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Defectiveworkinconstructionprojects

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Defectiveworkinconstructionprojects
Thisguidewillconsiderthelegalandpracticalissuesarisingoutofdefectivework.Itwaslast
updatedinAugust2011.
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Thenatureofdefectivework
Inconstructionandengineeringprojectsthenatureandtypeofdefectscanvarydramatically,as
canthepointatwhichtheybecomeapparent.Atoneendofthescaleminordefectscaneasilybe
correctedbeforethebuildingorplantishandedovertotheemployer,whileattheotherextreme
significantdefectsmayoccurlongaftertheoriginalworkhasbeencompletedandrequireextensive
remedialworkstofix.
Defectscanarisebecausetheworkwasnotcarriedoutina'goodandworkmanlikemanner'in
accordancewithgoodpracticeoraparticulardesign,orbecausethewrongmaterialshavebeen
usedmatterswhichwouldusuallybetheresponsibilityofthebuildingcontractoranditssupply
chain.Alternativelythedesignercouldbeatfault,becauseaparticulardesignisnotworkinginthe
mannerthatitshould.Inthefrequentlyuseddesignandbuildscenario,thecontractorwould
normallyhaveprimaryliabilityforbothtypesoffailurealthoughitmayhaveconsequential
claimsagainstitsdesignersandsupplychain.
Ononeviewidentifyingadefectshouldbeeasy:somethinghasusuallynotbeenprovidedinthe
mannerthatitshouldhavebeen,thefoundationsofabuildingcouldcrackandsubside,theair
conditioningunitsfailortheroofleak.However,inconsidering'defects'asamatterofprinciple,
workmaybedefectiveevenifithasbeencarriedoutwithalldueskillandcarebutitfailstomeeta
particularspecification.Forexample,brickworkmaybeerectedcorrectlybutthewrongtypeor
colourofbrickcouldhavebeenusedinbreachofplanningpermission.
Potentiallydifficultargumentscanarisewhereworkhasbeencarriedoutincorrectlybythe
contractorbutthearchitectorengineer'sdesignisalsoatfault.Inthesesituations,thecontractor
maydenyliabilityonthebasisthateventhoughtheworkwascarriedoutdefectively,itdidnot
causethedamagecomplainedof.Anemployerwillnotbeasconcernedasthecontractorand
architecttogettothebottomofexactlywhoisatfaultforthataslongasitcanclaimagainstoneor
bothofthepartiesandbothstillexist.
Itisoftenimportanttodistinguishbetweenpatentandlatentdefects.Apatentdefectisonethatis
detectableeitheratorbeforeapparentpracticalcompletionorduringthedefectsliabilityperiod.In
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thepast,thecourtshaveheldthatpatentdefectsmustbeapparentoninspectionbutneednot
necessarilyhavebeenseenbythepeoplecarryingoutthatinspection.Bycontract,alatentdefectis
onewhichhasbeenconcealedintheworksandmaynotbecomeapparentformanyyears.
Typicalcontractualprovisions
Thestandardformconstructioncontractscontainprovisionsdealingwiththetreatmentof
defectiveworkduringthecourseofconstruction,atcompletionandduringthedefectsliabilityor
rectificationperiod.Bywayofillustration,theJCTformprovidesthattheemployermayissue
instructionsrequiringtheopeningupforinspectionofanyworkcovereduportestsofmaterialsor
goodsorexecutedwork.Thecostofopeninguportestingisaddedtothecontractsum,unlessthe
inspectionshowsthatthematerials,goods,orworkarenotinaccordancewiththecontractthe
contractorthenbearsthosecosts.
Thequestionofdefectsoftenarisesinthecontextofpracticalcompletion(PC),andwhetherornot
completioncanbesaidtohaveoccurredeventhoughminordefectsexist.Intheabsenceofany
definition,guidelineshavebeendevelopedfromcaselawwhichbroadlystatethat:
atthedateofpracticalcompletiontheworkshouldbecompleteandfreefrompatentdefects
PCwillbeachievednotwithstandingthepresenceoflatentdefects,becausesuchdefectsareby
definitionnotapparent
anydefectswhicharenotapparentatPCwhichdobecomeevidentduringthedefectsliability
periodmaybeaddressedinthatperiod
discretionusuallyexiststocertifyPCwhenminorworkremainstobecarriedout,althoughitis
possibletoinsistoncompletionofallsnaggingitemsbeforePC.
