85 Princess Pty Ltd v Fleming

1. [1]

   PAYNE JA: I agree with Ball JA.

2. [2]

   STERN JA: I agree with Ball JA.

3. [3]

   BALL JA: By a contract entered into on 20 September 2021 (the Sale Contract) the appellant, 85 Princess Pty Ltd (85 Princess), acquired from Fleming Investments (ACT) Pty Ltd (Fleming), whose sole shareholder and director is the respondent, Mr Ian Fleming, the Crown lease of land located at 16 Spongolite Street, Beard in the Australian Capital Territory (the Land). Located on the Land were two large warehouses which had recently been constructed by another company controlled by Mr Fleming, A & J Projects Australia Pty Ltd (A & J Projects). It will be convenient to refer to the Land together with the warehouses as the Property.

4. [4]

   At the time of the sale, the Property was the subject of a long‑term sublease (the Sublease) in favour of Reece Australia Pty Ltd (Reece) which commenced on 1 April 2021 and terminates on 31 March 2031. Following the sale, Reece granted an underlease of the Property (the Underlease) to Go Troppo Fruit Market Pty Limited (Go Troppo) which commenced on 15 July 2022 and terminates on 30 March 2031. Go Troppo entered into occupation of the Property and installed fixtures, including offices and cool rooms, in the warehouses.

5. [5]

   Under the Sale Contract, Mr Fleming gave several personal warranties including warranties to the effect that the construction of the “Building” (defined to mean “the buildings and other improvements erected on the Land”) had been carried out in a proper and skilful way and complied with relevant regulatory requirements including the Building Code of Australia.

6. [6]

   After completion of the construction work, cracks began to appear in the concrete slab that had been laid by A & J Projects and on which the two warehouses had been built. The cracks were the subject of a dilapidation report prepared by Ekror Pty Ltd (Ekror) that 85 Princess had obtained in connection with its purchase of the Property. Some initial cracks had been repaired using an epoxy filler, but further cracks developed following completion of the Sale Contract.

7. [7]

   On 17 August 2022, 85 Princess commenced proceedings in the Equity Division claiming $5,313,593.39 as the cost of replacing the concrete slab.

8. [8]

   The primary judge (Brereton J) rejected that claim: see 85 Princess Pty Ltd v Fleming [2025] NSWSC 407. His Honour accepted that Mr Fleming was in breach of several of the warranties contained in the Sale Contract. However, he held that replacement of the slab was not “a rational or reasonable commercial response” to the cracking (J[134]) and that an appropriate response was “to repair the cracks that now exist as required and then to implement a program to monitor for any new cracks and to have them repaired in a timely way, probably using an epoxy or a polymer resin remedial repair product” (J[131]). In the absence of any evidence concerning the costs of dealing with the cracks in that way, the primary judge held that 85 Princess was only entitled to recover nominal damages of $100. 85 Princess appeals against that decision.

9. [9]

   For the reasons that follow, in my opinion the appeal must be dismissed with costs.

Background

1. [10]

   The certificate of occupation and use of the warehouses was issued on 8 February 2021. The Sublease commenced on 1 April 2021. The term of the Sublease is 10 years. The Sublease grants Reece three options of renewal for a further term of 5 years each. The initial rent payable under the Sublease was $331,650 per annum (plus GST).

2. [11]

   Clause 16.3 of the Sublease provides:

3. [12]

   Clause 16.8 of the Sublease provides:

4. [13]

   Clause 17.1 of the Sublease provides:

5. [14]

   Reece did not move into the Property, but instead it appears sought to find a sub-tenant. In the meantime, on 20 September 2021, Fleming entered into the Sale Contract with 85 Princess.

6. [15]

   85 Princess is a company owned by Dr Shruti Kapila (who gave evidence) and her husband, Mr Deepak Shankar (who did not). Mr Shankar is a solicitor who acted for 85 Princess in connection with the purchase of the Property and the subsequent litigation. Ms Kapila said in cross-examination that the Property was bought “As part of our planning for our retirement” and that 85 Princess itself did not operate a business that would “have the need of a commercial warehouse of this kind”.

7. [16]

   As already mentioned, in connection with the purchase of the Property, 85 Princess obtained a dilapidation report from Ekror dated 2 May 2021. In relation to slab cracking, the dilapidation report relevantly said:

8. [17]

   In response to that report, Fleming obtained a report dated 7 June 2021 from Sellick Consultants Pty Ltd (Sellick). In relation to the cracks, that report said:

9. [18]

   The Sale Contract was in the terms of the standard form contract issued by the ACT Law Society together with a substantial number of special conditions. Both Fleming and Mr Fleming were parties to the contract. Fleming was named as the “Seller” and Mr Fleming as the “Seller Director”.

10. [19]

    Clause 70.2 (part of the special conditions) is in the following terms:

11. [20]

    “Work” is defined to mean “the construction of the Building” and “Building” is defined to mean “the buildings and other improvements erected on the Land”. “Identified Defects” is defined to mean “the defects in the Building Dilapidation Report by Ekror dated 2 May 2021 Revision A, a copy of which is annexed to this Contract”.

