SCENARIO

Patrick is a prematurely retired middle-level manager.After having been 'promoted sideways' for poor management practices, he gave up his professional career and turned to investing in real estate.He bought a house in Thornbury and rented it out to tenants without using a property agent.

On 1 June 2019, the heater in the rented property malfunctioned. The heater operates on gas, which is used to heat air in a unit outside the house and then blow the air into the house through a system of ducts under the floors. The tenants immediately gave Patrick an urgent repair notice. After five follow up phone calls to Patrick, he organised Duct Off Plumbers to inspect the heater. After inspection DOP informed Patrick that the heating unit located outside the house would need replacing. DOP advised that he had worked with two main heating suppliers in Melbourne: Spacecadet Heating Pty Ltd and Ducted Frustration Pty Ltd.

On 2 June, Patrick contacted both heating suppliers and obtained quotes.Spacecadet Heating's quote was for an 'Ecoworrier' unit that cost $4000, could be installed by any qualified plumber, and had a 90% thermal efficiency rating.The thermal efficiency rating is how much of the energy contained in the gas is converted into heated air coming out of the heater.Ducted Frustration's quote was for the 'Hubris' unit that cost $4500 and had an efficiency rating of 80%. The Hubris had to be installed by a specialist installer, which would cost $2000, but the quote promised that the specialist would guarantee it worked properly with your house. The expected lifetime of a gas heating unit is 20 years.

Patrick decided to go with the Ecoworrier model and was sent a contract.

The contract included the following terms:

12.The heating unit supplied under this contract has a 90% efficiency in converting the energy in gas to heated air.

...

15. The heating unit must be installed correctly to achieve the outcomes promised under this contract. The unit may not work optimally with all duct systems or built structures and the supplier is not responsible for any loss if they are incompatible. (not a contractual promise)

...

21. This agreement constitutes the entire agreement between the parties. The parties agree that no negotiations, commitments or representations form part of this agreement apart from those included in this document.

Patrick noticed cl 15 and was concerned because he knew his house was about100 years old and the ducted heating was at least 60 years old.At this time Patrick talked to his one friend (really an acquaintance who was too polite to hang up the phone) and related a long story about the heater problem. The friend remembers that Patrick was finding it difficult to decide which unit because theHubris was more expensive, but the Ecoworrier did not guarantee it would work.Patrick said he was leaning towards paying more to make sure there were no problems. The friend suggested he ask Spacecadet about cl 15 if he was concerned about the clause.

Patrick called and asked the Spacecadet representative whether the Ecoworrier would work with his house as the other company Ducted Frustration had guaranteed that the installer would make it work. The Spacecadet representative asked him about the age of the ducts in the house. The rep then said that based on that information (60 years old) the unit would work fine. However, Spacecadet had done aninvestigation only the year before that had found that the Ecoworrier model failed to work properly in 20% of installations where the ducts were more than 50 years old.All agents of Spacecadet had been informed about the investigation and the representative had a copy of the report on his desk. After the representative's reassurance,Patrick agreed to buy the Ecoworrierand signed the contract.DOP installed it, which cost $1000 including removing the old broken unit.

The following week Patrick received a series of phone calls from his tenants complaining that the heater was not working. They said it would turn on and start heating but would turn itself off when it got to about 14 degrees Celsius. It would then only restart if the unit was switched off and on again at the wall. The tenants were furious that their heating was not working in winter as they had a young child and demanded that Patrick fix it immediately. Patrick called Spacecadet Heating to complain about the unit. Spacecadet Heating said that they were extremely busy and would not be able to inspect the unit for two months. DOP was able to conduct an inspection of the installation that week and found thatthere was nothing wrong with the installation so the problem must be with the unit.

The tenants were adamant that they could not wait two months without heating for the unit to be inspected. They gave Patrick a breach notice claiming that Patrick had breached his duty to get the heater fixed urgently. Patrick fumed when he received the breach notice as he thought it was completely unreasonable when he could not fix the heater himself. However, in the face of possible VCAT proceedings Patrick compromised. He purchased seven large electric heaters for the tenants ($700) so they could heat the whole house and agreed to pay the increased cost of their electricity bills. The increased cost of the tenants' electricity bills for the three months of June, July, and August was $1,500/month. The tenants did pay $100/month less in gas bills but did not tell Patrick this and he did not think to ask.

On 1 August Spacecadet sent a technician to inspect the Ecoworrier unit. The technician found that the old system of ducts under the house had somewhat restricted airflow. This meant that the air pressure in the heating unit outside was increased and the unit itself heated up to its safety limit. The reason the unit was switching off was that the safety switch tripped, which required the electricity to be turned off and on to reset. Spacecadet offered to modify the unit so that it would work better with the old ducts. Patrick agreed and the modification was completed by the end of August.

On 1 September Spacecadet sent Patrick a bill of $2000 for the modification. This drove Patrick into a wild fury. He stormed into the Spacecadet offices demanding to speak to the manager. Throwing the bill on the desk he shouted that he would never pay this and demanded that Spacecadet pay the cost of his tenant's electricity bills. Spacecadet's manager simply pointed at cl 15 in the contract. Patrick then stormed out of the office without achieving any progress.

In September the tenants discovered that, although it was improved, the gas heater was still not working properly. First, it would get the temperature up to 19 degrees, but would then cut out and require resetting. Second, even with that lower functionality the tenant's gas bills were not much lower than their bills in the 2018 winter, when they had kept the house about 21 degrees.

After sending more breach notices stating that Patrick was breaching the tenancy by not fixing the heater, the tenants validly terminated their $3000/month tenancy, which ended on 1 October 2019. Before the tenants left, one of them was seriously injured after being physically attacked during an argument at a local bowls club in Thornbury. Because of the injury, the other tenant needed support to look after them and their child. The tenants cancelled the tenancy they had planned to move into in Melbourne and relocated to NSW so they could be supported by their family.

