "reasonable steps" included regular, at least weekly, visits to the site to observe the works.

• Where a builder or engineer departs substantially from the specifications of its contract, the proprietor's damages are not limited to any diminution in value of the building, but rather, the cost of making the work conform to the specifications. The court also confirmed that the work undertaken must be necessary to produce conformity to the specifications and must be a reasonable course to adopt in light of the contract.

• A subsequent sale does not preclude a party receiving damages for the cost of rectification of defective works.

This article has been published by Colin Biggers & Paisley for information and education purposes only and is a general summary of the topic(s) presented. This article is not specific legal advice. Please seek your own legal advice for any questions you may have. All information contained in this article is subject to change. Colin Biggers & Paisley cannot be held responsible for any liability whatsoever, or for any loss howsoever arising from any reliance upon the contents of this article.​

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