Damages for Defective Works: Reasonableness and Restitution

ACLN - Issue #43 13 Defects

Damages For Defective Works: Reasonableness and Restitution

- Duncan Miller, Allen Allen & Hemsley.

When assessing the appropriate measure of damages for breach occasioned by defective works, the courts are confronted with a series of apparently irreconcilable decisions. Should quantum be assessed on the basis of replacement or rectification costs, the decline in market value, or by reference to the profit or benefit retained by the defaulting party which can be attributed to the defective works?

This article analyses the current judicial approach to this area of the law by comparing the Australian judicial reasoning with the relatively more strict and formalistic interpretations adopted in recent years by the courts in England. There are significant divergences in the emphasis that the respective court systems give to considerations of reasonableness and the applicability of restitutionary principles. Practitioners must be aware of these differences when analysing the authorities. In application they can, and will, dramatically alter a court's assessment of quantum.

1. INTRODUCTION "In principle it is not easy to see why the law relating Any contractor, or subcontractor, who carries out to contracts for the sale of goods should be different contract works defectively will expect to be liable in from the law relating to the performance of other damages for their breach. It is not, however, always a contractual obligations, whethercharterparties orother simple proposition to set out what the measure of those types of contract. It is desirable that the same legal damages will be. Should the defaulting party be liable for principles should apply to law of contract as a whole the full rectification orreplacement costs, the difference in and that different legal principles should not apply to the value of the property to the owner in view of the different branches of that law.,,2 defects, or, should the contractor be required to disgorge the profits or benefits that the contractor has obtained on There are obvious commercial reasons to support this account of the defective works? approach. Arguably, the central aim ofthe commonlaw of As the law presently stands, the resolution of this contract is the attainment of certainty in the bargain and question will notgenerallybedependentonthe application outcome. That is, to fashion a legal framework3 which of a stand-alone formula or principle. Considerations of seeks to follow the traditional model of consideration, reasonableness, andunjustenrichmentmay directly impact objective consensus and freedom to contract4, yet provide on the court's assessment of quantum, and not merely its contracting parties with an objective reference point in the determination of the existence or otherwise of a cause of event that a matter arises for determination which is not action. More socially-just decision making may arguably strictly covered by an express term of their agreement. be the result, but, it is submitted, it is achieved at a This judicial trend towards the attainment of greater considerable price. certainty has, in recent times, arguably held greater sway with the English courts than with their Australian 2. POLICY OBJECTIVES AND THE LAWS OF counterparts. Cases such as Bunge Corp (NY) v Tradax CONTRACT Export S.A., PanamaS, Photo Production v Securicor It has been said that underpinning the law of contract TransportLteF, and, WatfordvMiles7 canall beinterpreted is a presumption that the law is the same for all contracts1. to illustrate this point. However, even at the highest level In short, that there is a "law of contract", not, "laws of there can hardly be said to be uniformity of approach. contracts". To illustrate this proposition, Lord Roskill Indeed, no better example of this can be found than to observed in Cehave NV v Bremer Handelgesellschaft contrastthe approach takenbyLord Bridge intwo separate MbH: cases when required to adjudge the meaning and validity ACLN - Issue #43 14 of certain contractual terms. In the first instance, in A/S "unconscionability,,13, and "estoppel,,14. New Awilco ofOslo v Fulvia SpA di Navigazione ofCagliari8 "contractual duties" have been "identified", such as a duty His Lordship stated as a general principle that: in certain contracts (such as a principal requiring a show "Theidea(atwhichthe courts shouldaim) inconstruing cause notice prior to exercising a termination clause) to such clauses, is to produce a result, such that in any perform one's obligations in good faith15 or with given situation both parties seeking legal advice as to reasonableness. Agreements previously thought to have their rights and obligations can expect the same clear been unenforceable for want of certainty now have legal and confident answer from their advisers and neither effect, as, for example, a "promise" to "negotiate in good will be tempted to embark on long and expensive faith"; Coal Cliff Collieries Pty Ltd v Sijehama16. In a litigation in the beliefthat victory depends on winning similar vein, an agreement to mediate will be binding on the sympathy of the court." the parties,17 though since the decision of Giles J .in Elizabeth Bay Developments Pty Ltd v Boral Building Notwithstanding this, and less than two years later, in Services Pty Ltd18 on the proviso that the mediation George Mitchell Ltd v Finney Lock Seeds LtJJ, Lord process to be followed must be certain and verifiable at the Bridge took a less strict view of the need for objective outset of the contract. The importation of these ideals of certainty of the time of entering into the bargain. In that commercial fairness has arguably also lead to case his Lordship was considering whether to allow a "fundamental"contractlaw principles suchas consideration consumerplaintiffto avoid the application ofan exclusion being undermined. In Williams v Roffey Bros & Nicholls orlimitationclauseundersection 11 ofthe Unfair Contract (Contractors) Ltd19 the English Court ofAppeal held that Terms Act 1977 (UK) because the term was not "fair and an agreement by a principal to pay a subcontractor more reasonable". In holding the clause to be valid Lord Bridge money to completeworks thathe was already contractually considered that such an assessment could only be made obliged to undertake, was enforceable. Notwithstanding after the breach. In short, that it was not possible to the principle from Pinnel's case20, the Court held that the determine the effect and validity ofthe contractual term at obviation by the subcontractor of a disbenefit bearing on the beginning of or during the performance period. His the principal - the disbenefit being that the contractor was Lordship noted: exposed to a liquidated damages claim as a result of the "There will sometimes be room for a legitimate subcontractor's default - was sufficient consideration by difference of judicial opinion as to what the answer the promisee for the variation to be binding21 .A similar should be, where it will be impossible to say that one fate has also befallen the concept ofprivity with the result view is demonstrably wrong and the otherdemonstrably in Trident General Insurance Co Ltd v McNiece Bros Pty right ... The question whether it is fair and reasonable Ltd22. In that case Toohey J confirmed the High Court's to allow reliance on a term excluding or limiting willingness to make ad hoc orders that reject such liability for a breach ofcontract can only arise after the longstanding foundation principles as privity where, in the breach. The nature ofthe breach and the circumstances circumstances, their utility is weakened by commercial in which it occurred cannot possibly be excluded from reality: "all the circumstances of the case" to which regard "When a rule... harks back no further than the middle must be had." of the last century, when it has been the subject of constantcriticismand when... itlacks a solidfoundation Despite then the attractions of the traditional and injurisprudence orlogic and further, when that role has objectivelycertainmarket-individualismcontractmodel10, been so affected by exceptions and qualifications, I see it is clear that it now bears little resemblance to the current nothing inimical to principled development in this Australian judicial approach. Individual contractual Court now declaring the law to be otherwise in the disputes are increasingly dealt with by the courts on an circumstances of the present case." individual basis. The outcome in each instance often has little in common with a system that strictly applies The underlying cause ofthese developments has been standardised rules. Instead, the current Australianjudicial a change in the court's wider objectives. Rather than approach appears to have more in common with a system objectively applying a set of legal rules, the courts where the courts seek nothing more than a reasonable increasingly now see it as their task to scrutinize the outcome, and seek to achieve this by applying: parties' standards ofconduct23 . At the heart ofthe debate "... a model based onbroader standards, such standards is the question of what weight the courts should place on having a strong normative content, such as fair dealing, the demands ofcommercial certainty. Someproponents of fulfilling reasonable expectations and the view that considerations of good faith and fairness unconscionability".11 should take a greater role in commercial contract law justify their stance by arguing that no attempt has been Toreachthis end, the courts are increasinglytransferring made by their opponents to provide empirical evidence to to the law ofcontract, the concerns, principles and policy establish that their stance does not itself lead to promote objectives more traditionally12 associated with the law of certainty24. This approach though brings with it some torts. Considerations of "reasonableness" for example, inherentpracticaldifficulties. MrJustice Brennanrecently now have contractual currency under labels such as noted inBryan vMaloney, that the law ought to be capable ACLN - Issue #43 15 ofapplication in the office ofa suburban solicitor25. Yet Justice Meagher observed (correctly, it is submitted) in His Honour's sentiments are not presently shared by a Renard Constructions (ME) Pty Ltd v Ministerfor Public majority ofhis HighCourtcolleagues, and while the courts Works34, not only was the importation or implication of in Australia have not gone so far as to impose a general such a concept contrary to the principles laid down in duty to act in good faith, or reasonably, on parties (apart Codelfa Construction PtyLtdv State RailAuthorityofNew from fiduciaries) to a contract, the view is held by some South Wales35 : members of the judiciary that there may be merit in that "Moreover, it (reasonableness) suffers a more basic approach. Sir Anthony Mason recently summarised that defect: it is difficult, if not impossible, to ascribe any viewpoint in the following way: sensible meaning to such a concept in this connection. "Good faith and fair dealing concepts are already As Taylor J said in a very different context: substantially in place under our general law, though in ,... Butreasonableness, alone, is anabstractconcept some areas, such as contract negotiation and contracts and does not by itselfprovide a test for determining of guarantee, the application of specific good faith whatcharges mayormay notbemade; it is a useful duties, based on the reasonable expectations of the guide if, and only if, we are aware of the various parties, mightadvancethe interests ofjustice. Moreover, matters which must be considered where the recognition of good faith and fair dealing concepts necessity arises of determining whether particular would bring greater coherence and"unity to the varied charges are or are not reasonable (Armstrong v array ofprinciples whichare presently available. Some State ofVictoria (No.2) (1957) 99 CLR 28 at 88 commentators suggestthattheUnitedStates experience 89). '" shows that there good faith and fair dealing doctrines have generated ambiguity and uncertainty26. Even if Support for Meagher JA's traditional restrictive this be true, the experience does not appear to have interpretation is found in a number of places. Mr Justice been unduly detrimental to commerce in that country. Cole ofthe NSW Supreme Court in an enlightening paper, Finally the criticism ofthose doctrines may be no more "The Concept of Reasonableness in Construction than the reluctance to accept unconscionability as a Contracts" 36, pertinentlyobservedthat, "anyexamination basis ofrelief; in other words, the reluctance is in truth ofthe concept ofreasonableness quickly leads to the view an objection to the application by courts ofgeneralised that the standard is entirely subjective and probably concepts and standards instead of rigid rules27. indefinable." However, in His Honour's view, this did not portend the demise of the concept as a consideration The choice then between these two approaches is having legal currency. Notwithstanding the impossibility essentially one ofpolicy. Should the courts give primacy of ascribing an objective meaning to the word, Cole J to legal rules, or, to a court's perceptions of the values to foresaw a safety-net role for the reasonableness concept. whichthe communitywouldhavebusiness people adhere? To this end His Honourwith approval cited, the comments It is perhaps trite to observe that as the latter view has ofHope JA in Biotechnology Australia Pty Ltd v Pace37 : increasingly gained favour so too has it become more "The law has filled innumerable lacunae in the difficult for practitioners to provide certain and verifiable contractual arrangements of parties by applying a commercial advice. Some members ofthe judiciary have doctrine of reasonableness." heartily embraced the ad hoc approach and have, on occasion been moved to remark (with apparent pleasure) Given the imprecise boundaries of the policy and that "uncertainty" has fallen into disfavour with the courts reasonableness concepts, itis perhaps notsurprising thatin as a "tool for striking down commercial bargains,,28. those areas ofthe law wherepolicyjudgmentshavebecome However, as the Chief Justice of the Supreme Court of determinative some members of the judiciary are now New South Wales has recently observed, the increasing reconsidering the utility of their approach. In the field of trend towards individualised justice cannot proceed tortious pure economic loss claims, for example, the policy unfettered. Themoderndemandfor subjectivisedsolutions factor (under the guise of"proximity") has, since the 1985 to disputes mustbebalancedagainstcountervailingpolicies High Court decision in Sutherland Shire Council v which also inform our ideas ofjustice29. Heyman38 become the "touchstone" of liability39. In The practical difficulties brought about by this current Bryan v Maloney40 - one of the most recent High Court judicial trend stem from the need when giving advice to pronouncements in this area - Mr Justice Brennan noted second-guess judicial attitudes on matters of policy. that while the proximity-based formula may enable more "Policy", as used in a common law sense, is inherently so sympathetic decision making, it was wrong for it to be abstract, indeterminate or malleable as to defy a stand promotedattheexpense ofcertainty. His Honourendorsed alonedefinition. Theconcepthas variouslybeendescribed the obiter comments of Underwood J in Christopher v as, "fairness"30, and, "public interest,,31. In Egerton v Motor Vessel "Fiji Gas,,41 to that effect and remarked: Brownlow32 the House of Lords (unhelpfully) defined "In novel cases in which the question is whether a public policy to be, "thatprinciple oflaw which holds that tortious dutyofcareshouldbeexpanded, the appropriate no subject can lawfully do that which has a tendencj to be approach, in my respectful opinion, is to attempt to injurious to the public, or against the public good,,3 . The identify "the content of the criteria or rules" which concept of "reasonableness" is equally nebulous. As Mr mightthereafterbe appliedindetermining cases falling ACLN - Issue #43 16

