September 1, 2020

In Leeda Projects Pty Ltd v Zeng [2020] VSCA 192, the VSCA has established that damages for loss of use and enjoyment of a property arising from a breach of contract must be ‘compensatory’, and calculated to place an owner in the position they would have been if the property was available for the intended use.

Yun Zeng (Owner) contracted Leeda (Builder) to carry out internal fit out-works including an art gallery and residence in the Eureka Tower (the contract). The contract set 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 arose between the parties, and the Builder filed VCAT proceedings for final payment. Senior Member Farrelly held that in breach of the contract the Builder failed to complete the works within a reasonable time and was 130 weeks late (delay period). The Owner was awarded a nominal sum of $100 in damages. The Owner appealed the decision to the VSC on the basis that the VCAT Member had erred in finding there was no entitlement to general damages.

We previously provided a summary of the VSC decision between the parties which is accessible here. At first instance, McDonald J determined that an appropriate award of damages should take account of the Owner’s loss of use and enjoyment of the property, irrespective of whether the Owner had suffered loss of rental income, or incurred alternate accommodation expenses. McDonald J found that in respect of the Builder’s breach:

  •   the Owner’s loss was the estimated rental value of the property during the delay period, which amounted to $357,500; and
  •   the Owner’s expenses during the delay period in the sum of $283,802.17 (comprising council rates, owner’s corporation fees and utility charges) were not included in the Owner’s loss and damage, as they were a ‘direct consequence’ of the ownership of the property and would have been incurred irrespective of the breach.

The Builder appealed to the VSCA on the basis that (among other things) substantial damages should not have been awarded by reference to the rental value of the property in circumstances where the Owner had not intended to rent or reside at the property during the delay period. Specifically, it was submitted that the primary judge had contravened the ‘compensatory principle’: that an award of damages for breach of contract is to put the injured party in the position in which it would have been if the contract had been performed.

In response to the Builder’s appeal, the Owner contended that if the Builder’s submission as to loss of use damages based on rental value was accepted, then the judgment should be affirmed on the basis that his Honour should have allowed general damages for ‘wasted expenditure’ in the sum of $283,802.17. The Builder argued that if the Owner were to recover this expenditure, she would be placed in a better position than she would have been in, had the contract been performed in contravention of the compensatory principle.

Broadly, the matters for determination before the VSCA were whether it is accepted at common law that loss of use or enjoyment of real property is a compensable loss in contract and if so, what is the appropriate measure of damages.

In relation to the award of substantial damages, McLeish JA (with Tate and Kaye JJA agreeing) found that:

  •   it was within the reasonable contemplation of the parties that the property would be used as an art gallery and would not be rented for reward;
  •   in such circumstances, an award of damages based on what it would have cost to rent the property, or a replacement, goes beyond the compensatory principle; and
  •   for these reasons, damages for loss of use should not have been assessed according to the commercial rental value of the apartment.

In respect of the Owner’s contention regarding ‘wasted expenditure’, McLeish JA (Tate and Kaye JJA agreeing) found:

  •   damages for wasted expenditure are, in fact, manifestations of the compensatory principle;
  •   the Owner’s damages should have been measured by reference to the amount spent on the property during the delay period which, but for the Builder’s breach, the Owner would have been able to enjoy;
  •   council rates, owner’s corporation fees and utility charges were amounts spent, without benefit to the Owner, on a property in which the Builder retained possession to complete its work in breach of the contract; and
  •   $283,802.17 was the appropriate measure of damages in the circumstances.

The full decision can be found here.

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