Breach of Contract?
Timothy Bates and Katrin Saran Lee of Auckland law firm Legal Vision examine a recent High Court decision (Smeaton Construction Limited v Garrett Pasquale Limited & Anor [2012] NZHC 3079) in which the High Court was required to consider whether a subcontractor had breached a contract with the builder in respect of stonework and concrete floor polishing on a residential construction project. A case well worth a read as the Court, in assessing whether there was a breach of contract, was called upon to carefully consider the scope of the subcontractor’s contractual responsibility and whether a mistake by the subcontractor in carrying out the work under the contract necessarily amounted to a breach.
Overview
Mr Coburn (representative of the Coburn Family Trust) had entered into an agreement with Smeaton Construction Limited (Smeaton) to build a luxury home at Jack’s Point, Queenstown. Smeaton in turn engaged Garrett Pasquale Limited (GPL) to complete the stonework and the polishing of extensive concrete floors.
A dispute subsequently arose between Smeaton and GPL in respect of a pool deck surrounding the swimming pool, and the upper deck. Almost as soon as the concrete was poured for the deck surrounding the swimming pool, cracks began to appear. As a result, the decking around the pool had to be cut up, removed, and replaced with a new deck. In respect of the upper deck, an error had been made by GPL in the application of sealants in that water had got under the seal and mottled the surface. GPL made an attempt to fix the problem and was intending to do further work on it but they were prevented from doing so and the problems with the upper deck were eventually rectified by Smeaton.
Smeaton sought to recover damages from GPL but the District Court dismissed Smeaton’s claims and Smeaton accordingly appealed to the High Court.
Scope of Contractual Responsibility
In respect of the pool deck, the issue before the Court was whether it was within the scope of GPL’s contract with Smeaton that GPL would take control of, and be responsible for, the concrete mix itself. That issue was essential because it was alleged that the additives in the concrete mix caused the concrete on the pool deck to crack.
Fogarty J noted that the starting point of any analysis of contractual responsibility needs to be an examination of the formation of the contract itself. After taking into account a number of factors, Fogarty J held that there was no intention between Smeaton and GPL to have a legal relationship in contract whereby GPL took responsibility for the formula for the special mix of concrete and its placing. According to Fogerty J, it was plain that Smeaton never contracted the responsibility for formula for the mix and its placing to GPL. It followed from this that GPL was never put in a position where it assumed the responsibilities of designer of the concrete for the purposes of the Building Act 2004 and New Zealand Standard 3104 (setting out responsibility for concrete mix designs). Those specifications were prepared by a firm of engineers, and were the joint responsibility of that firm and the builder (Smeaton). GPL had no contractual liability for the cracking that had occurred and hence no liability in contract for the defective construction of the pool deck.
Mistake as a breach of contract
In respect of the upper deck, GPL had applied a penetrating sealer to the deck. However, following that it applied a “topical sealant” prematurely. As a result, rainwater was able to get under and lift the sealant. To remedy that mistake, GPL ground off the sealant and then applied two coats of sealant thinking that this would be sufficient. It was not sufficient and GPL sought to go back and apply a third level sealant. Smeaton , however, had lost confidence in GPL by reason of the troubles with the pool deck and GPL was prevented from completing that third level of sealant. Instead, Smeaton had the work completed and sought to recover the cost of that ($25,000) from GPL.
Fogarty J started the contractual analysis by noting that where a party breaches a term of a contract, the other party to whom the obligation is owed has a duty to mitigate the loss. Accordingly, if GPL had breached the contract, Smeaton was not obliged to continue with GPL but could mitigate the breach by taking action at its expense, suing GPL in default for the cost. However, the first step in that analysis involved answering the critical question of whether or not GPL was actually in breach of the contact by prematurely applying the first layer of topical sealant.
Fogarty J took a practical approach to this issue noting that competent tradesmen make mistakes and that making mistakes is not normally described as a breach of contract. The normal procedure in such instance is for the tradesmen to simply get on and rectify the mistake at their own cost (otherwise the building industry would collapse if every time a tradesman made a mistake the employer brought in another tradesman to fix it). Fogarty J noted that an employer is not obliged to give tradesman endless opportunity to fix problems, and if it becomes apparent that the tradesman cannot fix a problem, then the employer is entitled to employ another tradesman to do it. But, in this instance, the Court was of the view that GPL would have in fact had the opportunity to apply a further coat of sealant and otherwise discharge their obligation to ensure the sealer system performed but for the breakdown in the parties’ relationship over the poolside deck (paragraphs 36 – 38). The High Court agreed with the District Court that Smeaton should have permitted GPL to complete their contractual obligations rather than remove them from the job. Having prevented GPL from doing so however, it followed that Smeaton could not claim the extra costs that they took on as a consequence of banning GPL from the site. Accordingly, this contractual claim failed as well.
Personal liability
It is noted that Smeaton attempted to claim against Mr Pasquale (sole director and shareholder of GPL) personally in negligence but this claim was quickly dismissed by the Court.
Conclusion
This decision brings to the forefront some important principles to take into account when considering issues surrounding breach of contract. In particular, it is important to consider whether the obligation that is alleged to have been breached actually falls within the scope of responsibilities imposed by the contract. In addition, a practical approach may need to be given to situations where a party makes a mistake in carrying out construction work under the contract such that they may need to be given the opportunity to rectify that mistake. Of course, while not every mistake may necessarily amount to a breach of contract, it is still critical to keep in mind the duty to mitigate loss.
NOTE: This article is not intended to be legal advice (nor a substitute for legal advice). No responsibility or liability is accepted by Legal Vision to anyone who relies on the information contained in this article.