Rightsandremedies
Anissuewhichoftenarisesinthecontextofconstructionprojectsiswhetherthecontractorhasa
'righttoreturn'tothesitetoremedydefects.However,thereisnosuchrightunlessoneis
specificallyconferreduponthecontractorbythedefectsliabilityprovisionsorotherwiseinthe
contract.Wherethereisnoexpressrightforthecontractortoreturntothesitetoattendto
remedialworks,ortherelevantperiodhaspassed,anemployerisentitledtoemployothersto
rectifydefects.However,whereathirdpartyisappointedandthatisthoughttobeunreasonablein
thecircumstancesofthecasethentheemployermaybecriticisedforfailingtomitigateitsloss.
Thestandardformsusedifferentterminologyforthedefectsrectificationperiod,including
'rectificationperiod','maintenanceperiod'and'defectscorrectionperiod'.Thenatureandscopeof
suchperiodsdependonthemechanismadoptedintheparticularcontract,andtheyaretypically
seenasapplyingtothewholeoftheworks,therelevantpartorsection.Thelengthoftheperiodwill
benegotiatedbythepartiesandthenatureoftheworkstobeundertaken.
Incircumstanceswheredefectiveworkispresent,severallegalremediesmayexist.Startingwith
remediesincontract,wheredefectiveworkispresentasaconsequenceofabreachofcontractthen
aclaimingpartyisentitledtobeputintothepositionitwouldhavebeeniftheworkhadbeen
correctlycarriedout.Thisisachievedbyamonetaryaward.Theclaimingparty'slossesmaybe
assessedonthebasisof:
thereasonablecostofrepairofthedefectwork
thedifferenceinvalueorlossofamenityoftherelevantwork.
Instrictlegaltermsthedateforassessmentofthelossiswhenthedefectisnoticed,butwhen
consideringthecostofrepairthedateofassessmentisusuallytakenaswhenitisreasonableinthe
circumstancestoundertaketherelevantworks.Apartyseekingtobringanactionforbreachof
contractinrelationtodefectiveworkshassixyearstodosoifthecontractisexecutedunderhand
(signedbyasingle,authorisedrepresentative)or12yearsifthecontractisexecutedbydeed.Those
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periodsrunfromthedateofthebreachofcontract.Inthecaseofpatentdefectsthisshouldbe
obvious,asitisthedatewhenthedefectiveworkiscarriedout,butforlatentdefectsthedateof
causeinactionisusuallytakenasbeingthedateonwhichPCiscertifiedorgiven.Similar
considerationswouldariseinrelationtoallegationsofdefectivedesign.Formoreinformation,see
ourseparateOUTLAWGuidetolimitationperiods.
Betterment:whererepairworksresultinabetterornewerbuilding,adeductionindamageswill
notusuallybemadeiftheclaimingpartyhadnoreasonablechoicebuttoundertaketheworksin
thatway.However,ifapartychoosestorebuildtoahigherstandardthanwasstrictlynecessaryit
mayonlybeentitledtorecoverthecostofthoseworkslessacreditforthebettermentelementofit.
Whileeachcasewillturnonitsownfacts,ifworksaresaidtobeunnecessarilyexpensivethetestto
beappliediswhethertheclaimingpartyactedreasonablyinproceedinginthatway.Ifnot,itmay
struggletorecovertheadditionalcosts.
Pureeconomicloss:defectsinbuildingscanalsoposesignificantproblemsforsubsequent
ownerswhotakeonresponsibilityforabuildingwithouthavingprocuredtherelevantwork.Thisis
becausetherewouldbenoclaimincontract,unlessseparaterightsorawarrantyhadbeen
conferredonthatnewowner.Ifthissituationarisesandthesubsequentownerhasnoremedyin
contractitraisesthequestionoverwhethertheownercanrecoveritscostsandlossesinanyother
way,forexampleintort.Thegeneralruleisthatdamagetoabuildingwhichisattributabletoa
defectinthestructureofthatbuildingisnotrecoverablesuchdamageisknownas'pure
economicloss'astheonlylosssustainedisthefactthatthenewownerhaspaidtoomuchforthe
property.In2011theCourtofAppealclarifiedthat,ordinarily,contractorswillnotowedutiesnot
tocausepureeconomicloss.Thereforetheywillnotowesuchdutiestosubsequentowners.
Limitedexceptionsmayapplyifthenewownerisabletoshowthatthecontractorhadassumed
responsibilityforthatlossthroughtheprovisionofskilledadviceorservicesoratleastsomedesign
responsibility,andthattheownerhadreliedonthatadviceorservicesordesign.Suchsituations
havebeenheldtoarise,forexample,whereaspecialistsubcontractorprovidesservicestothe
contractorwhoemployeditandwhereacivilengineerprovideddesignservices.However,such
situationsarecomplicatedandthepreferableroutewouldalwaysbetoensurethatanynewowner
hadtheappropriatecontractualprotectiontotryandguardagainstitslosses.