12. [21]

    Clause 70.3 of the Sale Contract relevantly provides:

13. [22]

    “Loss” is defined in cl 54 to include “any cost, liability, loss, fine, penalty, suit, claim, damage or proceeding”.

14. [23]

    Clause 70.5(a) of the Sale Contract provides:

15. [24]

    “Defect Liability Period” is defined to mean in relation to a “Structural Element of the Building” six years from the date of completion and in the case of a “Non‑Structural Element of the Building” within 12 months from the date of completion. “Structural Element” is defined to mean:

16. [25]

    On 14 June 2022, Reece sent Mr Shankar a report prepared by Napier & Blakeley Pty Ltd (Napier & Blakeley), apparently in anticipation of entering into a sub-lease of the Property to Go Troppo. On the same day, Mr Shankar sent Mr Fleming an email attaching a copy of the report and referring to 85 Princess’s obligations under cl 70.3(b) of the Sale Contract. The report listed a number of alleged defects with the warehouses including relevantly cracks in the concrete slab affecting both warehouses. In relation to those defects, the report stated under the heading “Description of Defect” the following:

17. [26]

    Under the heading “Remedial Action Required” in relation to that item, the report stated relevantly:

18. [27]

    There was then correspondence between the parties in which 85 Princess asserted it was entitled to make a claim for breach of the warranties contained in the Sale Contract and Mr Fleming denied that it was entitled to do so. In connection with that correspondence, and in order to respond to the Napier & Blakeley report, 85 Princess obtained a supplementary report dated 24 June 2022 from Ekror. In that report, which was prepared without a further inspection of the site, Ekror said that it disagreed with Napier & Blakeley’s comments on the cracking of the concrete. The report added the following:

19. [28]

    On 15 July 2022, the Underlease was entered into (it appears that it was signed by Go Troppo on 24 June 2022). It commenced on that day and expires on 30 March 2031. It incorporates the terms of the Sublease subject to a number of amendments.

20. [29]

    Clause 13 of the Underlease requires Go Troppo at the end of the lease to remove all the “Tenant’s Property” and to reinstate the premises “back to its condition as at the Commencement Date, per the Condition Report”. “Condition Report” is defined to mean the Napier & Blakeley report dated 23 May 2022, a copy of which was attached to the Underlease.

21. [30]

    There was further correspondence between 85 Princess and Fleming in which 85 Princess continued to press Fleming to rectify the defects identified by Napier & Blakeley, including defects in the concrete slab, before Go Troppo installed its offices and cool rooms and in which Fleming refused to do so.

The proceedings below

1. [31]

   On 17 August 2022, 85 Princess commenced proceedings. Its pleaded case was that in breach of the contract, Mr Fleming had failed to:

2. [32]

   Relevantly, it gave as particulars of those allegations the Ekror report dated 9 June 2021, the Napier & Blakeley report dated 23 May 2022 and the Ekror defects report dated 24 June 2022.

3. [33]

   Although the pleaded case appears to be a case that Mr Fleming failed to comply with the obligations placed on him by cl 70.5(a) of the Sale Contract and that 85 Princess was entitled to recover damages for a failure to comply with that obligation, the case proceeded on the basis that what in fact was alleged was that Mr Fleming had failed to comply with the warranties contained in cl 70.2 and that 85 Princess was entitled to recover damages in accordance with common law principles for a breach of those warranties.

4. [34]

   Ultimately, Mr Fleming defended that claim on two main bases. First, he denied that there were any breaches of the contractual warranties. Second, he submitted that 85 Princess purchased the Property as an investment, that its real interest was in the value of the leasehold, that 85 Princess had no obligation under the Sublease to repair any defects other than structural defects and that therefore “applying Bellgrove [a reference to the decision of the High Court in Bellgrove v Eldridge (1954) 90 CLR 613; [1954] HCA 36] no substantive damages should be awarded (other than nominal damages) in the event that a breach is otherwise established”.

5. [35]

   In support of its claim, 85 Princess served two expert reports, one from Mr David England, a civil and structural engineer, and one from Mr Ken Whyte, a quantity surveyor.

6. [36]

   In his report, Mr England expressed the opinion that the cracks were likely to have been caused by:

7. [37]

   Mr England also said:

8. [38]

   Mr Fleming served a report dated 24 October 2023 from Mr Aaron Hazelton, structural engineer, in response. In relation to the cracking, Mr Hazelton said:

9. [39]

   In a joint expert report dated 18 March 2024, which had been prepared by Mr England and Mr Hazelton following a conclave between them, Mr Hazelton expressed his conclusion in these terms:

10. [40]

    Mr Whyte expressed the opinion in unchallenged evidence that the cost of replacing the concrete slab was $5,254,230. Much of that cost relates to the removal and reinstatement of the cool rooms and the cost of doing the work in stages over a 74 working week period to permit Go Troppo to continue to use the Property.

