A recent case breaks new ground in dealing with how ‘appropriate deductions’ for defects can be deducted by the employer

Ryan Greening

During my usual monthly trawl through the TCC judgments, I found upon what had all the hallmarks of being a notable JCT based judgment. The case I’m referring to was Mul vs Hutton Construction and appeared to break new ground in dealing with how “appropriate deductions” for defects can be deducted by the employer.

The background to the dispute is rather interesting, if not terribly unusual. A substantial contract was placed by Ms Oksana Mul (the employer) in the sum of circa £3m to undertake substantial extensions and modifications to a large country house in Kent. The contractor (Hutton Construction Ltd) appears to have commenced the works in around May 2008 and a practical completion certificate was issued on 14 May 2010, along with a considerable list of works, said to be defective and/or incomplete. The contractor had also been provided with a final payment certificate in the sum of circa £4m (the judgment does not state what sum the Contractor had applied for). Subsequently it appears that the employer arranged for very considerable “fit-out” type works to be undertaken.

Proceedings were commenced on 17 October 2013 after a period of correspondence exchanges and meetings between the parties in an attempt to satisfactorily agree a resolution to the defects. Rather obviously these discussions were fruitless, and upon further reading it becomes apparent that the main dispute between the parties was over what assessment method is correct when evaluating the employer’s deductions under the contract. The employer’s claim is principally for the cost of putting right the claimed defects by another contractor, whereas the contractor’s position was that it should be assessed as the cost to them (if in fact any) of remedying the items.

The decision in short was that the term “appropriate deduction” simply means a deduction that is appropriate in all the circumstances

The judgment rather eloquently sets out at paragraphs 8-15 the particular contractual obligations of the parties which I do not intend to duplicate here save to state that the contract was a largely un-amended JCT Intermediate Form (presumably 2005 or 2011). Mr Justice Akenhead also set out and considered a number of relevant authorities, albeit his final analogy was that they did not deal with the particular “appropriate deduction” argument that was currently being placed before the court.

In a useful summary of the contract provisions it was set out that the rectification period commences on practical completion, whereby the works are certified as being practically complete (albeit not always factually complete). From this point on the contractor does not have an entitlement to be on site and the employer can no longer deduct liquidated damages. If there are any defects beyond this date the contractor is principally in breach of contract and hence a cause of action for damages by the employer is created. It was said that often but not always, this damage is the cost of putting right those defects. It is the contract administrator’s responsibility to notify the contractor of any defects and it was suggested that this must carry an obligation upon the employer to co-operate reasonably which usually means to allow the contractor access to do the making good.

The decision in short was that the term “appropriate deduction” simply means a deduction that is appropriate in all the circumstances. There were some 11 reasons for coming up with such a generic statement, not least of which was that if the drafters of the contract had wished a distinct evaluation methodology they could easily have drafted such, and they did not.

Unfortunately the case was upon preliminary issues and hence it probably has not yet gone far enough to satisfactorily test the application of the term “appropriate deduction”. However, it appears that this case is destined for more court time and hence this, amongst no-doubt other issues, will be brought to trial at some point in the future.

Mr Justice Akenhead also took the opportunity to discuss the practise of issuing a practical completion certificate prior to the works being practically complete. In his judgement (this clearly being something which we would do well do adhere to) the implications of a false or premature issue of the certificate is that it will be unclear when the rectification period runs from (as arguably this cannot occur until practical completion has properly occurred), or it may be argued that the rectification period runs from the certificate date (which essentially shortens the rectification period).

Ryan Greening is a director at Bennington Green