Setoff,abatementandwithholding
Defectiveworkalsoraisesissuesrelatingtocertain'selfhelp'remedies,includingcommonlawset
offorabatementandequitablesetoff.
Commonlawsetofforabatement:AsummaryofthelegalprinciplesherewassetoutbyMr
JusticeJacksonin2006:
inacontractforlabourandmaterialswhereperformancehasbeendefectivetheemployeris
entitledtomaintainadefenceofabatement
themeasureoftheabatementistheamountbywhichtheproductofthecontractor'sendeavours
hasbeendiminishedinvalueasaresultofthedefectiveperformance
dependingonthefacts,thisdifferencemaybedeterminedbycomparingthemarketvalueof
whathasbeenconstructedwithwhatoughttohavebeenbuilt,orbyreferencetothecostof
remedialworks(butnotthecostoftheremedialworksthemselves)
themeasureofabatementcanneverexceedthesumwhichwouldotherwisebeduetothe
contractoraspayment
abatementisnotavailableasadefencetoaclaiminrespectofprofessionalservices
claimsfordelay,disruptionordamagecausedtoanythingotherthanthatwhichthecontractor
hasconstructedcannotfeatureinadefenceofabatement.
Equitablesetoff:thisispermittedwhereapartyhasacrossclaimwhichitwouldbeunjustnot
totakeintoaccount.Thisisawidetestandwillcoveranycrossclaim'closelyconnected'withthe
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claimbeingmade.
Theissuessurroundingsetoffandabatementleadustotherestrictionsonthoserightsunderthe
HousingGrants,ConstructionandRegenerationAct.TheActprovidesthatapartytoa
constructioncontractmaynotwithholdpaymentafterthefinalduedateunlessitgivesaneffective
noticeofitsintentiontowithholdpaymentincludingitsgroundsfordoingsototheotherparty.
Thisistostopcontractorsabusingtheirpositiontowrongfullywithholdsumsdueto
subcontractorswhotypicallyhavenoquickorcheapmeanstochallengethewithholding.
Practicalissues
Asastartingpoint,itisworththinkingabouthowdefectsandcompletionissuesshouldbe
addressedatprocurementstage.Whethersomethingisdefectivewilloftendependnotsomuchon
whetheritiscompletedcompetentlyfromaworkmanshipperspectivebutontheprecisestandard
andspecificationtobemet.Similarly,ifspecifictestsaretobepassedthesewillneedtobe
providedforcontractually,andconsiderationgiventowhethergeneralorliquidateddamages
shouldapplyintheeventoffailure.TheprecisestandardandlevelofcompletionrequiredforPCis
somethingwhichcanoftencausearguments,socarefulconsiderationshouldbegiventowhether
thecompletionrequirementsareclearandwhatriskstheymayhold.
Itgoeswithoutsayingthatthosepassingtheirobligationsdownasupplychainshouldseekthe
sameassumptionofresponsibilityinrelationtodefects.
Turningtotheexecutionphaseofthecontract,thepracticalissuestendtofocusaroundevidence
andnotices.Defectsaremostlikelytobepickeduponsiteifthereisregularmonitoringand
testing.Itwillbeacommercialjudgementforemployersandcontractorsastohowmuchtheywish
tospendmonitoringandtestingtheworks,butwhatiscruciallyimportantisthatifdefectsare
identifiedthatarelikelytohaveimplicationsfortheprojectthencomprehensiverecordswillneed
tobetaken.Similarly,ifitisintendedtoreduceapaymentoradvanceaclaimasaresultofa
defect,thenconsiderationshouldveryrapidlybegiventothebasisoftheclaim.Itisalsonot
uncommonforissuestoariseastowhetheranemployerwaivedoragreedtoallowadefectto
remain.Again,evidenceofagreementorwaivershouldbeobtained.
Postcompletion,ifadefectoccurswithinadefectsliabilityperiodunderacontracttheninall
probabilitytheemployerwillbeentitledtorequirethecontractortocorrectthedefect.Insome
formsthisisthecaseevenifitisnotclearthatthedefectisthecontractor'sresponsibility,although
thecontractorwillbeentitledtopaymentifitisprovedthedefectisnotoneforwhichisit
responsible.
Clearly,earlyconsiderationshouldbegiventothecontractualproceduresandrelevantnotices.
Evenifthedefectsliabilityperiodhasendedthecontractorwillinthevastmajorityofcasesremain
liableindamages.
Ifyouareanenduserwhodidnotemploythecontractorordesignteamthenyouwillwantto
considerwhetheryouhavethebenefitofanyassignmentoftherelevantbuildingcontractor
professionalappointments,oralternativelywhetheryouhavecollateralwarrantiesorthirdparty
rights.

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