11. [41]

    The primary judge rejected Mr England’s evidence of the cause of the cracking. His Honour reached the following conclusions (which are not challenged):

12. [42]

    His Honour also found (at J[61]):

13. [43]

    Having reached those conclusions, his Honour found that Mr Fleming was in breach of the warranties contained in cll 70.2(a), (c), (d) and (e).

14. [44]

    In relation to the warranty contained in cl 70.2(a), his Honour concluded that the construction of the concrete slab was not carried out in a proper and skilful way because “the saw cuts were not installed sufficiently early or were not otherwise installed in a way such that they fulfilled their intended function”: J[68]. For a similar reason, he thought that there had been a breach of cl 70.2(c): J[71].

15. [45]

    His Honour also thought that there had been a breach of the warranty contained in cl 70.2(d) because “there was a structural problem in that the saw cuts were ineffective and that meant that cracks were highly likely to emerge which, if left untreated, would lead to the deterioration of the slab such that it would come to fail to bear loadings likely to arise from its expected use”: J[72].

16. [46]

    Finally, his Honour concluded that there had been a breach of cl 9.5.1 of AS3600 Concrete Structures, which provides “Cracking shall be limited to an extent that does not impair the durability or serviceability of the slab, both in terms of function and appearance”. That clause was breached because “the cracking that came about because of the ineffective saw cuts would, without repair, impair the durability of the slab”: J[73].

17. [47]

    In relation to damages, the primary judge observed uncontroversially that the starting point was the statement of principle in Robinson v Harman (1848) 1 Exch 850 at 855; 154 ER 363 that an award of damages for breach of contract should so far as money can do it place the injured party in the position it would have been in if the contract had been performed and the statement of principle in Bellgrove at 618-9 that, in the case of a contractual stipulation that a building will meet certain specifications, that amount is the amount necessary to bring about conformity with those specifications provided that is a reasonable course to adopt. His Honour also referred to the principle stated by this Court in Owners SP 92450 v JKN Para 1 Pty Limited [2023] NSWCA 114 at [71] (Gleeson JA; with whom White and Brereton JJA agreed) that:

18. [48]

    After reviewing a number of factors identified by Kourakis CJ in Stone v Chappel (2017) 128 SASR 165; [2017] SASCFC 72 at [55] as being relevant to the question of reasonableness (including the degree of departure from the contractual stipulation, the objective reason for those stipulations, the feasibility and cost of the work and the nature of the wrongdoer’s fault for the defect), the primary judge concluded that it was not reasonable in this case for 85 Princess to insist on replacement of the concrete slab. His Honour summarised his conclusions in these terms:

19. [49]

    Since 85 Princess had not led any evidence of the costs of implementing a monitoring and repair program, it was only entitled to nominal damages: J[137]-[138].

The grounds of appeal and the notice of contention

1. [50]

   85 Princess advances only one ground of appeal, although that ground has several sub-grounds. Essentially, 85 Princess advances two interrelated arguments on appeal. The first is that the primary judge erred in concluding that it was unreasonable in the circumstances for it to seek damages calculated by reference to the costs of achieving compliance with the contractual warranties that the primary judge found had been breached. The second is that the primary judge erred in concluding that a reasonable alternative to achieving compliance with the contractual warranties was to repair the existing cracks and to implement a program to monitor for any new cracks and to repair those cracks in a timely way.

2. [51]

   By a notice of contention, Mr Fleming challenges the primary judge’s finding that he breached the warranties contained in cll 70.2(d) and 70.2(e) of the Sale Contract (grounds 1 and 2 respectively). Mr Fleming also challenges the primary judge’s finding that 85 Princess had suffered loss and damage (ground 3). That challenge, which to a large extent repeats his argument at first instance which was not dealt with by the primary judge, rests on the following contentions:

3. [52]

   Lastly, Mr Fleming contends that the primary judge should have drawn adverse inferences from the fact that 85 Princess did not call Mr Shankar or witnesses from Reece or Go Troppo (ground 4).

4. [53]

   It is convenient to deal first with the question of breach (raised by grounds 1 and 2 of the notice of contention) and then to deal with the question of damages. However, before doing so, it is desirable to say something more about the relevant legal principles.

