Victorian Supreme Court clarifies limits of rectification damages in building disputes

Case note - Stanley v EWH Constructions West Pty Ltd

The Supreme Court of Victoria has provided important guidance on the limits of rectification damages in building disputes.

In Stanley v EWH Constructions West Pty Ltd [2025] VSC 699 (Stanley), the Court upheld a VCAT decision which held that while the measure of damages for a builder’s defective works giving rise to a breach of contract remains the cost of rectification, demolition and rebuilding costs will be refused where they are excessive and disproportionate to the owner’s attainment of the contractual benefit.

The decision has important practical implications for builders and owners when assessing claims for demolition and rebuild costs in defective works disputes.

Background

The proceeding arose from a domestic building contract between caravan enthusiasts Mr John Paul Stanley and Mrs Rosina Stanley (the Stanleys) and EWH Construction West Pty Ltd (the Builder) for the construction of a house in Victoria.[1] In pre-contractual discussions and email correspondence the Stanleys had emphasised the importance of the driveway being constructed in such a way as to permit their caravan to be reversed down the driveway, through the garage and stored in the backyard (Caravan Requirement).[2] It was a design assumption of the contract plans that the garage would have a finished floor level at or near the same level as the footpath.

The builder failed to achieve this outcome and constructed the garage floor 130 mm lower than specified in the plans.[3] As a result:

• the driveway gradient made it impractical to manoeuvre the caravan as intended, and
• expert evidence was led by the Stanleys that rectification of this defect would require demolition and rebuilding of the house and garage, at a cost exceeding $650,000.

At first instance, the Victorian Civil and Administrative Tribunal (VCAT) found the Caravan Requirement was an express term of the building contract.[4] This was on the basis that the Stanleys had stated the particular purpose for which the building works were required and the result they wished to achieve, and the contractual terms included a requirement that, if the contract states a particular purpose for which the building works are required, or a result the owner wishes to achieve, so as to show that the owner relies on the builder’s skill and judgment, the building works will be reasonably fit for that purpose.

However, the Tribunal held that demolition and rebuilding was unreasonable as a way to remedy that breach.[5] Instead, VCAT awarded modest compensation, on the basis that the Stanleys were nevertheless entitled to damages arising from their inability to store the caravan at their home in the way they intended.[6]

The Stanleys appealed the decision, contending that they were entitled to damages for the full cost of the house and garage being demolished and rebuilt and that this was not an unreasonable remedy, consistent with the contractual terms.[7]

The Court’s findings

Justice Watson substantially upheld VCAT’s refusal to award demolition and rebuilding costs, while clarifying the proper approach to proportionality and damages assessment.

His Honour held that the Tribunal erred in holding that the Caravan Requirement was an express term of the building contract as the agreement contained an ‘entire agreement’ clause, and the prior discussions and email correspondence had not been incorporated into the written contract.[8] The owners did not ultimately plead a partly written partly oral contract, equitable estoppel or misleading or deceptive conduct so the Court did not need to address those arguments.[9]

Nevertheless, His Honour accepted that the building contract had been breached because the plans indicated a flat line between the footpath and the garage, and the fixed floor level was constructed below the level required by the building permit plans.[10] The Court confirmed that the breach of contract entitled the Stanleys to a remedy. The critical question was what remedy was appropriate in the circumstances.

While His Honour confirmed that the builder had breached the contract by constructing the garage floor at a level inconsistent with the signed plans,[11] the Court did not find it reasonable to compensate the Stanleys for that breach by reference to the cost of demolishing and rebuilding the house and garage.[12]

In determining the appropriate award of damages, Justice Watson accepted the qualification to the general rule in Bellgrove v Eldridge[13] is that exceptional circumstances must exist for a court to depart from awarding the cost of rectification necessary to achieve conformity with the building contract.[14] While VCAT failed to identify the requirement to find exceptional circumstances, the Court was in any event satisfied, on the basis of the facts found by the Tribunal, that exceptional circumstances existed.[15]

Consistent with Tabcorp Holdings Ltd v Bowen Investments Pty Ltd,[16] the Court held that rectification must not only be necessary to produce conformity with the contract but also must be a reasonable course to adopt.[17] In assessing reasonableness, Justice Watson considered the factors identified by Chief Justice Kourakis in Stone v Chappel[18], a case involving a ceiling height that was 48 mm less than the contractual required height.  In that case, the Court had regard to factors including:

• the degree of departure from the contractual stipulation
• the functional and aesthetic impact of the departure
• the reasons for making the stipulation that was breached
• the practical feasibility of rectification
• the proportionality between rectification cost and benefit
• the nature of the fault giving rise to the defect, and
• the public interest in reducing economic waste.[19]

