Defects correction arrangements

© University College of Estate Management 2018

Introduction
Here, we consider:
• the concept of defects
• the arrangements for defects correction commonly found in construction contracts.
Defects
Defects 1
• The International Council for Research and Innovation in Building and Construction’s (CIB) group W86
(Building Pathology) define a ‘defect’ as ‘a situation where one or more elements don’t perform its
intended function and an anomaly is referred to as an indication of a possible defect’ (CIB 1993)
• There is no comprehensive definition of what constitutes a ‘defect’ in English common law
• In Yarmouth v. France (1887) 19 QBD 647, a case where a horse was held to be ‘plant’ and its vicious
nature a defect in its condition, a defect was described at 658 as:
• ‘anything which renders the plant unfit for the use for which it is intended when used in a
reasonable way and with reasonable care.’
• It is noteworthy that both these approaches focus on function (fitness for purpose) rather than form.
However, most people would regard a contractor’s use of the incorrect colour of tile, even if he used
the correct specification of tile, as a defect
• Defects are breaches of contract.
Defects 2
• The international standard for quality management systems (ISO 9001) suggests the term ‘quality’ is
to be regarded as the delivery of a product at a set standard. This suggests that a defect is a measure
of deficiency when it is compared, albeit in a subjective manner, against a predetermined minimum
standard. In the case of construction, this would be the specification documents forming part of the
contact
• This definition appears to align with the interpretation many of the construction standard forms of
contact have implemented:
• In the JCT (2016) forms, at 3.18, a defect is expressly defined as ‘materials or workmanship not
in accordance with this agreement’
• NEC4 (2017), at 11.2(6), defines a defect as ‘part of the works which is not in accordance with
the works information or a part of the works designed by the contractor which is not in
accordance with the applicable law or contractor's design which the project manager has
accepted’
• HKIA SFC 2005 at 8.3 refers to ‘materials, goods, workmanship or work … not in accordance
with the contract’
• The FIDIC Red Book (2017) at 7.6(a), (b) and (c) similarly refers to plant, materials and work not
in accordance with the contract.
Defects 3
• Defects are usually regarded as falling into two distinct categories:
• patent
• latent
• A patent defect is open or visible to the eye: Yandle & Sons v. Sutton, Young and Sutton (1922). The
test is an objective one, according to Sandserson v. National Coal Board [1961] 2 QB 244:
• ‘A patent defect is not latent when there is none to observe it. The natural meaning of the
word “patent” is objective, not subjective. It means “observable, not observed”. A patent
defect must be apparent on inspection, but it is not dependent on the eye of the observer;
it can blush unseen. In this case, although the defect was in darkness, it was patent. Had
the plaintiff or his mate shone their lamps on it at the relevant moment, they would have
seen it.’
• A latent defect is a ‘defect that would not be discovered following the nature of inspection that the
defendant might reasonably anticipate the article would be subjected to’ – see Baxall Securities Ltd v.
Sheard Walshaw Partnership [2002].
Defects 4
• Defects may result from a failure of design, materials and/or workmanship
• Defects give rise to two rights:
• a right of abatement - that is a right to reduce the amount payable in respect of the works, or
particular aspects of the works, by reference to their value in their defective state: Mondel v.
Steel (1841) 8 M. & W. 858, 1 BLR 106
• a right to compensation (damages) - that is the cost of remedial work and any consequential
loss: East Ham Corporation v. Bernard Sunley & Sons Ltd [1966] AC 406
• The parties’ rights and obligations in respect of defects will depend on the particular express and
implied terms of the contract.
Contractual arrangements
Contractual arrangements 1
• There is no common law right for a contractor to return and remedy a defect
• A contractor only has a right if the contract expressly provides for the contractor to return and remedy
a defect
• If the contract contains such a provision then the contractor has a right (and an obligation) to return to
site and remedy any defects – see William Tomkinson v. St Michael’s PCC (1990) 6 Const. LJ 319
• The contractor is obliged to return within a reasonable period and remedy those defects
• Where the employer refuses to allow the contractor to return to site to rectify a defect, this may not
preclude recovery of third-party costs, but may mean that any claim is limited to that which it would
have cost that contractor to remedy the defects: Pearce & High Ltd v. Baxter and ors [1999]
• This rule also applies in cases where the relevant defects correction period in the contract has
passed, if the employer’s use of a third party is considered to be unreasonable. In essence, the
employer has failed to mitigate his loss.
Contractual arrangements 2
• It was argued in Maersk Oil UK Ltd v. Dresser-Rand (UK) Ltd [2007] EWHC 752 (TCC) that the
Pearce approach meant that failure to invite the builder to remedy defects was a breach of the duty to
mitigate so that the purchaser could not recover by way of compensation more than it would have cost
the builder had he been invited to remedy the defects
• This argument was rejected as the builder, in Maersk, did not have a contractual right to return to site
and remedy defects, whereas in Pearce there was such a right
• Nevertheless, an unreasonable refusal of an offer from the builder to remedy defects may amount to a
failure to mitigate loss, and result in a reduction or extinguishment of the damages otherwise
recoverable. For example, in Woodlands Oak Ltd v. Conwell [2011] BLR 365, the Court of Appeal
considered a simple contract which did not have a defects liability clause. May LJ said at para. 20 in
relation to a finding by the first instance judge that where the employer fails to give the contractor an
opportunity to rectify defects in the work, that amounts to a failure to mitigate the losses:
• ‘I am in no doubt that the last proposition misstates the law. What it should have said was
“where the employer fails to give the contractor an opportunity to rectify defects in the work
that may amount to a failure to mitigate the losses.”’