Relevant legal principles

1. [54]

   In Bellgrove the appellant argued that the correct measure of damages was the difference between the value of the respondent’s house as it was (with the defects) and the value it would have had if the appellant builder had built it in accordance with the contractual specifications. After pointing out that “It is true that a difference in the values indicated may, in one sense, represent the respondent’s financial loss” and that that was the prima facie measure of loss to be applied where defective goods have been tendered and accepted, the High Court, said (at 617):

2. [55]

   What is necessary and what is a reasonable course to adopt in any particular case is a question of fact. However, if the proposed course of action is not a reasonable one, then the appropriate measure of loss is the difference in value:

3. [56]

   The leading decision in the United Kingdom on this area of the law, Ruxley Electronics & Construction Ltd v Forsyth [1996] AC 344, is an example of a case where the Court held that reinstatement to bring about conformity with the contractual specification was not a reasonable course to adopt because the costs of reinstatement were out of all proportion to the benefit to be obtained. In that case, the appellant had agreed to build a swimming pool on the respondent’s property which was to have a depth of 7 feet and 6 inches. The swimming pool as built had a depth of 6 feet and 9 inches. The trial judge had rejected a claim for the costs of demolishing the swimming pool and building a new one of the correct depth. However, he awarded the appellant an amount of £2,500 as general damages for loss of amenity. The House of Lords upheld that decision (although controversial, there was no appeal against the award of general damages). The leading judgment was delivered by Lord Lloyd (with whom Lord Keith and Lord Mustill, writing separately, agreed) and Lord Jauncey writing separately substantially agreed. Lord Lloyd accepted that the two principal methods of assessing damages were the cost of reinstatement and the difference in value between the contracted-for work and the work as done and that “the cost of reinstatement is the ordinary measure of damages for defective performance under a building contract”: at 366. However, he went on to say (at 368):

4. [57]

   Lord Lloyd also said that relevant to the question of reasonableness is whether the plaintiff intended to reinstate the building: at 372. In Ruxley, reinstatement was totally disproportionate to the benefit to be obtained. A swimming pool with a depth of 6 feet 9 inches could be used in the same way as one with a depth of 7 feet and 6 inches (in particular, the trial judge had found such a pool was “perfectly safe to dive into”). There was no suggestion that the appellant intended to install a diving board, which might have provided a reason for a greater depth. The trial judge had found that “Mr Forsyth’s stated intention of rebuilding the pool would not persist for long after the litigation had been concluded” (at 372). Reinstatement in those circumstances did not reflect the appellant’s true loss.

5. [58]

   These principles were affirmed by the High Court in Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272; [2009] HCA 8, although the Court thought that the example given by the Court in Bellgrove of a case where it was unreasonable to seek reinstatement (of a cement rendered wall constructed with new bricks where second hand ones had been specified) tended to indicate that “the test of ‘unreasonableness’ is only to be satisfied by fairly exceptional circumstances” (at [17]). The Court also quoted with approval (at [16]) the following passage from the judgment of Oliver J in Radford v De Froberville [1977] 1 WLR 1262 at 1270 which it thought was closely aligned to the example given in Bellgrove:

6. [59]

   In Tabcorp Holdings, a tenant in breach of a term in the lease not to make any substantial alterations to the leased premises without the landlord’s prior written consent (which was not to be withheld unreasonably) demolished the foyer of the leased building which had only been constructed less than six months earlier to achieve a particular (high) quality and aesthetic. The High Court held that the landlord was entitled to recover as damages the cost of reinstating the foyer to its original condition. In doing so, it rejected the tenant’s argument that the landlord had erected and leased the building for commercial purposes and that the reconstructed foyer did not alter its value for that purpose. The only way that the landlord could obtain the benefit of the covenant was if reinstatement damages were ordered; and it was not unreasonable for the landlord to insist on their payment: at [20]. As the Court explained at [19]:

7. [60]

   Two points may be made about the decision in Tabcorp Holdings that are relevant to the present context. First, Tabcorp Holdings was obviously not a case concerned with the failure to meet a contractual specification. It was concerned with the failure to comply with a negative stipulation in the contract not to alter premises without written consent. It was a right that could have been vindicated by equitable relief in the form of a negative injunction if the tenant had not clandestinely made it impossible for the landlord to apply for relief of that type. The purpose of the clause was to do more than protect the landlord’s interest in the financial value of the building. It was to protect the landlord’s interest (for whatever reason) in having the building preserved in its current form. The protection afforded by the clause would be seriously undermined if damages were assessed merely by reference to the financial consequences of the breach. That is not what the test stated by Parke B in Robinson requires: see particularly Tabcorp Holdings at [13]-[15].

8. [61]

   Secondly, there may on the face of it appear to be a tension between the decision in Ruxley and the decision in Tabcorp Holdings. Indeed, the High Court suggested in Tabcorp Holdings at [18] that “The result at which their Lordships arrived is on one view inconsistent with those principles [that is, the principles derived from Bellgrove and Radford]”. However, the facts of the two cases are very different. In Ruxley, Mr Forsyth had originally entered into a contract with Ruxley to build a swimming pool on his land with a depth of 6 feet 6 inches at the deep end. However, following a discussion between Mr Forsyth and Mr Hall, who controlled Ruxley, Ruxley agreed to increase the depth to 7 feet 6 inches for no extra charge. The work was performed by a subcontractor. However, it was defective with the result that Mr Hall agreed to remove the existing pool and build a new one, which Ruxley did. Mr Forsyth raised a number of complaints about the new pool, including the fact that the depth was only 6 feet 9 inches. Ruxley sued to recover the contractual price for the work. Mr Forsyth filed a counterclaim. The initial counterclaim contained particulars of ten defects, but nowhere was there a complaint about the depth of the pool. The counterclaim was amended three years later, but still there was no complaint about the depth of the pool. A complaint was only raised about the pool’s depth during the second day of the hearing.