within the category then under consideration. instances the court's general approach is to award the If proximity in the broader sense be invoked as a (generally) lesserdifference inmarketvalue sum, unless to criterion ofliability in particular cases without a prior do so would be unreasonable; Parramatta City Council v definition ofits content, the certainty which analysis of Lutz50. By virtue though of the differences between the the different elements of tortious liability in different court's objectives when awarding contractual damages as categories of care can produce will be lost, and the opposed to tortious damages, the presumption is reversed definition of elements which might constitute and in the case of defective works under a contract. distinguish a new category of care will give way to a mere evaluation ofthe circumstances favouring or not 3.1 Construction Contracts and Damages for favouring recovery. Such a notion ofproximity would Breach be ajuristicblackhole into whichparticularcriteriaand The oft cited general principle ofdamages in contract rules would collapse andfrom whichno illuminationof comes from Robinson v Harman51 . Primafacie, where a principle would emerge.,,42 party suffers a loss by reason of another's contractual breach, the innocentparty is entitled, as far as damages will In a similar way, the law ofcontract has suffered from do so, to be placed in the same position as if the contract the increasingapplicationofpreviouslyunrecognisedpolicy hadbeenperformed. Inapplication, however, this principle considerations. While the transformation may appear to is not straightforward. be greatest at the front-end of the contract - with, for example, the embellishment of the rules covering the 3.1.1 The English Approach to Damages for parties' obligations under the contract in light of Defective Works considerations of "unconscionability", "good faith" and Thedilemmawhich acourtoftenfinds itselfconfronted "reasonableness" - the law concerning the damages that with is whether the Robinson v Harman objective is will be recoverable in the event of breach has also been achieved by an award which represents the difference in dramatically altered. Atthis endthe courts, and inparticular market value of the subject matter, or by an award that the High Court, have continued with their social justice in represents the costs of rectification or replacement of a decision-making agenda43. defective structure oritem. Whenfaced with such a choice in Tito v Waddell (No.2)52, Megarry V-C noted: 3. THE IMPACT ON DAMAGES AWARDS IN "... it is clear that in some cases ofa contract to do work CONSTRUCTION DISPUTES OF to the plaintiff's land the measure of damages for CONSIDERATIONS OF COMMERCIAL breachis the reductioninvalue ofthe plaintiff's interest FAIRNESS in the land, and in other cases it is the cost ofdoing the work. But which? I have been unable to find any clear There is good reason for choosing to examine statement ofprinciple in the cases or books put before construction contracts in this context. Quite simply, as the me, or in other sources that I consulted." majority observed in Bryan v Maloney, the residential house: In the absence of any coherent principle, the Vice "... in this country, is likely to represent one ofthe most Chancellor set out to find some. It is helpful to set out significant, and possibly the most significant, Megarry V-C's propositions at length here since they investment which the (initial owner and) subsequent highlight the 'difficulties that judges face in trying to owner will make during his or her lifetime.,,44 describe what is essentially a policy driven exercise. It is submitted that at best, His Lordship's five propositions are As such, when dealing with disputes which cover this merely general concepts that a court will start from before subject matter, the courts will almost invariably be met seeking to find a socially equitable result. with a host ofcompeting policy considerations. Many of Thefirst ofthe Megarry V-C principles is thatdamages these may seek to impel the court to test or extend the in contract are awarded to compensate the plaintiff by boundaries of the law in an effort to find some method of putting the plaintiff in as nearly as possible the same avoiding a strict application of legal principle to the position as he or she would have been in had they not detriment of a commercially unsophisticated plaintiff of suffered the wrong. The object ofcontractual damages is limited means. not to make the defendant disgorge what he or she has Difficulty arises from the differing approaches taken saved by committing the wrong53. This proposition will by the courts to compensating plaintiffs for losses incurred be dealt with more fully below under the "restitution" when there are defective works under a building contract, heading. and where the plaintiff, by virtue of another's negligent The second fundamental proposition enunciated by advice, purchases a property which is itself defective or Megarry V-C states that where the plaintiff's loss is constructs a property in an unsound manner. In the latter occasioned by a reduction in the value of his property by case, the usual measure ofdamages is the difference in the reason ofthe wrong, then that will plainly be the loss that price paid for the property and its true market value; Ford he or she is entitled to recoup. In the Vice Chancellor's vWhite & Co.45 ,PerryvSidney Phillips & Son46,Stewart view, itdoes notnecessarily follow that whatthe defendant v Ratley47, Brickhill v Cooke48, and recently, Sved v has saved what the plaintiff has lost54. Council of the Municipality of Woollahra49. In such ACLN - Issue #43 17