These factors were commented upon by Justice Brereton in 85 Princess Pty Ltd v Fleming,[20] His Honour noting that the public interest factor may not be applicable in light of comments made by the High Court in Bellgrove.[21] Justice Watson determined to follow the same approach as outlined by Justice Brereton in 85 Princess.[22] Although decided after Stanley, in dismissing the appeal the NSW Court of Appeal affirmed Justice Brereton’s scepticism regarding the public interest factor, while further observing that the factors ought not to be applied ‘mechanistically’ but that the ultimate question is whether in all the circumstances it would be reasonable to undertake the work necessary to achieve compliance with the contractual specification.[23]

While Justice Watson held that most of the factors favoured rectification,[24] His Honour was of the view that the degree of disproportionality in this instance was decisive and made performance of the contractual stipulation unreasonable in the circumstances.[25] This was because there was an absence of any fundamental structural defects or safety concerns with the house, allowing it to function for ordinary residential use, which included the driveway being functional for general vehicles, other than caravans.[26]

On the above basis, His Honour concluded that in the circumstances demolition and rebuilding at a cost exceeding $650,000 was unreasonable particularly in circumstances where there was no suggestion of any fundamental structural defects in the property, or that the fixed floor levels made it prone to flooding.[27]

Notwithstanding the above, Justice Watson found that damages were available for the ongoing loss of amenity arising from lifestyle and enjoyment impacts and physical inconvenience arising from off-site storage.[28]  His Honour however declined to determine the appropriate measure of damages and referred the case back to the Tribunal for assessment.[29]

Implications of Stanley for builders

This case confirms that when defect claims are being considered in the context of contractual breach, VCAT and Victorian courts will closely scrutinise the relationship between the cost of strict contractual conformity and the practical and commercial value of the performance interest affected.

For builders, this creates a meaningful avenue to resist claims for demolition and rebuilding, where:

• the defect does not affect the safety or structural integrity of the property
• the house remains commercially or functionally viable for general use, and
• the cost of demolition and reconstruction is materially disproportionate to the benefit to be achieved.

The case is important because expert evidence adduced by owners, for example in:

• defective slab cases
• cases involving non-compliant plumbing beneath the slab
• cases involving incorrect siting of the property, and
• as in Stanley, cases involving construction of the property at the wrong level,

is often relied upon to support a claim that the only reasonable means of rectifying the defect is via demolition and reconstruction. The costs involved in doing so are often very significant and may be disproportionate, having regard to the nature and effect of the defect itself. 

It is clear from the Court’s decision that exceptional circumstances must exist for a departure from the ordinary rule that a party is entitled to the cost of rectification as the appropriate measure of damages for contractual breach. However, in cases where demolition and rebuilding costs are sought, the Court helpfully confirmed that an evaluative judgment is required to assess the question of the reasonableness (or otherwise) of the proposed rectification solution. The application of Stanley in such cases may therefore not be so exceptional.

[1] Stanley at [6].

[2] Ibid at [2(a)].

[3] Ibid at [2(b)].

[4] Ibid at [2(a)].

[5] Ibid at [60], citing the VCAT judgment at [116].

[6] Ibid at [2(c)-(e)].

[7] Ibid at [3], [61].

[8] Ibid at [43].

[9] Ibid.

[10] Ibid at [44]-[46].

[11] Ibid at [5(b)], [45]–[47], [53], [64].

[12] Ibid at [5(c)].

[13] Bellgrove v Eldridge (1954) 90 CLR 613.

[14] Stanley at [59], citing Bellgrove v Eldridge (1954) 90 CLR 613 at 618-19.

[15] Ibid at [61(d)].

[16] Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272.

[17] Stanley at [67], citing Tabcorp Holdings Ltd v Bowen Investments Pty Ltd (2009) 236 CLR 272 at [17].

[18] Stone v Chappel (2017) 128 SASR 165.

[19] Stanley at [79], citing Stone v Chappel (2017) 128 SASR 165 at 182 [55].

[20] 85 Princess Pty Ltd v Fleming [2025] NSWSC 407 [83]–[84].

[21] Ibid at [84].

[22] Stanley at [85].

[23] 85 Princess Pty Ltd v Fleming [2025] NSWCA 261 at [65], [94].

[24] Ibid at [86], citing Stone v Chappel (2017) 128 SASR 165 at 182 [55].

[25] Ibid at [88].

[26] Ibid at [91].

[27] Ibid at [91].

[28] Ibid at [102]–[104].

[29] Ibid at [107].