9. [62]

   The circumstances in Tabcorp Holdings could not have been more different, as illustrated by the first two paragraphs of the High Court’s judgment:

10. [63]

    The two cases serve to demonstrate the point made by the High Court in Bellgrove that what is reasonable is very much a question of fact that depends on the particular circumstances of the case. They also appear to support the view that relevant to the question of reasonableness is the subjective intention of those in whose favour the relevant contractual requirement is included.

11. [64]

    In Stone – a case relied on heavily by the primary judge – Kourakis CJ at [55] helpfully set out a number of matters relevant to the question of reasonableness. They are:

12. [65]

    As the primary judge pointed out (at J[84]), there is a question about (8) in view of the comments made by the High Court in Bellgrove, which cast doubt on the proposition. Moreover, although this is a useful checklist, it should not be applied mechanistically and the ultimate question remains whether in all the circumstances of the case it would be reasonable to undertake the work necessary to achieve compliance with the contractual specification.

13. [66]

    As already mentioned, it is generally accepted that although the burden of proof for establishing loss lies on the claimant, the party in breach bears at least an evidential onus of displacing the prima facie rule that damages for breach of a contractual stipulation in a building contract are to be assessed by reference to the costs of reinstatement: see JKN at [71] and the cases cited there. It follows that the party in breach must at least introduce evidence which, if accepted and left unanswered, would satisfy the court that reinstatement is unreasonable.

14. [67]

    The two methods of assessing damages identified in Bellgrove are not the only methods for assessing damages for breach of a contractual specification in a building contract. As Kirk JA and Griffith AJA pointed out in Roberts v Goodwin Street Developments Pty Ltd [2023] NSWCA 5 at [94], quoting with approval a passage from the dissenting judgment (in the result) of Santow JA in Port Stephens Shire Council v Tellamist Pty Ltd [2004] NSWCA 353; (2004) 135 LGERA 98 at [187], “rules and principles as the common law has developed to assess the damages of an injured party are not inflexible, and must always be applied with the overriding goal of compensation”.

15. [68]

    In building cases, one way in which defendants often seek to establish that the costs of reinstatement are unreasonable is by leading evidence that some alternative and cheaper method of rectification would produce the same practical outcome, in which case damages are assessed by reference to the costs of that rectification method. In those cases, it is necessary for the defendant to lead evidence of the method, its effectiveness and its cost. Unless the court can be satisfied that the method of rectification is as effective as reinstatement, damages will not be awarded on that basis. Building Insurers’ Guarantee Corporation v The Owners – Strata Plan No 57504 [2010] NSWCA 23 is an example. In that case, the contract required the builder to construct concrete or brick hobs between residential units and their balconies to prevent storm water from entering the units. The builder had installed inferior wooden hobs. Following the builder’s liquidation, the owner sued Building Insurers’ Guarantee Corporation (BIGC), the builder’s insurer, for the costs of replacing the hobs with hobs that met the contractual specification. BIGC argued that it would be unreasonable to demolish and to replace the hobs because the same result could be achieved by treating the wooden hobs with a sealant. The Court (Handley AJA, with whom Tobias and Campbell JJA agreed) upheld the primary judge’s rejection of that argument. The expert called by BIGC gave evidence that little was known about the sealant, and there was no certainty that it could prevent water penetration under the aluminium angles. In the light of that evidence, BIGC had failed to establish its evidential onus:

16. [69]

    Cases such as Guarantee Corporation need to be distinguished from cases, such as Ruxley, where the party in breach simply seeks to establish that it would be unreasonable for the claimant to insist on reinstatement. In those, the claimant has a choice. It can rely solely on its claim that the costs of reinstatement are the appropriate measure of its damage. But in doing so it takes the risk that, if the party in breach discharges its onus of proving that reinstatement is unreasonable, it will recover only nominal damages, since it will have failed to prove that it suffered any loss. Alternatively, the claimant can lead evidence of its loss calculated on that alternative basis. It is not for the party in breach to prove the damages that the claimant would be entitled to recover on that alternative basis.

17. [70]

    Against that background, it is now possible to turn to the issues raised by the current appeal.

The breaches

1. [71]

   Mr Fleming challenges the primary judge’s finding that he was in breach of the warranties contained in cll 70.2(d) and 70.2(e).

2. [72]

   The primary judge’s conclusion that cl 70.2(d) (that “the Building is structurally sound and can withstand the loadings likely to arise from its expected use”) was breached rests on two propositions. The first is that the warranty is a continuing one in the sense that it should be interpreted as saying that the Building is and will remain structurally sound. The second is that the warranty was false because unless the cracks were repaired with a sealant the slab would deteriorate “such that it would come to fail to bear loadings likely to arise from its expected use”: J[72].

