Court of Appeal clarifies approach to reasonable remedial scope, revisits Calderbank offers

In Body Corporate 406198 v Argon Construction [2025] NZCA 684 (18 December 2025) [Argon], the New Zealand Court of Appeal addressed whether the plaintiffs (Body Corporate and unit owners) were entitled to recover the cost of full reinstatement, applying the principle of “necessary and reasonable” repair scope.

A building owner is generally entitled to the cost of repair where they intend to repair and it is reasonable for them to do so, otherwise they are entitled to the loss of value.[1] But, in Argon, the Court decided – on the facts of the case, described by the Court of Appeal as “unusual” – that despite it being proven that balcony membrane failures were a common issue in the building that could lead to significant water damage and other risks, the High Court judge was right not to award damages based on a ‘full membrane replacement’ (at a cost of over $40 million).

Rather, it was correct to assess quantum based on the much more limited but, the judge found, no less effective and durable repair scope put forward by the defendants’ expert (at a cost of some $5.3 million). Consultancy costs were available but referred to the High Court to be reassessed, as was the question of costs.

Key facts and background

·        The plaintiffs owned ‘The Bianco Off Queen’ apartments. The apartments comprised two towers with 157 units. The plaintiffs sued the head contractor, Argon Construction, and Auckland Council in negligence alleging Argon had constructed the cantilevered balconies and ground level (including podium common areas) in breach (as found by the High Court judge and Court of Appeal) of a “non-delegable” duty of care to secure compliance with the building consent and Building Code. As-built, none of the balconies investigated had the membrane to the inside face of the raised perimeter nib, as specified in the consent: the membrane instead terminated on the horizontal surface of the balcony before the nib, such that the as-built detail was high risk. The podium was also defective for reasons that do not much matter here but passed by Council upon a single inspection.

·        In reliance on standard damages principles applied in leaky building claims[2], which are usually tort or contract claims, the plaintiffs’ quantum case was that the defects identified required the removal and replacement of the waterproof membrane. The defendants, having put forward an alternative scope of repair which did not require full replacement of the membrane, the so-called “Alexander scope”, argued that the appropriate remedy for breach was the reasonable cost of bringing the defective building work up to Building Code compliance, which necessarily equated with the least expensive method.

·        The High Court[3] rejected entirely the defendants’ assertion that the remedial works reasonably required, and the reasonable cost of carrying out those remedial works, always requires adopting the “least expensive method”. That was a misreading of apex authority, which makes clear the “controlling question” is always reasonableness in the circumstances. A flexible and pragmatic approach is necessary.

·        Here, however, the High Court preferred the expert evidence for Argon on this issue, from Mr Stephen Alexander. In the result, the Court awarded the sum of $4.9 million in remedial costs (including a sum for escalation), as well as $780k in general damages. This compares to the sum initially claimed by the Body Corporate of $40.7 million (in total). The plaintiffs appealed; the defendants also cross-appealed a number of aspects, including the “non delegable duty” and “least expensive method” points. There was also a cross-appeal on the High Court’s costs award in favour of the plaintiffs, despite their having refused a settlement offer for some 3.5x more than they were awarded. We add a brief comment on this point below.

Like for like replacement must be both necessary and reasonable

The Court of Appeal upheld the finding of the High Court judge in relation to the defendants’ duties of care, as well as the scope of remedial works and associated costs.

The Court noted that the Supreme Court has more than once linked the duty owed by councils in construction to the non-delegable statutory duties to secure code compliance and compliance with the building consent.[4] Such a duty arises from the Council’s control over the construction process and associated reliance. Applying these principles, the Court held that “…Council was under a duty of care to ensure that all building work complied with the Building Code and on completion, with the building consent….[C]ode compliant conformity with the building consent is required.”[5]

And further: “Logically the same reasoning should apply to builders.”[6]

However, the Court accepted that, as found by the High Court:

1.      the Apartments did not comply with the Building Code in relation to the installation of the membranes, giving rise to actionable damage; and

2.      the Council [and/or Argon] was liable to pay for the costs of achieving a code compliant build, though not on a like-for-like basis.

In coming to that conclusion, the Court made four “related points”:

1.      Given the scope of Council’s [and Argon’s] duty of care, full reinstatement or cost of like-for-like repair is an available remedy and has been the remedy in many building defect cases;[7]

2.      Liability extends beyond repair of defects to “all corresponding risks”, including water damage caused by non compliant defects to other parts of the building that may, e.g., serve only a cosmetic purpose “like golden taps”;

3.      But, on the “unusual facts of this case”, there was no sufficient link between the costs of “full” membrane replacement and the defendants’ duty of care to secure code compliance, because the owners could be made good, and restored to a fully code-compliant position, without that costly remedy (the Court’s emphasis). Full membrane reinstatement was not necessary; and

4.      “As the cost of the full replacement of the membranes is also unreasonable in the circumstances, we can see no proper basis for making an award of that kind of repair against the Council.”