The third ofthe Vice Chancellor's propositions states nominal. A house with a backyard swimming pool would that where a plaintiffcan establish that the loss consists of, be equally saleable regardless ofwhether the pool's depth or includes, the cost ofdoing work which, in breach ofthe was 7ft 6in, or, 6ft 9in. Ifan order were made to rectify the contract, the defendant has failed to do, the plaintiff can defectthe defendantcontended62 thatbyexcavatingfurther recover as damages a sum equivalent to that cost. It the bottom ofthe pool and joining new concrete to old the remains, though, for the plaintiffto establish just what his costs couldbe containedin theregion of£5,000to £10,000. or her loss in fact is55. Alternatively the court could order the demolition of the The fourth principle is essentially an evidentiary one. old pool, and the construction ofa replacement pool. The The plaintiff may establish, by a number ofways, that the majority (Staughton and Mann LJJ) awarded the last cost of doing the work constitutes all or part ofhis or her mentioned figure, but in doing so made some pertinent loss56. Megarry V-C'sfifth and final principle is arguably observations as to the need for commercial reasonableness an addendum to the fourth. Thatis, that in most cases there in any such award. can be no certainty that work which the plaintiff alleges At page 809 of the report, Lord Justice Staughton needs to be done to rectify the breach will in fact be carried posed the question ofhow the reasonableness or otherwise out. A plaintiff who may begin with a firm and settled of the alternative remedial strategies was to be assessed. intention to do the work may later find that supervening Staughton LJ's judgment in this regard clearly put into events have weakened or destroyed his or. her resolve. effect His Lordship's ex curial comments doubting the Indeed, the plaintiff may be positively prevented from wisdomofweakening strictlegal theory bythe importation doing suchworks. As such, Hi.s Lordship felt, the plaintiff's of subjective considerations of commercial fairness63 : rights in respect of his or her entitlement to damages "NextI tumto the supposedrequirementthat it mustbe should not be affected by the absence of this certainty. It reasonable for the plaintiff to require the work to be is not the place ofthe court to speculate on possibilities of done. The difficulty here is to determine the hypothesis that sort. upon which reasonableness is to be judged. Is the So how do the courts assess the claims ofa principal or question whether a reasonable plaintiff would spend head contractor who alleges that the contract works were the money on repair or reinstatement, if that were a carried out defectively? Once the breach is established, condition ofhis being paid damages by the defendant? ought the principal or head contractor be entitled to the In such a case the answer must almost invariably be difference in the market value of property, the cost of Yes, except perhaps when the building was due to be repairing the defective works, or the cost ofreplacing the demolished as in (CR Taylor (Wholesale) Ltd v works so that they accord with the contract specifications? Hepworths Ltd)64. Or does one ask whether the In a series of judgments including; Radford v De plaintiffwould do the workifhewere spending his own Froberville57, Minscombe Properties Ltd v Sir Alfred money on it? The answer might depend on the McAlpine & Sons58 , and, Linden Gardens Trust Ltd v pecuniosity (if there is such a word) of the plaintiff: a Lenestra Sludge Disposals Ltd59, the English courts poorplaintiffwouldnotdo the work, arich one would." affirmed their acceptance in this context ofthe pacta sunt servanda principle, and held that an aggrieved owner will In the end Lord Justice Staughton, with whom Lord generally be entitled to damages representing rectification Justice Mann agreed, felt that the answer was provided by costs, as opposed to mere difference in value. This the House of Lords in Radford v De Froberville. The approach was recently reinforced by the Court of Appeal difference in value method was inappropriate where the in Ruxley Electronics and Construction Ltd v Forsyth60. defective item was unique orwas notcommonly available. The judgments of the Court in that case are, however, Afterfinding that a house was something ofunique quality, worthy of analysis. and thatthe contractwas one for a"personalpreference,,65, All the members of the Court in Ruxley Electronics the question of the reasonableness or otherwise of the accepted that the reasonableness or otherwise ofthe award award was superfluous. In their Lordship's opinions" was the determinative factor. Mr Forsyth had contracted reasonableness would only arise as a matter ofmitigation. with the defendants for the construction of a swimming As Lord Justice Staughton stated66: pool in his backyard. The contract expressly provided (on "In myJudgment the key lies in the proposition of Mr Forsyth's insistence) that the maximum depth of the OliverJ 7, thatreasonableness is amatterofmitigation. pool should be 7ft 6in. It was accepted by the Court61 that It is unreasonable of a plaintiff to claim an expensive this term had been requested by Mr Forsyth as he was a remedy if there is some cheaper alternative which large man who would feel safer diving into a greater depth would make good his loss. Thus he cannot claim the of water. In the event when the pool was completed the cost of reinstatement if the difference in value would maximum depth was only 6ft 9in. This breach by the make good his loss by enabling him to purchase the contractor was promptly met with a refusal to pay the building or chattel that he requires elsewhere. But if contract balance, and a claim for £2J,560, representing the there is no alternative course which will provide what cost of building a new pool. he requires, or none which will cost less, he is entitled On appeal the Court acknowledged that its options as to the cost ofrepair orreinstatement even ifthat is very to quantum were split three ways. Ifthe difference in value expensive." calculationwere applied the defendant's liability would be ACLN - Issue #43 18

After accepting evidence to the effect that the Courts in England, it is not only a consideration that goes defendant's suggestedrepairalternative was notstructurally to the question of mitigation. In Director ofWar Service feasible, replacementcosts were awarded to the plaintiffas Homes vHarris71 ,the Courtheldthatitwas reasonable for a matter of course. the owner to recover the cost ofremedying defects despite The dissenting judge, Lord Justice Dillon, however having, priorto discovering them, already resold the house took issue with the majority specifically on the role that for a price which was not reduced by reason ofthe defects. concerns ofreasonableness play in the damages equation. Similar "reasonable" results occurred in the following His Lordship noted: cases where the courts were prepared to ignore the fact that "It is ofcourse true that reasonableness lies at the heart the plaintiff's claimed remedial strategy was vastly more of the doctrine of mitigation of damages. But that is costly than their difference in value monetary loss. In not, in my judgment, the only impact ofthe concept of Carosella v Ginos & Gilbert Pty Ltd72 the High Court reasonableness on the law of damages ... awarded the plaintiff $64,000 demolition and rebuilding costs in respect ofa defectively constructed home, despite The basis (ofthe replacement costs award) would have the fact that the diminution in the home's value was in the been reasonableness. (The Plaintiff) has no absolute order of$31,250. In Monteleone vAV Constructions Pty right to be awarded the cost ofreinstatement. I see no Ltd73 the NSW Court ofAppeal awarded the principal the reason, therefore, why ifthere has beenno loss invalue, cost of a more expensive membrane to repair a defective he should automatically become entitled to the cost of roofratherthan the costofa less expensive butless durable reinstatement, however high. That would be a wholly membrane. unreasonable conclusion in law. Accordingly, I agree As Dillon LJ observed in Ruxley Electronics, it is the with the judge's approach and would dismiss this requirement ofreasonableness in the Bellgrove vEldridge appeal." damages "test" which allows the importation of policy considerations. Damages will be recoverable only in Itwould appearthatLordJustice Dillon's case-specific circumstances where the court considers them to be approach to assessing damages for defective works on commercially reasonable and acceptable. However, for their merits is, at present, a minority one with the wider the reasons considered above, determining whether English judiciary. Indeed, Staughton LJ remarked that reasonableness is in fact satisfied is not an exact science. when questioned counsel for both parties in Ruxley It is submitted that when assessing if the extent of the Electronics were able to point to only one English case claimed damages will be recoverable, the judges in reality where the award ofreplacement damages had been held to adopt an approach akin to that followed at the outset ofthe be unreasonable; George Stow & Co v Walter Lawrence damages deliberations when determining if there is a Construction LtcJ68. It can simply be said, however, that causal nexus between the claimed breach and the factual the samenear-unanimity ofapproachhas notbeendisplayed event - they make, to quote McHugh JA (as he was then) by the Australian courts. inAlexander v Cambridge CreditCorp. ,apolicyjudgment ina"practicalcommonsense way"74. While this approach 3.1.2 The Australian Approach to Damages For may be readily recognisable and "accord with commercial Defective Works people's everyday experience", its practical utility is As a statement of general principle, the approach minimal. Itis an approach whichrequires second guessing followed bythe Courts inAustralia, atleastsinceBellgrove and defies objective application. Indeed, it is submitted v Eldridge69, has also been to award the plaintiff in such that it is difficult to see how, following this approach, the circumstances his or her rectification costs. The High submissions ofthe defendants in both the Director ofWar Court in so holding noted70: Service Homes and Carosella cases were not themselves "This loss cannot be measured by comparing the value reasonable. of the building which has been erected with the value In obiter comments, the High Court in Bellgrove v it would have borne if erected in accordance with the Eldridge acknowledged that there would be many case contract; (the plaintiff's) loss can, prima facie, be whererectificationorreplacementofremedial work, which measured only by ascertaining the amount required to though necessary to produce conformity with the contract, rectify the defects complained of and so give her the would not be a reasonable method of overcoming the equivalent of a building on her land which is problem. In such "unreasonable cases", the High Court substantially in accordance with the contract ... The noted that the true measure of the building owner's loss qualification, however, to which this rule is subject is would be the diminution in value, ifany, produced by the that, not only must the work undertaken be necessary breach. The "golden thread" in the cases which have to produce conformity, but that also, it must be a turned on this proviso has beenthe finding that the claimed reasonable course to adopt." (underlining added) damages represent a method ofremediation that is wholly, "outofproportionto the nature ofthe defect"; D Galambos The final result as such again comes back to a question & Son Pty Ltd v McIntyre75. This approach has recently ofpolicy - are the claimed remedial works reasonable? In been endorsed by the Full Court ofthe Queensland Court Australia, reasonableness is a threshold entitlement ofAppeal in Bell & Anor v Greenland Design Pty Ltd76 consideration. Contrary to the approach taken by the (albeit only implicitly), and, by the Victorian Supreme ACLN - Issue #43 19

