Defects: Making it right

Contractors often face pressure when approaching practical completion to get over the finish line, which can sometimes result in a fractious relationship with an employer. Once completion has taken place, the hope is that both parties can breathe a sigh of relief. But what happens when there are defects in the contractor’s work? As a matter of law, a defect is a breach of contract so would usually give rise to a claim for damages by the employer.

Most construction contracts include a mechanism enabling the employer to require, for a limited time, the contractor to return to site after completion to correct defects – effectively varying the right to claim damages. This period is typically called the defects liability period or defects correction period and it is not until the end of that period that the works can be said to be finally complete when the contractor is discharged from its obligations under the contract (except in relation to latent defects). Both employer and contractor benefit from this since it is likely to be cheaper for the contractor to repair defects itself than for a replacement contractor.

As noted in the Court of Appeal in Pearce & High Ltd vs Baxter & Anor [1999]: “The cost of employing a third party repairer is likely to be higher than the cost to the contractor of doing the work himself would have been. So the contractual right of the contractor to return in order to repair the defect is valuable to him.”

The Court of Appeal went on to find the contractor was not liable to the employer for the full cost of a replacement contractor as damages for the original contractor’s breach and that the employer could not recover more than the amount which it would have cost the original contractor to remedy the defects.

Most contracts include a mechanism enabling the employer to require the contractor to return to site after completion to correct defects

Of course, if the contractor refuses to return to site to rectify the defects an employer is within its rights to engage a third party contractor to do so, and, taking into account any notice requirements in the contract, seek to recover the costs of doing so as damages against the original contractor. But what if the contractor disputes responsibility for the defect? This occurred in a recent Scottish case, SSE Generation Ltd vs Hochtief Solutions AG & Anor [2016] which involved construction of a hydroelectric scheme. A tunnel forming part of the works collapsed eight months after take-over by the employer which forced the scheme out of commission causing a daily loss to the employer of £50,000. The contractor was only prepared to carry out the work in return for payment, and even refused the employer’s offer to share the costs on a 50:50 basis.

The employer then engaged a replacement contractor to undertake the remedial works which, needless to say, took much longer and cost far more than expected.

At the court hearing, the contractor was found not to be liable for the tunnel collapse since the contractor was not in breach of its duty to take reasonable skill and care. However, in spite of this finding, the contractor was in breach of contract for insisting that it would only return to site to correct the defect if it was paid; as a result the employer was entitled to engage a replacement contractor and the contractor could not succeed in its counter-claim against the employer for the loss of profit that it would have earned had it undertaken the repair work.

Although the court found the contractor was not liable for the tunnel collapse, it provided some guidance as to what damages it would have awarded to the employer in respect of the reasonable costs of a replacement contractor, had the contractor been responsible. The court suggested the employer should not be considered to have acted unreasonably in the adoption of remedial measures just because the original contractor might have carried out the work more cost effectively. So, in this case, the costs were “largely reasonable”.

In Mul vs Hutton Construction Ltd [2014], Mr Justice Akenhead recognised there may be circumstances where an employer might be said not to have failed to mitigate its loss if it failed to give the contractor the opportunity to rectify defects and therefore could potentially recover the costs of using a replacement contractor. These circumstances included where there were such whole-scale defects that no reasonable employer could be expected to allow a contractor back on site, where a contractor had been fraudulent, or where a contractor had made it clear it would not return to put right the alleged defects. This latter point resonates with SSE Generation vs Hochtief where the judge criticised the contractor’s refusal to return to site unless it was paid.

In summary, parties to a construction contract need to recognise that the defects regime includes rights and obligations: an employer needs to facilitate a return to site by requesting that return, and a contractor needs to return and rectify defects. Nevertheless, where an employer is justified in seeking to engage others to rectify the works, it will be unlikely to have been found to have failed to mitigate its loss.

Laurence Cobb is a partner in the construction and engineering team at Taylor Wessing. He was assisted in writing this article by Rona Westgate, a professional support lawyer at Taylor Wessing