Why the court awarded replacement of cork acoustic matting

The Court accepted that a repair need only achieve code compliance, and that replacement of acoustic matting was not strictly necessary for that purpose; nonetheless, the “factual nexus” test was satisfied as damage to the matting was a foreseeable consequence of a defective membrane.

Costs

On the issue of costs, we note that the High Court judge found[8], relevantly:

1.      The plaintiffs were the successful party and entitled to costs as such;

2.      Any award of costs to the defendants would be unconscionable and unjust, notwithstanding that they had made a “Calderbank offer” (aka a “Without prejudice save as to costs” offer) estimated to be some 3.5x more than the award of damages; and

3.      The defendants were to pay the costs of the plaintiffs on a category 3B basis in the sum of $583,254 and disbursements of $579,514.73.

The Court of Appeal overturned the costs award as insufficiently “steely” when it came to the plaintiffs’ refusal of the defendants’ settlement offer. It noted that as a threshold matter, (a) questions of costs are ultimately a matter of discretion such that an appellate court will only interfere if the judge is shown to have acted on a wrong principle, failed to take into account some relevant matter, factored in the irrelevant or was plainly wrong; and (b) costs usually follow the event – noting authority is legion on these points. But held that the Judge had (or appeared to have) failed to follow the directive in High Court Rule 14.11(1) that the normal effect of a “Without prejudice save as to costs” offer is that the costs position is reversed for litigation steps made after a qualifying offer (i.e. an offer of an amount greater than the final judgment sum) is made.

Therefore, the costs award was set aside and remitted back to the Judge for reassessment in light of the Court of Appeal’s judgment – in particular its endorsement of authorities mandating a “steely” approach to Calderbank offers in the interests of fair and expeditious resolution of disputes.

Comments

Plaintiffs must show that it is reasonable to repair and that the cost to carry out those repairs are both necessary and reasonable in the circumstances. In this case, both Courts have been very clear that this does not mean that damages are effectively capped according to what is the least expensive option possible: the plaintiff is entitled to be put back in the position he or she would have been in but for the tort (wrongdoing) – and there is nothing automatically unreasonable or disproportionate in full demolition and replacement if that is what is reasonably required to achieve code compliance. Other consequential damages/losses may also be recoverable if sufficiently linked to the repair.

In this case, the Court of Appeal has dismissed the appellant-owners’ argument that the High Court’s application of these settled concepts of reasonableness was wrong or inconsistent with the case law, as expert analysis showed the more limited “Alexander scope” was at least equally effective and durable. The “steelier” approach to Calderbank/settlement offers encourages parties to carefully consider their offer, ensuring it is a genuine compromise and nor a mere bargaining tactic. This is based on the principle that if a party unreasonably declines a reasonable offer, they many face costs consequences in the event they do not do better after a trial. This “steelier” approach to Calderbank offers may also be seen alongside the new High Court Rules that came into effect on 1 January 2026, introducing significant reforms to civil procedures aimed at enhancing access to justice and reducing delays.

[1] Leisure Investments NZ Ltd Partnership v Grace [2023] NZCA 89, [2023] 2 NZLR 724 at [176].

[2] See Leisure Investments above n 1, as well as Johnson v Auckland Council [2013] NZCA 662 at [110]; Warren & Mahoney v Dynes CA49/88, 26 October 1988 at 22, and other cases.

[3] Body Corporate 406198 v Argon Construction Ltd [2023] NZHC 3034 [liability judgment]

[4] See at [45] – [49] (The Supreme Court in Spencer on Byron (2012) held the Council’s duty was framed by its Building Act obligations. And in Southland Indoor Leisure Centre (2017) the Supreme Court rejected the idea that councils could contract out of their statutory obligations and or that their duty was obviated by another party’s negligence or knowledge.)

[5] At [55]

[6] At [92]

[7] Citing for example Body Corporate 326421 v Auckland Council [2015] NZHC 862 [Nautilus]; Minister of Education v H Construction North Island Ltd [2018] NZHC 871; Dicks v Hobson Swan Construction Ltd (in liq) HC Auckland CIV-‍2004-‍404-‍1065, 22 December 2006; and Body Corporate 462460 “Nikau Apartments” v Auckland Council [2023] NZHC 3203

[8] Body Corporate 406198 v Argon Construction Ltd [2024] NZHC 1037 [costs judgment]