VSC considers liability for loss of use and enjoyment due to breach of an implied term

The recent decision of the Victorian Supreme Court in Yun Zeng v Leeda Projects Pty Ltd [2019] VSC 109 considered whether a party had an entitlement to general damages for the loss of use and enjoyment of a property, as a direct consequence of a breach of an implied term that ‘the works must be completed within a reasonable time’.

The proceeding concerned a property in the Eureka Tower. Yun Zeng (Owner) contracted Leeda (Builder) to carry out internal fit out-works including an art gallery and residence. The fit-out contract schedule prescribed the date for Practical Completion of the works as ‘TBA’ and the rate for liquidated damages for delay as ‘$0 per calendar day’.

A dispute between the parties arose in relation to whether the works had achieved Practical Completion under the contract. While the Builder claimed Practical Completion had been achieved in June 2014, the architect certified the works as having achieved Practical Completion in May 2017.

The Builder was entitled to payment of its final invoice following the architect’s certification of the achievement of Practical Completion. The Owner refused to pay the invoice as it alleged that the Builder had delayed completion of the works. The Builder filed proceedings in the Victorian Civil and Administrative Tribunal (VCAT) against the Owner for payment, and the Owner brought a counterclaim seeking damages for the loss of use and enjoyment of the property due to the Builder’s delay. Given the absence of an express contractual date for Practical Completion, the Owner argued that it was implied that ‘the works must be completed within a reasonable time’.

At first instance, Senior Member Farrelly of VCAT held that the Owner had proven breach of the implied term by the Builder and that the Builder should have reasonably completed the works by 9 December 2014. As Practical Completion of the works had not been achieved until 25 May 2017, this represented a delay period of 130 weeks (Delay Period). Despite the Owner having proven breach, Senior Member Farrelly found that the Owner had failed to prove damages resulting from the breach of the implied term, and was only entitled to nominal damages of $100. Senior Member Farrelly relied on the following factors in making such a finding:

•   the Owner’s claim for general damages for the Delay Period fell within the Baltic Shipping[1] principle in that, a lengthy delay caused by a builder’s breach does not warrant an award of damages for loss of use and enjoyment of property;
•   the Owner had suffered no loss of rental income as the Owner had not intended to lease the property, and had not incurred additional expense renting alternative accommodation during the Delay Period.

The Owner appealed to the Supreme Court of Victoria on the basis that VCAT had erred in finding that there was no entitlement to general damages for loss of use and enjoyment arising from the Builder’s breach of the implied term. On appeal, McDonald J found for the Owner and awarded general damages. Justice McDonald held, amongst other things, that:

•   the Baltic Shipping[2] principle did not apply to the Owner’s claim for general damages for loss of use and enjoyment. This is because the High Court had not given unqualified endorsement to the principle and the High Court judgements relied upon in the Baltic Shipping[3] decision did not lend any support to the Builder’s proposition that damages for breach of contract for the loss of use and enjoyment of property were not recoverable;
•   “loss of use of property is loss of a kind for which the law of contract provides monetary compensation” irrespective of whether the Owner suffered loss in rental income or incurred expenses in securing alternative accommodation;
•   it was appropriate to assess the monetary value of the Owner’s loss of use by reference to the market rental value of the property; and
•   the loss sustained by the Owner was loss of a kind that should have been within the Builder’s contemplation as “a reasonable person in the Builder’s position would have realised that the Owner’s loss of use of the apartment, as a residence and art gallery, would flow naturally from a breach of the Builder of the implied term that the works would be completed within a reasonable time”.

Where an obligation to complete works within a reasonable time is implied into a contract, parties are reminded that conduct that results in breach of this obligation may lead to liability for loss of use and enjoyment, irrespective of whether the owner has suffered loss of rental income or incurred additional accommodation expenses.

The full decision can be found here.