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Metricon Holmes Pty Ltd v Lipari [2024] NSWSC 566

Building defects are a major source of concern for property owners, with stories of huge losses from defects now common in the media. Where building work has been defective or does not comply with the contract, the Courts provide a potential avenue for compensation. But how do Courts determine suitable compensation, particularly where the parties do not agree on the appropriate rectification.

In this case, among other issues, the Court had to assess how to calculate the damages to award to an owner as a result of the building not complying with the contract.

The contract initially specified a ‘class M’ slab, which the owner upgraded to a ‘class H1’ slab. The owner claimed that the building slab did not comply with the contract and the specified Australia Standard. The builder accepted that the slab did not comply with the contract and the specified Australian Standard in some respects.

The Court, the owner and the builder all agreed that the slab did not meet Australian Standard for a ‘class H1’ slab – although they did not all agree on the extent of the failure to comply. The builder constructed a ‘class M’ slab.

The Court accepted that the slab failed to meet the relevant Australian Standard in three ways:

• Some of the reinforcing was not long enough;
• Some of the beam overlaps were not long enough; and
• Some of the beams were not deep enough.

The Court accepted that that these failures were the cause of some cracking, however the cracking was not significant. The Australian Standard recognises that some cracking is to be expected.

The owner submitted that even though the failures to meet the Australian Standard had not yet caused significant issues, the slab was weak and that in time, they could expect more significant issues. The owner submitted that to eliminate the risk of the slab failing, they would need to demolish and re-build the home. The Court did not agree.

Nevertheless, the contract required the builder to build a slab that complied with the Australian Standards, and this slab did not comply. The builder had breached the contract. The owner was entitled to damages as a result of that breach of contract. The Court had to determine what damages would be paid by the builder to the owner.

How a Court assesses damages when a building does not comply with the contract

The Court started with the principles from the High Court decision of Belgrove v Eldridge: an owner is entitled to have the construction comply with the contract, and damages should be the cost of rectification where rectification is reasonable. Where rectification is not a reasonable course of action, the damages can reflect the diminution in value of the property attributable to the defects, or can be reliance loss, where the owner is compensated for the builder not complying with the contract.

As the defects were in the building slab, rectification would mean complete demolition and re-construction of the whole house. The cost of rectification was estimated to be $815,000.

Courts have often been required to consider whether rectification is reasonable. A classic example Courts mention is a rendered wall which was specified to be constructed with second hand bricks, but was actually built with new bricks. Although the wall would not comply with the contract, it would not be reasonable to demolish and re-build the wall. In such a case, the damages would be the diminution in value of the property attributable to the defects – probably nominal.

Other concepts considered by Courts include assessing whether a claimant is using a technical breach to claim damages and whether rectifying the defect is necessary to achieve the contract objective.

Note also, it will generally not be relevant to ask whether the cost of rectification is proportional to the diminution in value of the property. And it is also not generally relevant for the owner to demonstrate that they will actually carry out the rectification, however evidence that the owner will not carry out the rectification can affect the ‘reasonableness’ test.

These considerations affect the ‘reasonableness’ test because they illuminate whether the expense of damages awarded against the builder is disproportionate to the loss suffered by the owner.

In this case, the builder claimed that there was evidence that the owner did not intend to rectify the defective slab. That evidence was a statement by the owner that they would ‘never build again’. However, the Court accepted that even though the owner had lost faith in the building industry, they would go though it all again if their expert advised them they needed to in order to make the building safe.

The owner’s argument that rectification was necessary to prevent the slab from failing was not successful because the Court had rejected the owner’s expert’s evidence about the risk of the slab failing. The Court noted that in the six years between the completion of the construction and the hearing, no significant damage had become evident.

Outcome

The Court decided that it would not be reasonable to demolish and rebuild the house. The Court awarded damages of $55,020.40, based on the cost of the defective slab, that did not meet the requirements of the contact – this compensated the owner for the failure of the builder to construct the slab in accordance with the contract.

Courts commonly have to make an assessment in construction cases of whether rectification damages should be awarded or whether it would be unreasonable to do so. In this case, the owner wanted and paid for what they believed to be a higher standard of slab for their home. That was not enough for the Court to consider that the higher standard slab was necessary to achieve the contract objective.

There was a large difference between the cost of rectification and the damages awarded. The Court did not accept the owner’s claim that there was a risk of the slab failing. Given that ‘safety’ aspect of the owner’s case was not made out, the cost of demolishing and rebuilding a house which was in good condition meant that rectification damages would have been unreasonable.

This article was published on 11 March, 2026 by Carroll & O’Dea Lawyers and is based on the relevant state of the law (legislation, regulations and case law) at that date for the jurisdiction in which it is published. Please note this article does not constitute legal advice. If you ever need legal advice or want to discuss a legal problem, please contact us to see if we can help. You can reach us on 1800 637 716 or via the Contact us page on our website. (www.codea.com.au).