3. [73]

   In my opinion, the first proposition is not correct. The second depends on factual findings made by the primary judge which are not challenged on appeal.

4. [74]

   As to the first proposition, it seems clear that the warranties contained in cl 70.2 address the position as at the date the contract was signed. That is plain in the case of the warranties addressed to the past, such as the warranties contained in cll 70.2(a) and 70.2(b). It is logical to treat the other warranties in the same way. The warranty in cl 70.2(d) is that “the Building is structurally sound”. The use of the present tense makes it clear that the warranty is concerned with the position at the time it is given, not at some future time. Although the second part of the warranty (“can withstand the loadings likely to arise …”) uses the word “likely” to identify loadings that are likely (but may not) arise in the future the warranty is still a warranty about what the Building “can” withstand, not a warranty about what the Building will be able to withstand if it is in a different condition (namely develops significant additional cracks which are not repaired with sealant, resulting in the overall condition of the concrete slab deteriorating such that it cannot withstand loads) at some time in the future. Properly understood, the warranty is saying that the Building was, at the time the Sale Contract was signed, capable of withstanding the loadings to which it was likely to be subject during the term of the Sublease. Whether the warranty is breached should be assessed on the basis that reasonable steps are taken, either by 85 Princess or the current tenants, to repair cracks with sealant, as suggested by Mr Hazelton. There is no suggestion that, by reason of the sawcuts not being effective, the concrete slab was structurally unsound or incapable of bearing the loads to which it might be subject at the time the Sale Contract was entered into, nor that that would be the case if reasonable steps were taken to repair cracks in the concrete slab with sealant. In this regard, the problem with the concrete slab can be distinguished from, for example, foundations which render a building unstable: as was the case in Bellgrove (at 615). It follows that the warranty was not breached.

5. [75]

   The primary judge concluded that cl 70.2(e) was breached because the slab did not comply with cl 9.5.1 of AS3600 which provides that “Cracking shall be limited to an extent that does not impair the durability or serviceability of the slab, both in terms of function and appearance”. In the present case, on the unchallenged findings of the primary judge, absent repairs the cracking was such that its durability would be impaired.

6. [76]

   In my opinion, the primary judge was correct to conclude that that standard was not complied with and that therefore the warranty was breached. It is not entirely clear on what basis Mr Fleming submits that the warranty was not breached. The submission appears to be that, like the warranty in cl 70.2(d), the warranty in cl 70.2(e) is concerned with the position at the time it is given, not at some future time. That much may be accepted. But that does not dispose of the issue. The question is whether the slab was designed and constructed in a way that complied with cl 9.5.1 of AS3600. Although that clause uses the future tense, it is plainly a standard directed at the way in which the slab is constructed. Interpreted in that way, it is to be understood as saying that the slab must be designed and constructed so as to ensure that cracking is limited in the way stated. Understood in that way, the clause was breached because the slab in question was not constructed in a way that cracking was limited to the required extent. Rather, it was constructed in a way that caused cracking that would impair its durability or serviceability in terms of function because unless the cracks were repaired, the slab was likely to deteriorate to the point where it was no longer structurally sound.

The basis for assessing damages

1. [77]

   On the conclusions I have reached, Mr Fleming was in breach of the warranties contained in cll 70.2(a), 70.2(c) and 70.2(e). The primary judge found that the prima facie measure of damages for breach of those warranties is “the cost of making the building conform to the contract” which in this case was “the cost of replacing the slab”: J[129]. That finding is not challenged on appeal.

2. [78]

   Consequently, the issue on appeal in relation to damages is whether Mr Fleming discharged his evidential onus of establishing that replacement was not a reasonable course to take. Understandably, 85 Princess’s submissions in relation to that issue focussed on the primary judge’s finding that it was not a reasonable course because an alternative course was available – that is, “to repair the cracks that now exist as required and then to implement a program to monitor for any new cracks and to have them repaired in a timely way, probably using an epoxy or a polymer resin remedial repair product”: J[131]. However, the issue is broader than that because by his notice of contention Mr Fleming points to other matters which are said to make reinstatement unreasonable.

