Summary

An entitlement to damages following a breach of contract or negligence may be reduced to the extent the claimant could have taken reasonable steps to reduce the loss.¹ Builders often claim that because they were not given the opportunity to rectify defective work that there has been a failure to mitigate loss. The New South Wales and now Victorian Court of Appeal have provided some welcome clarity around what is reasonably expected by claimants in mitigating their loss following a breach of a construction contract. This article discusses the decisions in Ceerose Pty Ltd v The Owners – Strata Plan No 89074 [2025] NSWCA 235 and Bata v Pathik [2026] VSCA 138 and in particular, circumstances in which it may be reasonable for a claimant to allow others to rectify defects or complete the work of the builder and have that cost recoverable as damages at law.

Ceerose

The Owners – Strata Plan 89074 (Owners Corporation) brought claims against Ceerose (Builder) of “The Eliza”, a 16 storey residential apartment building located in Sydney CBD, for defects in its works. Through the course of 2018 and 2019 the Owners Corporation issued letters to the Builder, telling it that the Owners Corporation had lost confidence in its ability and willingness to carry out the necessary defect rectification works. This culminated in the Owners Corporation informing the Builder that it was unwilling to allow it any further opportunity to repair any defects in its works.²

A key issue in these proceedings as explained by Kirk JA was whether “the conduct of the [Owners Corporation] – including the failure to provide an opportunity to rectify – was unreasonable in all the circumstances, such that some or all of the claimed loss resulting from the breach of contract should be disregarded”.³

Relevant factors that the Court considered in determining that the Owners Corporation’s decision not to allow the Builder to rectify the defects was reasonable (in first instance and upheld on appeal) included:

1. the contemporaneous records show that there had been unexplained delay by the Builder in carrying out urgent repairs or otherwise carrying out rectification in a timely manner;⁴ and
2. that the relationship between the Owners Corporation and the Builder had broken down.⁵

The Court also reaffirmed the position regarding onus: it is the Defendant’s burden to prove that a plaintiff has failed to mitigate its loss. In these proceedings, the Builder’s case theory was that it was for the Owners Corporation to prove that its decision not to allow the Builder to undertake rectification works was reasonable. But that was incorrect, and it therefore failed to displace its evidentiary onus on this point.⁶

Bata

Mr Pathik (Owner) brought claims against Mr Bata (Builder) for defective and incomplete works under a contract for the construction of two townhouses in Seaford, Victoria. The Owner’s claims arose due to defects in the Builder’s works which resulted in the owner having to amend its original planning permission and if the Owner was to comply with the new permission, demolish and relocate works done by the Builder to date.⁷

The Owner could not afford to comply with the requirements of the new council permission and as a result, the Owner terminated the contract and sold the property on an ‘as is’ basis, without an occupation certificate, registration of subdivision or having undertaken the works required of the updated permission.

The Builder asserted that the Owner had failed to mitigate its loss because (among other things) the Owner:

1. could have terminated the contract much earlier;
2. failed to develop the property in accordance with the updated permission or complete the construction of the townhouses, including rectification of any defects; and
3. failed to sell the property in its developed and subdivided form (as opposed to a single property).

The Builder’s assertion that the Owner had failed to mitigate its loss was rejected. In rejecting the Builder’s assertion, the Court also summarised the principles on mitigation of loss in the context of construction contracts, including:

1. The claimant must take all reasonable steps to mitigate their loss consequent upon the defendant’s wrong and cannot recover damages for any such loss which they have failed through unreasonable action or action to avoid.⁸
2. There is no duty to mitigate loss, the consequence is that the quantum of claimable damages is reduced.⁹
3. The onus to prove a failure to mitigate is on the defendant. Whether or not there was a failure to mitigate is a question of fact, which is to be assessed in light of the circumstances at the time. The standard to which the claimant is held is not a high one. The financial circumstances of the claimant are also relevant – they are not required to ‘chance their arm further, to risk any capital they might borrow too far or to take steps which would cause their financial harm if they failed’. Also, conduct isn’t unreasonable just because the defendant can point to other more beneficial conduct.¹⁰
4. There is no invariable requirement that the owner provide the builder with an opportunity to rectify defects. Rather, the issue is whether the claimant’s conduct – including a failure to provide an opportunity to rectify – was unreasonable in all the circumstances. A key consideration will often be whether the builder’s offer(s) to rectify are genuine (which in this case, they were not).¹¹

Key takeaways

This case means for Owners that there is no absolute requirement to ask the Builder to come back to rectify. However, a decision not to allow a builder to return must be reasonable and taken into account (at least):

1. the relationship between the owner and the builder;
2. the confidence the owner has around whether the builder will correctly rectify defects or complete the work (including consideration of whether any offers by the builder are genuine); and
3. whether the owner can afford any further financial harm if a plan to have the builder rectify or complete does not play out as intended.

For builders these cases mean that there is a basis to say that a builder should be allowed to return to rectify defects because to do otherwise would not be an appropriate way to mitigate loss. However, this will mean that a builder will need to maintain a good relationship with the owner so that the owner can still have confidence that the defects will be rectified.

If an owner or builder want to provide for a right to return to rectify or to exclude this right the parties can provide for this in their contract.

This article was written by David Jury, Partner, and Timothy Connelly, Senior Associate.

¹ See for example, Sherson & Associates Pty Ltd & Bailey [2000] NSWCA 275 at [77].

² Ceerose at [10].

³ Ibid at [33] (emphasis added).

⁴ Ibid at [56]-[57], [61], [65] and [67].

⁵ Ibid at [69].

⁶ Ibid at [39]-[40].

⁷ Bata at [11]-[14].

⁸ Ibid at [61].

⁹ Ibid.

¹⁰ Ibid at [62].

¹¹ Ibid at [65]; see also Ceerose at [81].