Court inAlucraftPty Ltd(in Liquidation) v Grocon Ltd77, In Commonwealth v Amann Aviation the High Court whereinSmithJfound the contractor'sclaimedrectification held that depriving a plaintiff of a chance of attaining a costs against a subcontractor (which party had clearly benefit (in that case, a contract renewal) was assessable breached the agreement) to be unreasonable. damage eventhoughthe defendantwas underno obligation The judgment of Smith J in Alucraft is worthy of to confer the benefit. So long as it could be shown that the detailed consideration. In 1988 Alucraft and Grocon benefit had been in the contemplation ofthe parties at the entered into a subcontract under which Alucraft would outset, and that there was a possibility of renewal, denial supply and install aluminium and steel windows, doors, of that opportunity was compensable under the Hadley v screens and glazing at a carpark and office building project Baxendale82 formula. This approach has since been incentral Melbourne. Grocon'sletteraccepting Alucraft's appliedbythe HighCourtinSellars vAdelaidePetroleum83 tender specified that the tender was accepted, "fixed until in relation to damages under s82 ofthe Trade Practices Act the end of the project". In the event Alucraft was (1974). InbothAmann andAdelaidePetroleum itwas held unsuccessful in claiming damages or additional costs on a that a lost chance was compensable even where on the quantum merit for delays to what it alleged was the agreed balance ofprobabilities it was more likely than not that the performance period. The Court held that the contract chance would not have come to fruition. By analogy then, documents failed to specify clearly a completion date, could the plaintiff (contractor) in the Alucraft case argue though the actual performance period that ensued was not that there was a risk, albeit less than a 50% possibility, that unreasonable in view of Alucraft's tender. Smith J was the proprietorwould in the future act to cause the detriment unmoved by the fact that delays and difficulties on the under the head contract in the sense of the payment of project were such as to clearly contribute to the liquidation damages or requirement of remedial works, and that in of the subcontractor company. these circumstances the contractor should be entitled to Groconcounterclaimedfor defective works. Grocon's recover damages from the defaulting subcontractor? claim was notable in that, notwithstanding the apparent Smith J partially allowed the contractor's claim. In so defects, it had been paid the full contract sum under the doing His Honour was able to distinguish the facts from head contract. For its part Alucraft thus argued that those that operated in the Amann case. In Amann, Smith J Grocon had suffered no loss. In response Grocon asserted held, the High Court gave effect to the general principles that its loss hadbeeninpaying, orbeing calledupon to pay, ofcontract law ofdamages and compensated the plaintiff for works that did not comply with the specification. In for its reasonable expectation losses. InAlucrafthowever, short, thatit (Grocon) did notreceive whatithad bargained the Plaintiff's submission, and claim ofsome $118,00084 for under the contract78. was in His Honour's mind an attempt to "improve its Smith J held that Grocon was not entitled to recover position as a result of the breach,,85. Additionally, His rectification damages. His Honour found on the evidence Honourfelt that applyingBellgrove vEldridge itwouldnot that Grocon had been paid its full contractual sums under have been reasonable in the circumstances to assess the headcontractand thatneitherGroconnorthe proprietor damages on the rectification costs basis86. hadmade any demandorsoughtto instigate any rectification Despite this, Smith J felt that the contractor was works between the issuing of practical completion and entitled to some damages to compensate it for the risk that Grocon's claim. In the three intervening years nothing had the principal may act in the future. In Amann, Deane J had elapsed to suggest that the proprietor would take action in held that damages could be awarded not only for a loss of the future. Grocon had similarly not volunteered any a chance to benefit in the future but also where the breach undertaking to carry out the rectification works itself. ofcontract gives rise to the risk that the plaintiffwill suffer SmithJ beganhis analysis by referring to theBellgrove a future detriment. Deane J's example ofthis in operation v Eldridge formulation, but with the caveat that, in His was the situation of a plaintiff who has suffered physical Honour's view, the High Court did not in that case lay injury by reason of the other's breach with the chance or down any hard and fast rule as to the appropriate measure possibility of future adverse complications, receiving ofdamages79. His Honour went to some lengths to stress damages in relation thereto even though the evidence as to that the overriding objective when assessing damages in the likelihood of the risk arising is inconclusive. On the contract was to compensate the plaintiff but at the same evidence before Smith J the risk to Grocon was "very time ensure that the plaintiff was not placed in a better remote" at best87 but, notwithstanding this, His Honour position by the award of damages than he or she would felt the contractor was still entitled to some compensation. have beeninifthe contracthadbeenperformed80. Smith J After assessing the expert evidence of both parties cited the High Court's judgments in Commonwealth v concerning the projectedcosts ofrectifying the defects, Mr Amann Aviation Pty Ltd81 to that end. His Honour's Justice Smith found that a figure of around $35,000 choice ofthatcasewas deliberate. Couldthe headcontractor represented the appropriate sum. His Honour noted: sue the subcontractor for damages where the proprietor "It is then necessary to discount that figure in light of had apparently accepted the works by paying the head the risk of Grocon being called upon to rectify the contract in full but, due to the fact that the limitations surrounds or pay for their rectification. As I have period was still on foot, a risk remained that the proprietor indicated, I regard the risk faced by Grocon to be very would seekto recoverdamages from the head contractoror remote and in all the circumstances consider that a require remedial works to be effected? figure of$5,000 wouldadequately representreasonable ACLN - Issue #43 20