3. [79]

   I accept 85 Princess’s submissions that there are difficulties with the primary judge’s conclusion on reasonableness if that conclusion rests on the reasons given by his Honour. On the analysis adopted by his Honour, Mr Fleming bore at least an evidential onus of establishing that some alternative and cheaper method of rectification would produce the same practical outcome as replacement of the slab. In order to discharge that onus, it would have been necessary for Mr Fleming to lead evidence of the method, its effectiveness and its cost. That is not something that Mr Fleming sought to do. The identification of the likely problem by Mr Hazelton (the timing of the saw cut joints in the slab) and Mr Hazelton’s comments about an appropriate method of rectification certainly provided some evidence concerning the alternative method and its effectiveness. However, that evidence was inadequate to discharge the onus Mr Fleming bore. For example, it is unclear how the system of inspection and repair would work in relation to cracks that developed in the parts of the slab that were underneath the offices or cool rooms installed by Go Troppo, or whether it was unnecessary to repair those cracks because they were adequately protected from water ingress by the structures over them. Moreover, Mr Fleming led no evidence of the likely cost (over the balance of what was expected to be a 20 year life of the slab) of adopting the proposed method of rectification. However, evidence of that type was essential because it could only be in the light of that evidence that it would be possible to say that the costs of reinstatement were wholly disproportionate to the benefit that would be obtained by reinstatement compared to repair.

4. [80]

   That, however, is not the end of the matter. Mr Fleming submitted at trial, and I accept, that it was unreasonable for 85 Princess to seek to reinstate the slab in circumstances where:

5. [81]

   These matters need to be considered together. Some require further elaboration.

6. [82]

   In Tabcorp Holdings, the High Court rejected a submission that the landlord should only be entitled to recover damages measured by reference to the diminution in the value of the building because it had bought the building as an investment. But the circumstances of that case were very different to the present one. In that case, the evidence established that, for whatever reason, the landlord had an interest in preserving the building in its existing state and had chosen to protect that interest by including in the lease an express clause preventing the tenant from altering it without the landlord’s written consent (which was not to be withheld unreasonably). The only effective way of compensating the landlord for a breach of that obligation was to award damages on a reinstatement basis. In the present case, the relevant obligations were contained in the Sale Contract. The purpose of those obligations was to protect the value of what was bought. Dr Kapila conceded as much when she said in cross-examination that 85 Princess bought the Property “As part of our planning for our retirement”. There was no suggestion that 85 Princess had any interest in the state of the concrete slab beyond its effect on the value of the Property and the ability to earn rent from it. Moreover, there was no evidence, for example, that the value of the Property was affected by the cracking, or that Reece was unwilling to pay the rent due under the Sublease because of the cracking or that either Reece or Go Troppo had complained about the cracking.

7. [83]

   The primary judge found that 85 Princess did not intend to reinstate the pavement. That finding was based largely on evidence given by Dr Kapila in cross-examination who when asked whether “your present intention is to spend any damages in this case on rectifying any found issues in the property” replied that “It is to rectify the damage, yes”. The primary judge treated that evidence as evidence that 85 Princess “has an intent to address the cracking, but I would conclude that it will address the cracking in the manner that is most cost effective”: J[116]. That finding is challenged in para 1(a) of the grounds of appeal on the basis that Mr Fleming did not plead that 85 Princess did not have a genuine intention to reinstate and did not raise the issue in its submissions.

8. [84]

   In my opinion, the question of intention does not depend on the evidence of Dr Kapila and is bound up with the objective facts of the case, which Mr Fleming did rely on. The evidence, which was accepted by the primary judge, was that the concrete slab did not suffer from a structural defect requiring its replacement. The likely cause of the cracking was the failure to install saw cut joints sufficiently promptly after the slab was laid. At the time that it bought the Property, 85 Princess was aware of the cracks from the dilapidation report that it had obtained from Ekror. That report proposed that the “cracks be rectified by suitable means like an epoxy or polymer resin remedial repair product”. The warranty in cl 70.2(f) (that “the Identified Defects have been rectified in a proper and skilful way using good and proper materials”) must be understood as a warranty that the existing cracks had been repaired in a proper and skilful way using an appropriate epoxy or polymer resin. And the parties must have contemplated that further cracks giving rise to a breach of the warranties contained in cl 70.2 would be dealt with in the same way. They could not have intended that the cracks would be repaired, but that any future cracks would be dealt with by replacing the slab in its entirety. Nor would they have intended that future cracks would not be repaired in circumstances where a failure to repair the cracks might, ultimately, result in the concrete slab becoming structurally unsound.

9. [85]

   The conclusion of the previous paragraph is supported by the terms of the Sublease, which were known to 85 Princess at the time that it bought the Land. Clause 16.1 of the sublease provides that “the Tenant may peacefully enjoy the Premises during the Term without interruption by the Landlord”. Clause 16.3 requires the Landlord to “keep and maintain the Premises and the Buildings … in a structurally sound, watertight and weatherproof condition and promptly conduct all necessary structural repairs to the Premises and the Buildings … at its own cost”. Clause 17.1 gives the Landlord a right of access at a time agreed by the Tenant “to inspect, maintain, repair or alter the Premises” and “to carry out any building works required by the Landlord … subject to at least 1 month’s prior written notice being given to the Tenant”. Consequently, the Landlord has an obligation to enter the premises to repair structural defects. It has a right to do so to repair non-structural defects. Clause 19.1 provides that “If the Premises or part of the Premises are damaged or destroyed so that they cannot or a substantial proportion of them cannot be used for the Tenant’s Business, the Landlord may, on written notice to the Tenant to be served within 14 days from the date of the destruction or damage, choose to either end this lease or reinstate the Premises”.

