A common issue in construction disputes is whether a principal should be entitled to the full cost of fixing defects to what was originally specified despite there being a “reasonable” alternative solution that is cheaper and would still make the works fit for purpose. More controversial still, whether the principal should be entitled to the cost of the full rectification in circumstances where those costs have not (and may never) be incurred.

For many years the starting position has been that a principal is entitled to the costs of rectifying the works to bring them into conformity with what was specified. This was consistent with the common law’s starting position for remedying a breach of contract: being to put the innocent party in the position they would have been but for the breach.¹

This starting position is then tested against whether the rectification method (c.f. costs) is reasonable. The question of whether a rectification method is reasonable has caused great debate for the reasons outlined below.

In the decision Stone v Chappel,² the Full Court of the Supreme Court of South Australia identified eight factors for assessing reasonableness. By applying these factors, courts have in two instances reject rectification costs as damages in these cases.

In 2025 there were two cases (85 Princess³ and Stanley⁴) which considered and applied the eight factors and so provide useful guidance. This article sets out a summary of the development of the law to date, and how the two 2025 cases have applied it.

Some historical context from 1950s Australia: Bellgrove

The 1954 case of Bellgrove v Eldridge⁵ is the seminal Australian case concerning when it would be unreasonable to require a wrongdoer to pay damages equivalent to rectification costs.

The dispute involved a house built with serious structural defects, including non-compliant foundations. The homeowner submitted that the proper remedy was to demolish the house and rebuild it to comply with the contract specifications. The builder submitted that such work was excessive and that damages should be based on the difference between the value of the defective house and a properly built house (ie diminution in value).

The High Court held that the innocent party is generally entitled to recover the costs of rectifying the defects, provided two requirements are met:

1. the rectification must be necessary to achieve contractual conformity; and
2. the rectification method must be reasonable.

The High Court held that the demolition and reconstruction of the house was necessary to meet the contract specifications and that the rectification methodology was reasonable given the nature and seriousness of the non-compliant foundations.

The second limb of Bellgrove regarding what a reasonable methodology is, has since created significant uncertainty.

1. There is no settled definition of what ‘reasonable’ meant. This must be determined on a case-by-case basis based on the evidence adduced before the courts.
2. It requires a balancing act between strict compliance with the contractual rights and the practicalities of performing the rectifications works.
3. It raises questions about proportionality and economic waste. For example, how much should a wrongdoer need to pay an innocent party to rectify a cosmetic defect that it has no intention of fixing?

This lack of clarity makes it difficult for parties to assess the innocent parties’ damages, particularly in cases where the works are non-compliant with the contract but practically minor.

At last, some further guidance – the 8 factors in Stone v Chappel

After many decades of uncertainty in the 2017 case of Stone v Chappel the Full Court of the Supreme Court of South Australia identified eight factors to guide the reasonableness assessment. These were not pre-requisites nor were they an exhaustive list but were indicia that gave parties some guidance on how to approach the issue.

The case involved ceiling heights that were 32–57 mm lower than the specified 2,700 mm. The homeowner claimed $311,188 in rectification costs, which largely involved demolition and reconstruction to lift the ceiling height. The builder accepted the defect but submitted that the proposed rectification method was unreasonable and disproportionate because, among other things, there was no loss of utility and the homeowner continued to use the property without impairment.

Although the Court held that the ceiling was contractually non-compliant, the homeowner was not entitled to the full costs of rectification. Instead, the Court awarded the homeowner $30,000 for loss of amenity, finding that the proposed rectification method was not reasonable given the nature and impact of the defect.

The Court set out eight factors for assessing whether rectification costs are reasonable⁶

1. Degree of departure from the contractual stipulation: What is the extent of the departure from the specified contractual requirements?
2. Adverse effects of the departure of functional utility, amenity and aesthetic appearance of the building: What is the impact on functional utility, amenity and aesthetic appearance?
3. The reasons, for which the innocent party made the stipulation which was breached: Why was the term important to the innocent?
4. Practical feasibility of rectifying the work, including the effects on third parties: what disruption, risk or practical difficulty does the rectification involve?
5. Whether or not the innocent party intends to rectify the defects: Does owner intend to rectify the defects?
6. Absolute cost of rectification the disproportion between that cost and the value, diminution and effect of the departure: This includes considering the value of the building, contract price, the diminution in commercial value resultant of the breach, and the effect of the departure on utility, amenity and aesthetics of the building.
7. Nature of the wrongdoer’s fault for the defect: Was it deliberate, negligent or inadvertent?
8. Public interest in reducing economic waste: Public interest in minimising economic waste.