compensation having regard to that risk."88 principle and recognised a change ofposition defence. And a year later in Woolwich Equitable Building Soc. As such, SmithJ concludedthat, contrary to the English v IRC97, their Lordships relied on unjust enrichment judicial approach, a consideration ofwhether the damages thinking to reach decision that a citizen is entitled as of award was reasonable did not go only to the issue of right to restitution ofpayments demanded by a public mitigation. The Bellgrove v Eldrige formula could be authority ultra vires".98 rebutted where the circumstances warranted it. In Ruxley Electronics the Court ofAppeal had held that an intention, In Lipkin Gorman, Lord Goffrejected the proposition or otherwise to rectify the defective works by the Plaintiff that the recovery of money in restitution was a purely was not relevant when assessing damages. In Alucraft, discretionary matter for the court99. Rather, His Lordship however, the likelihood ofsuch happening was a pertinent asserted that, as with recovery at common law, the cause consideration. While this approach was not strictly at odds of action arose by right but was based essentially on the with the High Court's stated views, in Bellgrove89 , or the principle of unjust enrichment. To succeed a plaintiff English Court of Appeal's position in Ruxley90, it was would need to show that the defendant had been unjustly perhaps a novel way of circumventing the difficulty by enriched, at the plaintiff's expense, and in circumstances relabelling it a consideration pertaining to the where there do not arise any defences such as change of reasonableness or otherwise of the award91 . position, estoppel, illegality etc. From that formula it is clear that by far the most 4. RESTITUTIONARY DAMAGES AND difficult element to establish in any restitutionary claim CONSTRUCTION CONTRACTS will be the presence ofa benefit to the defendant received SmithJ addressed his final remarks to the possibility of in circumstances that rendered it unjust. awarding Grocon damages based upon the profit made by Alucraft from the breach92. That is, the amount retained 4.2 Traditional Restitution Claims in Construction by it, both base costs and profit, that should have been Cases referrable to that part of the works that were either not In a construction context, the principles ofrestitution done, or were done defectively. His Honour saw that had have tended to arise mainly in two situations. The first is such an avenue been open to him an award of around the case where a party has carried out works at the request $2,000 could feasibly have been made to Grocon on ofanother, though without any contract. In that situation account of the cost of the time saved by Alucraft in not the plaintiff will be entitled to the value of the benefit carrying out the full processes that would have been provided including the fair and reasonable market price of necessary for the works to have been satisfactorily materials, and, reasonable remunerationfor time expended undertaken. In Smith J's view, the authorities did not at current rates100. The (actual or implied) acceptance by support such a restitutionary approach. Indeed, it is the owner of the benefit of the builder's work on the submitted that it could be argued more strongly than that. owner'spropertygivesrise to concerns ofunjustenrichment The first of the five general principles enunciated by and an obligation on the ownerto reimburse the builderfor Megarry V-C. in Tito v Waddell positively excludes it. its reasonable costs independent of claims pursuant to an oral or implied contract. Authority for this proposition is 4.1 The Foundations of a Restitution Claim found in Pavey and Matthews, which has since been The objective of the law of restitution is to reverse a applied by the NSWSupreme CourtinLeeGleeson PtyLtd defendant's unjust enrichment made at the plaintiff's vSterling Estates PtyLtd101 and in Update Constructions expense: Pty Limited v Rozelle Child Care Centre Ltd102• "In 1966 Goff and Jones published The Law of The second situation is where one party claims their Restitution93 which attacked the traditional approach expenses that were incurred in carrying out preparatory and sought to demonstrate that there is a coherent and works in the mistaken belief that a formal contract would principled English (and Australian) law of restitution be subsequently entered into. In this context, however, the based on reversing unjust enrichment. Their thesis position is less clear. In Sabemo Pty Ltd v North Sydney slowly gained acceptance in academia and amongst Municipal Council103, Sheppard J expressed the view some practitioners and judges. In Australia this that, as a general principle, where two parties proceed on culminatedinthe acceptance in 1986 by the High Court the joint assumption that a contract will be entered into of the principle against unjust enrichment and the between them and one party does work beneficial to the rejection of the implied contract theory in Pavey & project which is thus in the interests ofthe two parties (and Matthews Pty Ltd v Paul94. Six years later this was would not normally be done gratuitously), that party will followed by the David Securities v Commonwealth of be entitled to restitution or compensation if the other Australia95 in which the High Court took Australian unilaterally abandons the projectfor reasons notassociated law further along the true restitutionary road by with any bona fide disagreement as to terms or price104. accepting the defence of change of position and by In application, this formulation requires a finding of a abolishing the mistake of law bar. England lagged degree of fault on one of the parties to the negotiations slightlybehindbutin 1991 inLipkinGorman vKarpnale before any entitlementto restitution couldbemade out.l 05 LtJJ6the HouseofLords acceptedthe unjustenrichment If no such finding can be made, the loss will lie where it ACLN - Issue #43 21 falls in accordance with the traditional view. That is, that directed to enabling Regalian to perform the expected each party will bear the risk of their own expenses of the contract11 O. However, the Courtfound thatthe preparatory negotiations106. works of Regalian had not resulted in any benefit to the In the UK the courts in recent years have given orders defendant development corporation. In so holding His entitling unsuccessful tenderers to recover costs and Honour criticised, and departed from, the decision based expenses thrown away on unsuccessful tenders, or in on similar facts in Marston Construction Co Ltd v Kigass preparatory works consequent upon lengthy negotiations Ltd111 . The costs incurred by Regalian had entirely been and letters of intent, see British Steel Corporation v on account ofefforts by itto putitselfin a positionto obtain Cleveland Bridge and Engineering Co. Ltd. 107, and a lease. There was no suggestion of a request on the part William Lacey (Hounstow) Ltd v Davis108. Those cases of LDDC to Regalian to carry out the works, and are interesting in that they illustrate the court's approach in importantly, the terms between the parties being "subject narrowly construing the facts in such situations. While, to contract" showed, to the Court's mind, that each party strictly speaking, an act which is wrong in law is not in the negotiations was "free to withdraw from the required to found such a restitutionary claim, the courts negotiations at any time"112. In His Honour's opinion, it will examine all the circumstances to determine if the was not sufficient, as Sheppard J had done, to base a defendant's actions were such as to give rise to the proper restitutionary claim on the presence of a joint assumption inference or understanding on the part ofthe plaintiff that that the contract would proceed, the carrying out by one he or she would be paid for the work. The cases, however, party of works which are "beneficial to the project", and need to be considered with care. Bothjudgments pre-date abandonmentfor reasons otherthanbonafide disagreement the House of Lords' decision in Lipkin Gorman, and on terms. The benefit must have been received by the therefore were based on the court being satisfied as to the defendant, in circumstances such that it would be unjust existenceofan impliedcontract. Inview oftheirLordship's for the defendant to be entitled to retain the benefit. acceptance of the unjust enrichment foundation of Considerations of "fault" in the sense of a "material restitution in Lipkin Gorman, the assistance or otherwise decision to abandon" for reasons pertaining only to one's that the earlier judgments may provide will have to be own position were felt by the Court not to be relevant to carefully considered. that enquiry, nor were they supported in English authority. The most recent, and post-Lipkin, pronouncement of It is suggested that the decision in Regalian does not the English Courts in this area is the single judge High necessarily signal the demise of Sabemo. Clearly the Court decision in Regalian Properties pic v London defendant Council in Sabemo did benefit directly from the Dockyard Development Corp109. The decision in this preparatory works undertaken by Sabemo in designing the case is particularly noteworthy in that in it the Court proposed Council tower. The decision by the Council to (Rattee J) rejected Sheppard J's "fault-based" analysis of scale-down the project in that case was made at a very late the law in Sabemo. point in the negotiations, and was made for obvious Thefacts oftheRegaliancasewere as follows. Regalian political reasons. The Council had, however, obtained the entered into negotiations with the defendant corporation benefit of having honed its design requirements in the with the view to obtaining a licence to build a residential interim. While fault, in a loose sense, could clearly be development in the former docks area of London. The shown on the part ofthe Council, it remains arguable that negotiations began at the height ofa building and property even without it the facts would satisfy the English Court's price boom period in 1986. The defendants accepted the formulation in Regalian of what is necessary to ground a plaintiffs £18.5m offer for a licence, but importantly, claim in restitution.113 specified in writing that their acceptance was subject to a number ofconditions, including the obtaining ofvaluation 4.3 Unjust Benefits and Breaches of Contract certificates, planning consents and the scheme, "achieving As the law in Australia and England presently stands, the desired design quality". The negotiations then stalled. a breach ofcontract will not trigger a restitutionary claim It was accepted that this was due to a number of factors. in the sense of requiring the defendant to disgorge gains The defendants had sought design and cost revisions and madeinbreaching acontract114. This muchwas recognised had experienced some difficulty in securing vacant and accepted by Smith J inAlucraft. Despite the efforts of possession. Fortheirpartthe plaintiffs realised that the fall some commentators to overcome this blanket exclusory in the property market meant that the project would not be rule - at least in so far as breaches of contracts importing economically viable based on their earlier offer. By the duties of confidentiality are concerned115 - the rule has time the parties walked away from the project Regalian recently been confirmedbythe English CourtofAffinjunction or order for specific performance based restitutionary principles should play in cases ofbreach of on the breach ofthe covenant, the Councils' delayed their contract stems from the effect ofLord Cairn's Act120, and claim and sought to later recover, after the houses had all its equivalent Australian provisions121. been sold, an amount equalto the paymentthey mighthave Equitable damages granted under Lord Cairn's Act as extracted from the defendant in return for modifying the a substitute for a mandatory injunction may be assessed, covenants at the outset. In short, they claimed restitution "insuchmanneras the court shalldirect"122. In application of part of the developer's profits consequent upon its a plaintiff's damages underthatActwill notbe assessed on breach of the contract. ordinary common law bases. Authorities such as, Leeds The Court of Appeal unanimously rejected the Industrial Co-operative Society Ltd v Slack123, Wrotham Councils' claims. In doing so, all the members ofthe Court Park Estate Co Ltd v Parkside Homes Ltd124, and, stressedthe compensatorybasis ofdamages incontract118. Bracewell v Appleby125 all illustrate how equitable As Lord Justice Dillon observed (and by express reference damages need not be restricted to compensating a plaintiff to the statement of Parke B in Robinson & Harman): for an injury which has already been occasioned. It is now "...the remedy at common law for breach ofcontract is common ground that equitable damages awards can also an award ofdamages and damages at common law are be made in respect ofdamage perceived by the court to be intended to compensate the victim for his loss, not to sustainable in the future by injuries which the injunction, transfer to the victim if he has suffered no loss, the if granted, would have prevented. benefit which the wrongdoer has gained by his breach Itis the interpretationand application ofthese equitable of contract." (underlining added) damages cases which, it is submitted, at the heart of the present debate. Many ofthe difficulties arise from expost For breach of contract then, the Court of Appeal held facto attempts at classifying an earlier case as one which that common law damages would not be assessed on a did, or did not fall under the ambit of Lord Cairn's Act. restitutionary basis. Lord Justice Steyn, however, went on Recently in laggard v Sawyer126, Sir Thomas Bingham to consider whether, as a separate cause of action, a M.R. observed that the result in Surrey Council vBredero restitutionary remedy should be founded on a breach of was to a large part a consequence ofLord Justices Dillon contract. For a number ofpolicy and substantive reasons and Rose therein concluding that the plaintiffcouncils had his Lordship also declined to hold that there existed such soughtonly commonlaw damages as opposedto injunctive a cause of action under English law. It is suggested that relief or damages in equity under Lord Cairn's Act127. Lord Justice Steyn's comments on this submission are Viewed in that context much ofthe apparent conflict in the important. His Lordship's comments arguably apply not authorities is resolved. As Bingham M.R. remarked128: only to the area ofrestitution law, butmore generally to the "The court's approach to restitutionary damages in this various remedial categories. The reasoning cuts to the case (Surrey Council v Bredero) has provoked some heart ofwider debate as to whether the law can and should regretful comment (see Professor Birks, "Profits of be more flexible or reactive. Breach ofContract" (1993) 109 LQR 518), and it may "Theintroduction ofrestitutionary remedies to deprive be as suggested (see p.520) that these judgments will cynical contract breakers ofthe fruits oftheir breaches not be the last word on that subject. But the court of contract will lead to greater uncertainty in the plainly treated the case as one not falling under the assessment of damages in commercial and consumer principles derived from Lord Cairn's Act." disputes. It is ofparamount importance that the way in which disputes are likely to be resolved by the courts Lord Justice Millett agreed with Bingham M.R. in must bereadily predictable. Given the premise that the consideringthatthe courtinBrederoHomes was concerned aggrieved party has suffered no loss, is such a dramatic with a claim for common law damages, and not for extension of restitutionary remedies justified in order equitable damages under Lord Cairn's Act. The sim~le to confer a windfall in each case on the aggrieved reason for this was that DillonLJhad expressly said so1 9. party? I think not. In any event such a widespread However, MillettLJwentonto further analyse the Wrotham availability of restitutionary remedies will have a Park and Bredero Homes cases, and in so doing, sought to tendency to discourage economic activity in relevant explainhow some orall ofadefendant's profits consequent situations. In a range ofcases such liability would fall upon a breach ofcontract or covenant may still be clawed ACLN - Issue #43 23 back by a plaintiff in a supposedly compensatory, rather It is rarely apparent what factors have weighed on the than restitutionary settingl30. His Lordship neatly court's mind when finding ifreplacement or rectification summarised his views as follows l31. However, whether costs are, or are not, reasonable. these views add to the existing law in the sense ofcreating Itis submitted, however, thatitis an altogetherdifferent a new restitutionary entitlement at common law for breach matter to suggest that the available remedies for breach of ofcontract andhaving general application is, in the writer's contract should be redefined so as to enable a plaintiff to submission, doubtful: receive (viaarestitutionarypath) compensationconsequent "It is plain from the judgment in the Wrotham Park upon abreachofcontractincircumstances where aplaintiff case that Brightman J's (in that case approach was has plainly suffered no lossl33. The courts must be compensatory, notrestitutionary). He soughtto measure conscious not to reframe legal theory to effect an ad hoc the damages by reference to what the plaintiffhad lost, and sociallyjustdecision that defies objective application. not by reference to what the defendant had gained. He It is clearly the position that the law does not exist in a didnotawardthe plaintiffthe profitwhichthe defendant vacuum. It must, and does, develop in a manner that had made by the breach, but the amount which he recognises the community's internalised acceptable judged the plaintiffmight have obtained as the price of standards of behaviour and enterprise. The development giving its consent. The amount ofthe profit which the and refining of new causes of action in circumstances as defendant expected to make was a relevant factor in those which existed in Pavey & Matthews vPaul, Waltons that assessment but that was all. Stores v Maher, Gala v Preston134 and recently, Bryan v Maloney all illustrate this process. Despite this, it must not Both the Wrothan Park and Bredero Homes cases be overlooked that a contract is a consensual arrangement. (unlike the present) were concerned with a single past The primary responsibility of the courts in the event of breach ofcovenant, so that the measure ofdamages at breach is to compensate the innocent party, by putting he, common law and under the (Lord Cairn's) Act was the or she, so far as monetary damages can suffice in the same. Prima facie the measure of damages in either position they would have occupied had the contract been case for breach of a covenant not to build a house on performed. It is not yet accepted that the court's role is to neighbouring land is the diminution in value of the arbitrate on the merits or otherwise ofthe bargain from the plaintiff's land occasioned by the breach. One element perspective of either party. in the value of the plaintiff's land immediately before Principals and proprietors to construction contracts the·breach is attributable to his ability to obtain an have the benefit during the contract's performance period injunction to prevent the building. Clearly a defendant ofanumberofpositive injunctions andremedies to compel who wished to build would pay for the release of the the contractor's specific performance. Further, their covenant, but only so long as the court could still periodic certification powers, ability to withhold retention prevent it by the grant ofan injunction. The proviso is monies during the defects liability period, and rights to important. It is the ability to claim an injunction which effect payment by instalment under most of the standard gives the benefit ofthe covenant much ofits value. If form contracts bolster the principal's persuasive position. the plaintiff delays proceedings until it is no longer It is submitted that no justifiable purpose would be served possible for him to obtain an injunction, he destroys his by giving the proprietor a third option ofseeking to recover own bargaining position and devalues his right. The as damages a sum which represents the contractor's profit unavailability of the remedy of injunction at one and on defective works when the Principal has of its own the same time deprives the court of jurisdiction to volition in the first instance paid out on those works, award damages underthe Act and removes the basis for retained real powers at law and under the defects liability awarding substantial damages at commonlaw. Forthis clause in the event that the works are not in accordance reason.. I take the view that damages can be awarded at with the contract, yet in the interim has suffered no loss. common law in accordance with the approach taken in Placing considerations of whether an award is the Wrotham Park case .. but in practice only in the reasonable at the heart of the common law damages circumstances in which they could also be awarded equation for breach may allow justice to be done in an under the Act." (underlining added). individual action, but also potentially undermines the practical utility ofthe law. It is an even more radical step 5. CONCLUSIONS though to allow a proprietor as a matter of principle to It is not the writer's agenda to argue that causes of recover in restitution the contractor's profits on account of actions should not lie in circumstances where they are defective works. In a great many cases this would allow morally desirable, in a commercial sense or otherwise. the proprietor to profit from the misadventure. While Indeed in some instances the writer has previously argued Professor Birks is right in highlighting that cases such as that the law should be changed to achieve that very Surrey Council vBredero, "raise some worrying questions objectivel32. To this end the use of considerations of about the capacity of our law of contract to deal with reasonableness in the damages equation to moderate certain kinds of breach"135, if the law is to develop to excesses or absurdities caused by the application of legal overcome these injustices it must be careful to ensure that rules is obviously a welcome development. Charting a it does not do so in a manner that gives rise to not only less course through those decisions is not though an easy task. objective certainty, but at the same time a far greater potential for injustice. 0 ACLN - Issue #43 24