Contractual arrangements 3
• In the JCT forms, the obligation is on the contractor to make good at no cost to the employer ‘defects,
shrinkages or other faults’ (clause 2.38)
• The defects rectification period begins from the date of practical completion of the works for a period
that is specified in the Contract Particulars
• If no such period is stated, then the period of six months from the date of practical completion of the
works is the default (clause 2.38)
• The architect can instruct a schedule of defects that occur during the defects rectification period that
can be delivered to the contractor as an instruction within a period of 14 days after the expiry of the
rectification period (clause 2.38.1)
• Whether the instructions are given during or at the end of the defects period, the builder must rectify
the defects within a reasonable time and at his own cost. If he does not do so, the builder will be in
breach of contract, and the purchaser may employ others to effect the necessary repairs and recover
the full cost from the builder
• It is usual practice for the contractor to attend to defects during the defects rectification period.
Contractual arrangements 4
• The ending of the defects rectification period does not, however, leave the purchaser without a remedy
merely because particular defects were not apparent, or were missed, at the time of the architect’s
final inspection
• The expiration of the defects rectification period merely renders the architect functus officio (i.e. he has
discharged his powers) and prevents him giving further instructions to the builder
• This means that the builder is no longer obliged (or indeed entitled) to correct further defects, but is
instead obliged to pay compensation to the purchaser for subsequently discovered defects (including
any missed by the architect and therefore omitted from his schedule of defects).
Contractual arrangements 5
• Under NEC4, the contractor must correct a defect whether notified or not (clause 44.1)
• The defects date under NEC4 is a date set out in the contract data and equates broadly to the end of
a period for defects correction found in other standard forms
• Until the defects date (that is, before and after completion), there is a mutual obligation on the
supervisor and the contractor to notify each other of a defect (clause 43.2)
• The inclusion of a ‘defects correction period’ under NEC4 is materially different in approach from the
JCT arrangement
• Under NEC4, the defects correction period is a specific period (calculated in weeks) within which the
contractor must remedy defects after completion (in the case of defects notified before completion) or
if a defect is not notified before completion, a period starting from when the defect is notified (clause
44.2).
Contractual arrangements 6
• There can be several defect correction periods (indeed the standard form contract data contemplates
this)
• This enables defects that give rise to health and safety risks or critical operational risks to be allocated
a specific (shorter) defects correction period than less critical parts of the works.
Contractual arrangements 7
• The FIDIC Red book (2017) provides at clause 11.2 that the contractor is responsible at its own ‘risk
and cost’ for remedying defects that are attributable to any design for which the contractor is
responsible, plant, materials or workmanship not being in accordance with the contract or failure by
the contractor to comply with any other obligation and which are notified to it during the ‘defects
notification period’.
• Clause 1.1.27 provides that the duration of the defects notification period (DNP) is to be as stated in
subclause 11.1 of the contract and may be extended under clause 11.3 if the works or plant are the
subject of the particular taking over certificate (there may be more than one if the employer uses its
discretion under clause 10.2 to take the work over in sections or if the contract provides for sectional
completion) and cannot be used for the purpose for which they are intended by reason of defect or
damage. However, the period cannot be extended by more than two years beyond the date on which
the DNP would otherwise have expired.
• The DNP ends automatically after the expiry of the stipulated period of time, even though the
Performance Certificate might not have been issued.
• If defects occur after the expiry of the DNP the employer will have to rely on normal legal remedies for
breach of contract.
Contractual arrangements 8
• FIDIC (2017) clause 11.2 is widely drawn and requires the contractor to remedy any defects, and for
those defects that the contractor considers to be attributable to any other cause, the contractor shall
promptly give notice to the engineer.
• If the defect is not attributable to the contractor, the cost of its repair is treated as a variation under
clause 13.3.
• Clause 11.8 places the contractor under a duty to search for the cause of any defect if required to do
so by the engineer.
• The cost of the search plus reasonable profit shall be agreed or determined by the engineer in
accordance with subclause 3.5 and included in the contract price if the defect is not attributable to the
contractor.
Contractual arrangements 9
• The HKIA SFC 2005 contains a similar arrangement to that found in the JCT forms.
• A defects liability period is stipulated in the contract and by virtue of clause 17.3(1) the contractor is
responsible for remedying defects that are the result of:
• materials, goods or workmanship not being in accordance with the contract,
• natural causes, or
• a specified peril occurring prior to substantial completion.
• The second bullet point above exposes the contractor to a potentially extensive liability and it is not
clear if it relates to natural causes occurring prior to substantial completion or to any such causes
occurring during the defects liability period.
• The employer’s ordinary legal remedies in respect of defects in the works or other breaches of
contract are not prejudiced by issue of a Defects Rectification Certificate (clause 17.7).
References
CIB (1993) A State-of-the-Art Report on Building Pathology (ed. Vasco Peixoto de Freitas), Rotterdam:
International Council for Research and Innovation in Building and Construction (CIB).
ISO (2008) ISO 9001:2008 Quality Management Systems, Geneva: International Organization for
Standardization.
JCT (2016) The JCT Standard Building Contract with Quantities (SBC/Q), London: Sweet and Maxwell.
NEC4 (2017) Engineering and Construction Contract (ECC), London: ICE Publishing.