Rectification costs for breach of contract

In Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) HCA 8 (Tabcorp), French CJ, Gummow, Hayden, Crennan and Kiefel JJ of the High Court were faced with the seemingly simple question of what damages are recoverable by Bowen Investments Pty Ltd (the Landlord) for breach of covenant of a commercial lease not to alter the premises.

Background

During the term of the lease, Tabcorp Holdings Ltd (the Tenant), without the Landlord’s consent, destroyed the foyer of the premises and constructed a new foyer.

As well as various repair covenants contained in the lease, by clause 2.13, the Tenant covenanted:

‘Not without the written approval of the Landlord first obtained (which consent shall not be unreasonably withheld or delayed) to make or permit to be made any substantial alteration or addition to the Demised Premises.’ 

At first instance: Federal Court of Australia

In the Federal Court, Tracey J held that the Tenant was aware that written consent from the Landlord was required, and that such consent did not exist, and upheld a claim for common law damages in relation to breach by the Tenant of clause 2.13. 

Tracey J was of the opinion that it would only be appropriate to award damages based on reinstatement of costs ‘in a relatively narrow range of cases where a tenant has so damaged or modified premises that they are unlettable at the conclusion [of] the lease’.

Accordingly, after accepting expert evidence that the Tenant’s changes to the foyer resulted in little diminution to the value of the building, Tracey J gave judgment for the Landlord in the sum of $34,820 – essentially reflecting the difference in value of the property with the old foyer when compared to the new foyer.

Appeal: Full Court of the Federal Court of Australia

On appeal, Finkelstein, Gordon and Rares JJ of the Full Court of the Federal Court unanimously adopted a cost of reinstatement approach focusing on the breach of repair covenants of the Tenant and increased the judgment sum to $1.38 million – comprising $580,000 for the cost of restoring the foyer to its original condition and $800,000 for the loss of rent while the restoration was taking place.

High Court decision

On appeal to the High Court the Tenant sought restoration of the trial judge’s figure.

The High Court, in a unanimous decision, confirmed that the Tenant was liable to pay the higher figure of $1.38 million – for reinstatement and loss of rent during reinstatement – but adopted different reasons to that of the Full Court.

The High Court found pursuant to clause 2.13:

  • the Landlord was contractually entitled to the preservation of the premises without unauthorised alterations;

  • its measure of damage is the loss sustained by the failure of the Tenant to perform that obligation; and

  • that loss is the cost of restoring the premises to the condition it would have been in if the obligation had not been breached.

The decision was based on what was referred to as the ‘ruling principle’ with respect to damages at common law for breach of contract as stated by Parke B in Robinson v Harman (1848) 154 ER 363:

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

The High Court confirmed that ‘the same situation does not necessarily mean ‘as good a financial position'.

Often, for example, in the case of sale and supply of faulty goods, the prima facie measure of damages is the difference in value between the specified goods and the goods supplied;

‘however, in cases where the contract is not for the sale of marketable commodities, selling the defective item and purchasing an item corresponding with the contract is not possible.  In such cases, diminution in value damages will not restore the innocent party to the ‘same situation…’ as if the contract had been performed.'

Qualifications to the rule

The Tenant sought to rely on Bellgrove v Eldridge (1954) 90 CLR 613 which imposed a qualification to damages recoverable by a building owner for breach of a building contract.

the qualification … is that, not only must the work being undertaken be necessary to produce conformity (with the obligation), but that also, it must be a reasonable course to adopt.’ [at 618]

The example which the court gave of unreasonableness was the following:

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

This indicates that the test of ‘unreasonableness’ will only be satisfied by fairly exceptional circumstances.

For further information please contact Mark MacLennan on (08) 9288 6970 / mark.maclennan@lavanlegal.com.au.