POSTSCRIPT FOOTNOTES Since completing this article, RuxleyElectronics vForsyth 1 Law of Contract, Cheshire, Fifoot & Furmston, has been unanimously reversed by the House ofLords. A 12th Edition - 1991, Butterworths (UK) at 24. short case note appears on page 3 ofthe Law Times issue 2 [1976] QB 44 at 71; [1975] 3 All ER 739 at 756. of 12 July 1995. Their Lordships found that the damages 3 "Contract - The Burgeoning Maelstrom", Mr awarded by the Court of Appeal to the Plaintiff (21,560 Justice Priestley (1988) 1 JCL 15. pounds) was unreasonable - particularly in view of the 4 "AustralianContractLaw: MaelstromorMeasured plaintiff's expressed intention not to apply that sum to Mutation?", N. Seddon (1994) 7 JCL 93. replace the defective structure. Lord Lloyd, in particular, 5 [1981] 1 WGR 711. adopted a flexible interpretation to the law of damages. 6 [1980] AC 827. His Lordship heldthatthe questionofthe "reasonableness" 7 [1992] 2 AC 128; [1992] 2 WLR 174. or otherwise of the award went beyond the issue of 8 [1981] 1 All ER 652. mitigation, and instead sat at the heart of the damages 9 [1983] 2 All ER 737 a. equation. In analysing the case in this fashion the House 10 "The Economics of Good Faith in Contract", J of Lords has adopted the approach generally followed in Adams (1995) 8 JCL 126, where itisobservedthat Australia to the question of damages consequent upon the present tensions in contract law result from a defective works under a building contract. As the law clash between market-individualism and presently operates, plaintiffs inbothEnglandand Australia consumer-welfarism. Market-individualism is willnowneedto take arobustlinewhenseekingrectification seen therein to define the function ofcontract law costs as opposed to damages representing the mere as being to facilitate competitive exchange: diminution in value. 0 "The market strand ofthis philosophy entails that the security oftransactions be promoted, the ground rules of contract be clear and that the law accommodate commercial practice (rather than the other way around). The individualist linchpins of this philosophy are the doctrines of "freedom of contract" and "sanctityofcontract": the greatestdegree both ofterm freedom and partner freedom must be recognised. Bycontrast, consumer-welfarism stands for a policy ofconsumerprotection and for principles of fairness and reasonableness in contract. It lacks, however, the unity and coherence of market-individualism." 11 Sedden, op cit at 94. 12 Since the advent of Lord Atkin's neighbourhood concept ofnegligence in Donoghue v Stevenson [1932] AC 562. 13 CommercialBankofAustraliaLtdvAmadio(1983) 151 CLR 447. 14 Waltons Stores (Interstate) Ltd v Maher (1988) 164 CLR 387. See also: Starke, Seddon and Ellinghaus, Cheshire & Fifoot's Law of Contract (6th Aust. Ed. 1992) at para. 251. 15 RenardConstructions (ME) PtyLtdvMinisterfor Public Works (1992) 26 NSWLR 234. Mr Justice Priestley noted at page 263-264 that: "the time may be fast approaching when the idea [ofgood faith], long recognised as implicit in many of the orthodox techniques of solving contractual disputes, will gain explicit recognition in the same way as it hasin Europe and the United States".

