Defects commonly occur when a contractor fails to carry out the works according to the plans and specifications required by a construction contract. In such a situation, the contractor is liable to rectify the defects.
If the contractor fails to rectify the defects, the principal can claim damages from the contractor for the defect rectification costs as compensation.
A betterment claim arises where a claim for defect rectification costs results in a better or newer building than what was originally contracted.
Assessment of defects rectification costs
Usually, the court will allow a claim for defect rectification costs if the costs are reasonable and necessary to make the building conform to the requirements and specifications of the contract following the principles set out in Bellgrove v Eldridge  90 CLR 613 (Bellgrove).
Court’s approach to betterment claims
Applying the principles in Bellgrove, the court may allow a betterment claim if the plaintiff can show that the betterment claim is necessary and reasonable.
The court will not reject a defect rectification claim simply because there is a cheaper alternative. In Monteleone Maria v A V Constructions Pty Limited And Anor  NSWCA 148, the court held that it was reasonable to grant the principal damages for the costs of a more expensive membrane (with a life span of 14 years) rather than the cost of a less expensive membrane (with a life span of 4 years).
However, the court took a different approach in Tyco Australia Pty Ltd v Optus Networks Pty Ltd  NSWCA 333(Tyco), where it held that the plaintiff should give a discount on a betterment claim:
- When there is a cheaper replacement or rectification option, but the plaintiff chooses a more expensive one; or
- When the plaintiff is forced to choose a more expensive option as no cheaper option is available, the plaintiff receives a benefit that is not too speculative and can be quantified.
In Walker Group Constructions Pty Ltd (Walker) v Tzaneros Investments Pty Ltd (Tzaneros) NSWCA 27, the court held that Tzaneros’s claim for costs to replace the defective pavement with a reinforced pavement (to meet the minimum lifespan of 20 years) was not a betterment claim. The court rejected Walker’s reliance on the ‘discount’ rules in Tyco as Walker failed to present other repair methods which would have cost less than the solution proposed by Tzaneros.
In Renown Corporation Pty Ltd (Renown) v SEMF Pty Ltd (SEMF) NSWCA 233, SEMF claimed losses for replacing the defective project management and accounting software installed by Renown (2011 version). Renown argued that SEMF’s enhanced and improved replacement software (2018 version) amounted to a betterment claim and that the court should reduce the damages to account for the enhancements and improvements received by SEMF with the upgraded 2018 version.
The court held that SEMF’s claim was not a betterment claim because:
- There were no other practical means for SEMF to rectify the errors in the defective 2011 version;
- If Renown did not supply the defective software, SEMF would have been entitled to the upgraded 2018 version under the contract in any event; and
- Renown had failed to quantify the betterment.
Depending on the facts of each case, the court may allow a claim that has resulted in betterment to the plaintiff subject to the ‘discount’ rules set out in Tyco. There is no one-size-fits-all rule that applies to every case. The court will assess each case based on its factual circumstances to determine fair and reasonable compensation for the losses suffered by the plaintiff.
Therefore, before claiming defect rectification costs, the plaintiff should carefully assess whether its claim would amount to a betterment claim and be prepared to justify the necessity and reasonableness of the rectification costs incurred or to be incurred.
If you would like to discuss this article with us further, please contact Brett Vincent, Partner, or Vince Yap, Associate, at (02) 9261 5900.
 Bellgrove v Eldridge  90 CLR 613 at 617
 Monteleone Maria v A V Constructions Pty Limited And Anor  NSWCA 148
 Walker Group Constructions Pty Ltd v Tzaneros Investments Pty Ltd  NSWCA 27
 Renown Corporation Pty Ltd v SEMF Pty Ltd  NSWCA 233