These factors have become an essential framework for assessing reasonableness, which have now been applied by courts in other jurisdictions.

Applying the law in 2025 (part 1): 85 Princess

The case of 85 Princess⁷ provides a useful guide in applying Bellgrove and the 8 factors from Stone. Despite finding that there was a defect, the plaintiffs were only awarded nominal damages of $100.

This dispute concerned cracking in a warehouse slab. The purchaser claimed $5.3M for full slab replacement. The vendor argued that the cracks could be repaired with epoxy.

The New South Wales Supreme Court held that:

1. the slab was defective because the saw cuts were improperly placed, which led to the cracking; however,
2. the full replacement was unreasonable and unnecessary because the slab could have been adequately repaired using epoxy; and
3. the purchaser was only entitled to $100 in nominal damages because the purchaser did adduce any evidence of the costs to perform the Court’s performed method of filling the cracks.

This was the first case that applied the eight factors for assessing the reasonableness limb as outlined in Stone v Chappel. The Court applied these factors as follows:

1. the degree of departure from the contractual stipulation was serious as the slab was a vital part of the building;
2. there was no evidence that the departure from the contract has had any adverse effect on the functional utility or amenity of the building;
3. the Court inferred that the purchaser wanted a fit for purpose building;
4. any rectification work would have an impact on the current tenant, however, it was inferred that filling of the cracks would have been considerably less instructive;
5. the evidence about any intention on the part of 85 Princess to carry out rectification works is equivocal;
6. neither party lead evidence about the costs that would be incurred to fill the cracks. Without this evidence, the Court could not weigh up the proportionality of the costs involved and/or find that the purchaser was entitled to the lesser amount of the rectification costs; and
7. the wrongdoer in this case was the vender. The vender did not construct the slab.

Applying the law in 2025 (part 2): Stanley

Further guidance was provided in the case of Stanley.⁸

In this case, caravan enthusiasts engaged a builder to build their home. It was a contractual term that the garage floor would be level or nearly level with the footpath at the front of the house so that the owners could back their caravan into the garage. The fixed floor level of the garage was 130 mm lower than provided for in the plans in respect of which the relevant building permit was issued.

At first instance, VCAT found that:

1. the builder had breached the express contractual term;
2. it would not be reasonable to demolish and rebuild the house in order to remedy the breaches found; and
3. the owners were entitled to damages arising from their inability to store their caravan at their home.

The homeowners appealed VCAT’s decision on the basis that it was not unreasonable to demolish and rebuild the house.

On appeal, Watson J considered the factors outlined in Stone and held that:

1. the degree of disproportion between the costs of rectification works and the homeowners’ interest in the performance of the contractual stipulation is such as to make that remedy unreasonable in the circumstances;⁹ and
2. it was reasonable that the homeowners be compensated for their inability to reverse their caravan down the driveway.

Key takeaways: Rectification methods must be reasonable, these costs are not a given.

It is clear from the cases extracted in this article that courts today are taking a more robust approach to whether the costs of full rectification is a reasonable measure of damages than in earlier years.

Plaintiffs should be prepared to adduce evidence that satisfy the eight factors outlined in Stone otherwise they run the risk of only being awarded nominal damages like the homeowners in 85 Princess.

This article was written by Leighton Moon, Partner, Tara Nelson, Special Counsel, and Ariandne Paras, Associate.

¹ Bellgrove v Eldridge (1954) 90 CLR 613 (Bellgrove).

²[2017] SASCFC 72 (Stone).

³ 85 Princess Pty Ltd v Fleming [2025] NSWSC 407 (85 Princess).

⁴Stanley & Anor v EWH Construction West Pty Ltd [4] [2025] VSC 699 (Stanley).

⁵ (1954) 90 CLR 613 (Bellgrove).

⁶ Stone v Chappel, [55].

⁷ [2025] NSWSC 407 (85 Princess).

⁸ [2025] VSC 699 (Stanley).

⁹ Stanley & Anor v EWH Construction West Pty Ltd [2025] VSC 699, [88].