See also at p.258 where His Honour felt the requirementofreasonableness arose byimplication of a term under the test in Refinery (Westernport) Pty LtdvHastings Shire Council (1977) 52 ALJR 20. Meagher JA has since strongly asserted to the ACLN - Issue #43 25

contrary in, Hughes Bros Pty Ltd v Trustee ofthe J Carter (1994-95) 8 JCL 1 and 91; "Commentary Roman Catholic Church for the Archdiocese of on "Good Faith and Fairness in Negotiated Sydney, (1993) 31 NSWLR 91 at 104. Kirby P in Contracts", L Sealy (1995) 8 JCL 142. that case felt "obliged" to apply the Renard 24 "Suspending Contract Performance For Breach", decision. Mr Justice Priestley's remarks were JW Carter University of Sydney Seminar, endorsed by Handley JA (at p.280), though Thursday, 24 February 1994. First presented at a Meagher JA firmly rejected the importation or Symposium on Contract Law, Merton College, implication ofany concept ofreasonableness into Oxford, September 1993. the C1.44 powers. 25 Bryan v Maloney (1995) 128 ALR 163. 26 "Good Faith in Contract Performance: Principle For further analysis of the Renard decision see: or Placebo?", Girard, (1983) 5 Supreme Court "Good Faith in Commercial and Construction Law Review 309 at 326. Contracts", S Hibbert andEMaloney, [1993] BCL 27 "Contract and its Relationship with Equitable 183; and; "The Concept of Reasonableness in Standards and the Doctrine ofGood Faith", Paper Construction Contracts", Mr Justice T.R.H. Cole, delivered at the Cambridge Lectures 1993, 8 July [1994] BCL 7. 1993, pp 62-63. Referred to and discussed in, 16 (1991) 24 NSWLR 1, andreviewedin"Cliffhanger "Law - All in Good Faith", Mr Justice T.R.H. Negotiations in the Supreme Court ofNew South Cole, [1994] 10 BCL 18. Wales", G. Tolhurst (1994) 7 JCL 79. Contrast 28 per Rogers J in Banque Brussels Lambert SA v this result with the "strict" approach followed by Australian National Industries Ltd (1989) 21 the House of Lords in Watford v Miles [1992] 2 NSWLR 502 at 523. WLR 174, considered in "Watford v Miles: False 29 "Individualised Justice - The Holy Grail", The Certainty About Uncertainty - An Australian Hon. AM Gleeson, (1995) 69 ALJ 421 at 432. Perspective", RP Buckley (1993) 6 JCL 58. See 30 PacificAssociate vBaxter [1989] 3WLR 1150per also: "The Duty of Utmost Goodfaith After Russell LJ. Formation ofthe Contract" Brownie J (1992-93) 5 31 Goldberg vHousingAuthorityofthe City ofNewark IGJ 276. See also Goff & Jones, The Law of (1962) 186A 29.291 per Weintraub CJ at p.293. Restitution, 4th Ed (1993) at 555 wherein it is 32 (1853) 4 HLC 1. noted: 33 See also Richardson v Mellish (1824) 2 Bing 228 "English law does not recognise, at least in at 252. For an overview of the definition and name, any doctrine of good faith bargaining, application of the principle of public policy, see: culpa in contrahendo, as it is known in civilian "Public Policy in International Commercial jurisdictions ..." Arbitrations in Australia", D Miller (1993) Vol.9, 17 HooperBailieAssociatedLtdvNatcon Group Pty No.2 Arbitration Intemational 167 atpp 172-178. Ltd (1992) 28 NSWLR 194 . 34 (1992) 26 NSWLR 234 at 275. 18 (Unreported) Supreme Court of NSW 28 March 35 (1982) CLR337. MeagherJAalsocitedin support, 1995. Secured Income Real Estate (Australia) Ltd v St. 19 [1990] 1 All ER 512. Martin's Investments Pty Ltd (1979) 144 CLR 20 (1602) 5 Co. Rep. 117a. See also Stilk v Myrick 596. Meagher JA's comments in this regard were (1809) 2 Camp. 317; S & T 231. not agreed with by Handley JA or Priestley JA in 21 That case has since been applied by the English that case. See footnote 15 above. High Court inAnangelvIHI [1990] 2 Lloyds Rep. 36 [1994] 10 BCL 7 at 10. 256. 37 (1988) 15 NSWLR 130, at 145. 22 (1988) 165 CLR 107. See also: "The Trident 38 (1985) 60 ALR. Insurance Case: Death of Contract?" P. Kincaid, 39 See generally: Stevens v Brodribb Sawmilling Co (1989-90) 2 J.C.L. 160. The application of this Pty Ltd (1986) 160 CLR 16; Cook v Cook (1986) judgment has, though, since been limited; see 162 CLR 376 at 381-2; San Sebastian Pty Ltd v Winterton Constructions Pty Ltd v Hambros The Minister (1986) 162 CLR 340; Hawkins v AustraliaLtd(1991) 101 ACR363 where abuilding Clayton (1988) 146 CLR 539 at 545,576; Gala v contractor was unsuccessful in invoking the case Preston (1991) 172 CLR 243 at 252-4; Burnie to claim payment from the principal's financier. PortAuthority v GeneralJones PtyLtd(1994) 120 See also, Visic v State Government Insurance Co ALR42. Ltd (1990) 3 WAR 122. 40 (1985) 128 ALR 163 at 192. 23 Seddon, op at 94. See also "Commerce and 41 (1993) Aust Torts Rep 81-202 at 61,964-5. Conscience: The High Court's Developing View 42 op cit at p.193. of Contract", J Carter and A Stewart (1993) 23 43 See the comments of Sir Maurice Byers, "The UWAL. Rev. 49; "The Economics ofGood Faith Lawmaking Role of the High Court" (1994) 11 in Contract", J Adams, Ope cit; "Commentary on Aust. Bar Rev. 187. See also the introductory "GoodFaithandFaimessinNegotiatedContracts", comments to that paper by KE Lindgren QC (as ACLN - Issue #43 26