In October, for $1000, Patrick hired an independent expert heating consultant, Sandra, to thoroughly inspect the system and advise on options. On the efficiency problem, Sandra used various specialised tools to check the efficiency of the unit. She found that it was converting the energy in each joule of burned gas to heated air with 85% efficiency. The remaining 15% of energy was being lost through heat in other ways. The old unit that had been replaced also had 85% efficiency. She advised that 90% efficiency was extremely rare in home heating systems. It could only be achieved if the unit was replaced with a specialist type of unit that was used in some commercial buildings. She advised that replacement of the Ecoworrier unit with a commercial one that achieved 90% efficiency would cost $10,000, plus the standard installation cost ($1000). Sandra estimated that the commercial unit would not appreciably change the value of Patrick's house because the value provided by extra efficiency would be offset by it creating slightly more noise.

Sandra also advised on the compatibility problem between the heating unit and the old ducts under the house. Sandra advised that Patrick had three options: (A) replace the Spacecadet unit with Ducted Frustration's Hubris model, which would come with a contractual guarantee that it would work properly; (B) replace the underfloor duct system entirely, which would cost $10,000; or (C) replace the gas heating with electric split system heating with multiple heafds for the different rooms, which would cost $15,000 but would have a thermal efficiency of 300%. Sandra recommended option (C) because of the much better efficiency and it would be easier to install than getting under the floor. Sandra also advised that the Victorian state government had legislated new standards for rental properties. From June 2023, rental properties are required to have an efficient heating option, which would not be satisfied by the ducted gas heating and will require the installation of an electric split system. However, by this time Patrick had spent his savings and had no funds available to undertake any of these options.

Also in October, as soon as his tenants left, Patrick advertised the house for rent. Patrick expected the house to be empty for two to four weeks because of the time it takes to do inspections and review tenancy applications. However, Patrick didnot receive any satisfactory applicationsbecause everyone who inspected the property asked about the heating and he had to explain that the heating was having problems.Patrick turned down five applications by people who could not provide proof of income.

On 1 April 2020, Patrick lowered his rent asking price 10% from $3000/month to $2700/month. While several promising inquiries were made at this price even with the broken heater, the 2020 lockdown commenced a few days later and Patrick could not arrange inspections until late May 2020. Even in May finding tenants was still hampered by the lockdown and uncertainty about what was going to happen.On 1 June 2020, Patrick managed to rent out the house for $2400/month - 20% less than what he had been charging.

Patrick's financial position was devastated by the loss of rental income from 1 October 2019 to 1 June 2020. On 1 April 2020 Patrickwithdrew $10,000 from his superannuation account to cover the loss of income over the first six months without tenants. According to Australian Securities & Investment Commission data this withdrawal will cost Patrick $5000 in lost investment returns when he retires in 10 years. On 1 June 2020,Patrick borrowed $20,000 from the bank and is paying interest on this borrowing at 10%.He used $5,000 for living expenses, to cover his lost tenancy income from April. He used the remaining $15,000 to replace the heating system. He chose option (C), the electric split system, as Sandra had recommended it and the alternative Hubris model had increased in price to $6000.

On 1 June 2021, Patrick's new tenants renewed their 12 month lease.Patrick increased the rent 5% to $2520/month justified because houses with electric split systems had 5% higher average rents than those with gas heating. Patrick would have been justified in increasing the rent back to the 2019 price as the average rents in the area had bounced back to very near their 2019 average. Patrick did not do the research to find this out.

Patrick has suffered significant emotional distress since June 2019. He has suffered distress from the confrontations with his tenants and with Spacecadet heating. He suffered further distress from the impact on his finances. Since June 2019 the distress of the heating and tenancy issues has prevented Patrick engaging in the daily practice of meditation required by his 'Reformed Neo Buddhist' beliefs. This has led to Patrick suffering spiritually, doubting his place in the universe and being refused the rank of Level Five Laser Lotus by his religious community.

Question

determine the expectation losses:

Where a party sustains a loss by reason of a breach of contract, he is, so far as money can do it, to be placed in the same situation, with respect to damages, as if the contract had been performed (Parke B,Robinson v Harman).

breach of contract essential term: CLAUSE 12; The heating unit supplied under this contract has a 90% efficiency in converting the energy in gas to heated air. (Patrick was advised by Sandra, the heating unit consultant that the purchased unit was supplying 85% not 90% and that 90% efficiency was extremely rare in home heating systems.(BREACH)

State:Different measures exist to calculate expectation losses. [X] would want to argue that [FILL] is the appropriate measure of damages.

Loss of profit = [expected profit]-[actual profit] (appropriate when parties contracting are expecting to profit)

Cost of rectification(there are two different measures of damages in rectification cases: Cost of cure; orDiminution in value which is Difference in value = [the value of what you expected]-[the value of what you received])

Reliance damages(Where expectation damages cannot be measured, a court may award reliance damages (McRae). Four questions must be addressed when managing reliance loss

1. Are reliance damages appropriate in the circumstances?
2. What expenditures did the plaintiff incur in the performance of the contract?
3. Was the expenditure reasonable?
4. If the contract had been performed, would the plaintiff have recouped their expenditure?

Loss of a chance

under action of breach of contract patrick is entitled to fulfilled expectations (expectation damages). CLAUSE 12 (The heating unit supplied under this contract has a 90% efficiency in converting the energy in gas to heated air)

Choice of damages: Should the defendant pay:

o The cost of repair/restoration of the heating unit? (can 85% efficiency be repaired with 90%?)

OR

o The loss of value difference between value of 90% with 85%? (refer to Sandra's advice)

explain your answer