10. [86]

    Under these clauses, 85 Princess has a right to enter the Property to repair cracks in the concrete with sealant or whatever other means is adopted to repair the cracks as they emerge. However, contrary to the conclusion of the primary judge at J[111] that “there is no obvious contractual impediment to the carrying out of rectification works, whether it be replacement of the slab or the filling of cracks”, it is less clear that under the sublease the Landlord has a right to demolish and to replace the slab if, as I have found, the slab does not (and provided repairs are carried out likely will not) suffer from a structural defect. For the Landlord to undertake the work necessary to do so may interfere with the Tenant’s right of quiet enjoyment. Similar issues arise in relation to the Underlease. It is neither necessary nor appropriate to resolve these issues in the context of the present dispute. The point is that the terms of the Sublease and Underlease, the obvious disruption that replacement of the slab would cause Go Troppo, and the absence of any evidence that 85 Princess has sought the agreement of Reece or Go Troppo to the replacement of the slab or that that agreement has been obtained make it objectively unlikely that 85 Princess intends to replace the slab and supports the conclusion that it does not have that intention.

11. [87]

    85 Princess’s response to the point made in the previous paragraph is to say that it was not an issue raised by Mr Fleming at first instance. I do not accept that submission. In para 76 of his written submissions in the court below, Mr Fleming said:

12. [88]

    In para 78 Mr Fleming submitted that in accordance with the principles in Jones v Dunkel (1959) 101 CLR 298; [1959] HCA 8, adverse inferences may be drawn from the unexplained failure to call any representatives of Reece or Go Troppo. He then made the following submissions:

13. [89]

    The adverse inferences that Mr Fleming contends in ground 4 of his notice of contention should have been drawn must be those inferences. Although Mr Fleming does not expressly state in the paragraphs just quoted that it is to be inferred that 85 Princess does not intend to reinstate the slab, that is the force of the submission and the reason that Mr Fleming submitted that 85 Princess had suffered no loss. In my opinion, the issue was clearly raised even if it is not to be resolved precisely how Mr Fleming contended it should be.

14. [90]

    The primary judge said this at J[117]:

15. [91]

    A similar point was made at J[132] (quoted above). However, that did not affect his Honour’s conclusion:

16. [92]

    The primary judge’s view that it was possible that the slab may have to be replaced but that that was unlikely must be understood in context. The primary judge’s conclusions were based on acceptance of Mr Hazelton’s evidence. That evidence was that cracking “is most likely related to the timing at which saw cuts were installed in the slab, and also the continuation of, and arrangement of, saw cuts over the suspended loading dock”. However, that opinion, was expressed “without any testing or geotechnical analysis, and without any criticism of any structural drawings”: J[48]. Consequently, neither Mr Hazelton nor the primary judge could be definitive about the cause of the cracking. For that reason, the primary judge could not be definitive about Mr Hazelton’s evidence that if treated appropriately with the right polymers the cracking would stop over time and that “provided the cracks are treated properly, their existence will not otherwise impact upon structural integrity of the slab” (J[55]). The primary judge’s qualification, then, was not about the effectiveness of the repair method but related to the certainty with which the facts relevant to liability had been established. Those facts were not relevant to the question of damages or the reasonableness of addressing the problem by the replacement of the slab. Damages are not to be increased or decreased to reflect the certainty with which the facts proving liability have been established. As the primary judge observed, the relevant warranties were breached because the work was not carried out in a proper and skilful manner. That was because, on the balance of probabilities, the saw cuts joints had not been installed correctly. Accepting that that was the breach, for the reasons given, it was not reasonable to remedy that breach by the replacement of the slab.

17. [93]

    It might be added that, contrary to Mr Fleming’s submissions, it is not correct to say that 85 Princess has suffered no loss. There are cracks in the concrete which need to be repaired. Those cracks arose from a breach of the warranties contained in cll 70.2(a), 70.2(c) and 70.2(e). It was open to 85 Princess to seek an indemnity under cl 70.3(a) in respect of that loss and to sue for damages if Mr Fleming failed to honour that indemnity, which he did. Indeed, that is how 85 Princess framed its case in its statement of claim. Framed in that way, it was open to 85 Princess to prove its loss by proving the costs of repairing future expected cracking of the slab over the remainder of its expected life of 20 years. Damages framed in that way would have meant that 85 Princess would be compensated for the cost of obviating structural damage by repairing cracks as they emerge. However, the fact that 85 Princess abandoned that claim in favour of a claim based on the cost of replacing the slab is not a reason for awarding damages on the latter basis. Indeed, the existence of the alternative claim may provide an additional reason for thinking that replacement of the slab was unreasonable. However, that was not an argument that was advanced by Mr Fleming, and it need not be considered further.

Conclusion

1. [94]

   For those reasons, I would dismiss the appeal with costs.