His Honour was then) at (1994) 11 Aust. BarRev. and McPhersonJA, atp.1 0 oftheirjointjudgment. 185; "The Lawmaking Power ofthe High Court", 77 (Unreported) 22 April 1994. For some discussion DF Jackson QC, (1994) 11 Aust. Bar Rev. 197, ofthis case see: "RecoveryForDefectiveWorks", and, "The Political Impact of the High Court" S S Nankervis, (1995) 40 ACLN 29; "Damage Solomon, Allen & Unwin 1992 at 186.8 Without Loss: A Legal Conundrum", D Levin, 44 op cit at 171. [1995] 11 BCL 2. 45 (1964) 1 WLR 885. 78 at 26. 46 (1982) 1 WLR 1297. 79 at 31. 47 (1989) 1 EGLR 159. 80 at 28. 48 (1984) 3 NSWLR 396. 81 (1991) 104 ALR 1. (1991) 174 CLR 64 at 161 per 49 Unreported. Supreme Court of NSW, Giles J, 2 McHughJ. March 1995. 82 (1844) 9 Ex 341; 156 ER 145 at 151 per Alderson 50 (1988) 12 NSWLR 293, per Kirby P at 311 and B. McHugh JA at 336. 83 (1992) 120 ALR 16. 51 (1848) 1 Ex 850 at 855 (154 ER 363), per Parke J 84 at 50. in particular. See also: Livingstone v Rawyards 85 op cit, at 40. Cole (1990) 5 App. Cas. 2539 perLord Blackburn. 86 at 41. 52 [1977] 3 All ER 129 at 315e. 87 at 49. 53 At 316g. This conclusion is endorsed by J.L.R. 88 at 58. Davis in "Damages", Essays On Contract, Finn 89 op cit at 620. (Ed), 1987 Law Book Co., 200 at 203-4. 90 op cit at 657. 54 at 316-317. 91 Significant dicta exists against the Court's 55 at 317b. conclusiononthis pointinRuxley. Seefor example, 56 at 317c. Megarry V.C. in Tito v Waddell at 332, Lord 57 [1978] 1All ER 33; [1977] 1 WLR 1262. Griffiths in Linden Gardens v Lenstra at 97 and 58 (1986) 2 Const. LJ 303. perSladeJ inImodco Ltdv Wimpey MajorProjects 59 [1993] 3 All ER417. For a helpful analysis ofthis LtdandTaylor Woodrow InternationalLtd(1987) case see, "LindenGardens" -Judicial Gymnasticis 40 BLR 1 at 25 . Caused by aLack ofProximity", D. Jones, [1994] 92 at 59. 10 BCL 165. 93 (1993), 4th Ed. 60 [1994] 3 All ER 801. For a summary of the 94 (1986) 162 CLR 217. judgments see "Damages, Diminution in Value 95 (1992) 175 CLR 353. and Cost ofCure", R Halson, (1994) LMCLQ 27. 96 [1991] 2 AC 548. See also "Damages for Rebuilding". H Beale 97 [1993] lAC 70. (1995) 111 LQR 54. 98 "Understanding the Law of Restitution: A Map 61 at 804b. Through the Thicket", A Burrows, (1994) Bond 62 at 806b. University Seminar - Equity Restitution and the 63 "GoodFaith and Fairness in Commercial Contract Banking Lawyer, at page 3. Law, The Rt. Hon. Lord Justice Staughton, (1944) 99 [1991] 2 AC 548 at 578. 7 HCL 193 at 194. 100 Pavey v Matthews (1987) 162 CLR 221 at 263. 64 [1977] 2 All ER 784. Foradetaileddiscussion ofquantummeruitclaims 65 at 821e per Mann LJ. in a construction context see; "QuantumMeruit in 66 Mann LJ at 810j. Australia - How the Rules Calculate Value for 67 Radford v De Froberville, op cit, at 44. Work Done Are Changing", D Jones and R 68 (Unreported) 14 September 1992, cited at 811c. Varghese, [1992] 8 BCL 101. 69 (1954) 90 CLR 613. 101 (1991) 23 NSWLR571 perBrownieJ(Commercial 70 at p.617. Division Construction List). 71 [1968] Qd. R.275. 102 (1990) 20 NSWLR 251. InBrenner vFirstArtists' 72 (1982) 57 ALJR 315. Management Pty Ltd [1993] 2 VR 221 Byrne J in 73 (Unreported) 12 December 1989, NSW (CA). the Victorian Supreme Court, applied the Pavey v See: Building and Construction Contracts in Matthews principles of quantum merit to a music Australia, J. Dorter and J. Sharkey, (LBC 2nd Ed management arrangement. See also: Quantum at para 1.830). Meruit and Building Contracts", H.O. Hunter and 74 Alexander v Cambridge Credit Corp (1987) 9 J.W. Carter, (1989-90) 2 J.C.L. 95 and 189, at 97 NSWLR 310 at 351E. See also WharfProperties 102; Minister for Public Works v Renard v Eric Cumine and Associates [1991] 52 BLR1; Constructions (ME) PtyLtd(Unreported) Supreme and Czarnikow v Koufos [1969] lAC 350. Court NSW Brownie J, 15 February 1989 at 29 75 (1974) 5 ACTRF 10 per Woodwood J at 12. (see Halsbury's Laws ofAustralia, Butterworths, 76 (Unreported) 13 February 1995 per Macrossan CJ at para 65-610). ACLN - Issue #43 27

103 [1977] 2 NSWLR 880. 120 Chancery Amendment Act (UK) 1858 (21 & 22 104 at 902-903. Vict. c.27). 105 at 900-901. 121 See, for example, S.68 of the New South Wales 106 at901 citing in support, BrewerStreetInvestments Supreme Court Act, 1970. Ltd v Barclays Woollen Co Ltd [1953] 2 All ER 122 Section 2, Lord Cairn's Act. 1330, [1954] 1QB/428. 123 [1924] AC 851 per Viscount Finlay at 851. 107 [1984] 1 ALL ER 504. 124 [1974] 1 WLR 798 per Brightman J at 810-811. 108 [1957] 1 WLR 932; [1957] 2 ALL ER 712. See 125 [1975] Ch. 408. Hunter & Carter, op cit, at pp.102-104. 126 [1995] 1 WLR 269. 109 [1995] 1 ALL ER 1005 per Rattee J. Forfurther 127 at 281B. discussiononthis topic see The Law ofRestitution, 128 at 281-282. Goff and Jones (4th Ed) 1993, Chapter 25. 129 at 289 9. 110 at 1017-1018. 130 at 290-292. 111 (1989) 15 Con, LR 116. See Rattee J at p.1021- 131 at 291 D-H. 1022. 132 "The Certifier's Duty of Care to the Contractor 112 at 1024. Pacific Associates v BaxterReconsidered", (1993) 113 It is arguable that the result in Waltons Stores 10 ICLR 172. (Interstate) Ltdv Maher (1988) 76 ALR 513, may 133 As would have been the result had the plaintiffs also assist a claimant contractor in such submissions on the restitutionary loss claim been circumstances. However, to invoke that decision accepted in either the Alucraft or Bredero cases. it will be for the plaintiff to show that in the 134 (1991) 172 CLR 243. circumstances the inaction by the defendant in not 135 "Profits ForBreachofContract", (1993) 109 LQR correcting the basic assumption by the other party 518 at 519. 0 as to the future ofthe transaction (whichassumption the defendant had played a real part in creating) wouldconstituteaclearencouragementto continue, and would be unconscionable to resile from. See Mason CJ and Wilson J at 521,525. Against such an argument, however, is the fact that in Sabemo the Council advised the contractor ofits change of heartprompt!y upon changing its mind. There was no suggestion on the facts of delay on its part in notifying. See also Goff& Jones, op cit, at pp 561- 563. 114 Compare the position here, however, with the approach taken by the Israeli Supreme Court as described by D. Friedmann in, "Restitution of Profits gained by a Party in Beach of Contract", (1988) 104 LQR 383. 115 Seefor example, "TheRecovery ofBenefitsGained from Breach of Contract", G. Jones (1983) 99 LQR 442; "What Can Restitution Do For You", J. Beatson, (1988-89) 2JCL65 at75; "Restitutionary Damages for Breach of Contract: Snepp and the Fusion of Law and Equity", P. Birks [1987] LMCLQ 419; "The Independence of Restitutionary Causes ofActions", P. Birks, (1990) Vol 16 Qld.LJ 1 at 10, "Profits for Breach of Contract", P. Birks (1993) 109 LQR 518 at 519. Compare the sentiments in these papers with those ofProfessor Stoljar in, "Restitutionary Relief for Breach of Contract", (1988-89) 2 JCL 1 at 12. 116 [1993] 3 All ER705. Atfirst instance see: [1992] 3 All ER 302 per Ferris J. The case is noted by Prof. Birks at (1993) 109 LQR 518. 117 (1984) 156 CLR 41 at 122-5. 118 Dillon LJ at 709; Steyn LJ 714b and Rose LJ at 716c. 119 at 715f-j.