In the recent decision in Hacer Group Pty Ltd v Euro Façade Tech Export Sdn Bhd [2022] VSC 373, the Supreme Court of Victoria held that a contractor was entitled to damages for the cost to rectify defective work done by a subcontractor despite the contractor’s failure to comply with contractual provisions governing notification and rectification of defective work. The decision also examined the circumstances in which liquidated damages will be an exhaustive remedy for delay.
Background
In 2016, Hacer Group Pty Ltd (Hacer) was engaged as head contractor to design and construct an apartment complex in Heidelberg Heights, Victoria. Hacer engaged Euro Façade Tech Export Sdn Bhd (EFT) under a subcontract (the Subcontract) to design, engineer, procure, manufacture, fabricate and supply a façade system (the Subcontract Works) for the apartment complex.
Hacer commenced proceedings against EFT, alleging numerous design and manufacturing defects in the Subcontract Works and claiming approximately $2.4 million to rectify the defects as a debt due by EFT pursuant to a contractual indemnity in the Subcontract, or in the alternative, as damages for breach of the Subcontract at common law (the defective work claims). Hacer also claimed liquidated damages under the Subcontract in the amount of $589,500 or in the alternative, the higher amount of $898,162, for actual loss and damage suffered due to delay in performance of the Subcontract Works by EFT (the delay claim). In addition to the defect work and delay claims, Hacer also claimed credits for returned materials.
In its defence, EFT denied liability for some of the defective work claims on the basis that (amongst other reasons) it had never received from Hacer a notice of defect or a direction to rectify the defects alleged, and that therefore Hacer should only be entitled to recover the cost that EFT would have incurred in rectifying those defects. EFT denied liability for the delay claim on the basis that Hacer had allegedly delayed its performance of the Subcontract Works and on the basis that the liquidated damages sum stipulated in the Subcontract was an unenforceable penalty.
EFT did not tender any evidence in support of its defence or counterclaim or appear at trial.
Decision of the Supreme Court of Victoria
The defective work claims
The Court found that EFT had in fact been notified by Hacer of some of the defective work the subject of the defective work claims; further, that where Hacer had failed to notify EFT of defective work, that did not result in Hacer foregoing entitlement to recover damages in respect of the defective work.
In reaching its decision, the Court considered the terms contained in the Subcontract which allowed Hacer to give notice to EFT of defects, or to direct it to rectify defects, and which in turn provided EFT with an opportunity to rectify its defective work. The Court also considered the decision in Turner Corporation Ltd v Austotel Pty Ltd (1994) 13 BCL 373 (Turner), where similar terms were found to establish the parties’ rights and obligations in respect of defective work to the exclusion of a common law right to damages, thus preventing recovery where no notice was given. The Court distinguished the decision in Turner on the basis that the broad indemnities under the Subcontract did not make reference to the terms relating to notification and rectification of defects, and that therefore “a more harmonious construction of the Subcontract as a whole” was one that permitted Hacer to rely on its common law right to damages.
Further, the Court also observed that the principles of mitigation of loss could address the concern raised by Cole J in Turner of the “curious circumstance” in which a party, having not complied with notification provisions, could still recover damages for breach of contract, which in turn put at nought those contractual notice provisions. The Court determined that where Hacer had failed to notify EFT of a defect or otherwise to provide EFT with an opportunity to rectify, Hacer had failed to mitigate its loss. On that basis, Hacer was not entitled to recover more in damages than the amount which it would have cost EFT to rectify. However, as EFT did not file any evidence that it could have rectified defects for less, Hacer was awarded the costs which it incurred in its doing so.
The delay claim
The Court found that Hacer was entitled to liquidated damages under the Subcontract for EFT’s delay, and not to common law damages for breach by EFT due to its delay.
In reaching this decision, the Court observed that it is well established that an intention to exclude common law damages for breach must be expressed in clear and unambiguous terms. In this regard, the Court confirmed the two factors which weigh heavily in favour of a finding that a liquidated damages regime ought to provide an exclusive remedy for delay, namely:
- a stipulated positive sum for liquidated damages; and
- a mandatory liquidated damages clause.
The Court concluded that the liquidated damages clause in the Subcontract satisfied both criteria.
EFT did not provide particulars or evidence in support of its allegation that it had been delayed by Hacer or its claim that the liquidated damages sum payable under the Subcontract was an unenforceable penalty, both of which were rejected by the Court.
Key takeaways
The decision in Hacer Group Pty Ltd v Euro Façade Tech Export Sdn Bhd [2022] VSC 373 provides guidance on the circumstances in which a defect notification provision under a contract will not operate to exclude a party’s right to common law damages for breach for defective works.
When entering into contracts, parties should consider the probable interplay of provisions invoked or sought to be relied upon to sustain a claim for recovery for defective works, including indemnity provisions.
During a project, a party complaining of defective work should consider issues of mitigation of loss in connection with notification of defects to the other party.
This article was written by Jack Fry (Lawyer) and Catherine Bell (Principal Solicitor).
