A hard way to earn £2

What happens to works unfinished at partial possession? If an employer has gone into partial possession because it urgently needs to fit out the building, what does the contract say about finishing off the works? In most cases it says nothing. In JCT80 it says nothing, which is partly why Birse Construction and Eastern Telegraph found themselves locked in litigation several years down the track.

ET commissioned the construction of a training college that in 1995 won the building category award in Concrete magazine. Despite this accolade, there were problems, particularly over snagging. ET had gone into partial possession of parts of the building before it had achieved practical completion, so that they could be fitted out before students arrived. But once ET was in occupation, access was difficult for Birse. Practical completion was reached in December 1993 and in March 1994 there was an agreement between ET and Birse intended to resolve remaining issues such as snagging and retention.

A retention of £470,000 was held pending completion of the snagging items and all but £13,725 was released on certificates of partial making good of defects. An architect’s instruction was then issued in 1996, instructing Birse not to make good any defects until further notice.

Some years later, proceedings began between Birse and ET. Birse claimed the balance of the retention and ET claimed £865,000 for the cost of putting right outstanding defects. A huge schedule was produced. One item was cleaning mud from a door that had been left untouched since 1993 but for which ET now claimed £36.69. Other items were more substantial, such as replacing doors that had warped.

The issues were complicated by the fact that by the time the case came to trial, ET had for some years been attempting to sell the property. Was ET entitled to the cost of completing the “snagging defects” or were its damages limited to the diminution in value of the building? In this case, the latter seemed to have been virtually nil. The judgment contains a careful analysis of the law relating to that thorny issue: should damages for breach of contract be assessed by reference to the diminution in value of the building, or the cost of reinstatement or rectification of defects, which is usually much higher?

The judge held, first, that by allowing the outstanding snagging items to be referred to in the 1994 agreement as “snagging defects”, Birse had waived its right to argue that any of these items were not in fact its responsibility. Nevertheless he held that ET was entitled to nominal damages of £2. He took into account the architect’s instruction telling Birse not to carry out any more making good until further notice. He held that ET would have to pay the balance of the retention less anything that Birse was obliged to pay by way of abatement, set-off, or counterclaim. He did not consider which of these was appropriate and commented that the distinction between the three “is and has for some time been distinctly passé”.

The court decided ET had no intention of carrying out remedial works. It had decided in 2000 that it would sell the college and had not felt the need to do these works to make the building more saleable. Where ET had not rectified “defects” after 10 years, the court had serious doubts about its intention to do so. “It defies belief that there were any items that truly affected the general appearance, comfort and amenity of the college.” The pleaded claim for £865,000 for these items was therefore rejected. ET could not rely on the lack of a certificate of making good defects in order to withhold the retention either, though it could still exercise its right of abatement, set-off or counterclaim.

It is clear from this case that it is possible for a claimant to lose its ability to recover damages for breach of contract for failure to complete snagging items. If these have not been rectified by the original contractor or by the employer after a period of years, it will be difficult to persuade the court that these items really do need to be rectified, or that the contractor should pay for the cost of doing so. Where a building contract is under seal it might appear that a claim can be brought several years after practical completion. In practice, however, an employer may find that it is difficult to do so.

Gillian Birkby is a partner at Fladgate and Fielder. You can email her at gbirkby@fladgate.com