Standard definition of defects

There is no recognised standard definition of defects.  However, a definition that is easy to follow is given in the leading textbook Hudson’s Building and Engineering Contracts as work which fails to comply with the express descriptions or requirements of the contract, including very importantly, any drawings or specifications, together with any implied terms as to its quality, workmanship, performance or design.

In plain terms, therefore, a defect is something that has a fault or a flaw:

1. in terms of the goods themselves – this may be because:- 
   (a) something does not do what it should (a defect in the ordinary sense that the thing does not work);
   (b) something that does what it ought to do but is simply not what was asked for (non-compliance with specification) or goods are of a lower standard or quality than requested:
   
   
2. in terms of defective workmanship, this would include defective setting out and positioning and defective assembly and non-compliance with accepted, or specified practices and codes:
    
3. in terms of defective design, where there is an element of choice or option in how the works are done and what materials are used and the designer fails to use proper skill and care.

The defective work or materials will amount to a breach of contract by the building contractor.  There could be liability to third parties in the tort (i.e. civil wrong) of negligence, and breach of statutory duty.

One could be forgiven for thinking that, since a defect amounts to a breach of contract, once a defect (within (i) and (ii) above) had been detected, liability by the contractor had been established and the only question is the amount of damages to be assessed.  Nothing in construction law is as simple as that.

Where the contract does not expressly give the contractor any design liability and the nature of the works is set out in detail in bills of quantities and drawings, then there is at least a strong argument for a builder to say that although the product does not work, he was not at fault since he simply constructed precisely what he had been told to do in accordance with the bills, drawings and the other information given to him.

As a general principle, a builder ought not to be liable if he simply builds exactly what he was told to do.  However, virtually no contract completely defines the work to be done and in the majority of cases, there is an element of choice to be exercised by the builder over the use of materials and the nature of the work to be done.  The contractor may unwittingly be taking on a design liability and the argument “I did exactly what you asked me to do” is not always as cast iron as it appears to be.

Nevertheless, the following passage from Hudson is generally to be regarded as good law:

“As a poor generalization, if plans and specifications are supplied to a builder to work to (especially) if the building owner employs an architect or engineer for this purpose, the contractor will not normally have to do more than carry out the work according to the plans and specification in a workmanlike manner and using proper materials, though he may well be fully aware of the purpose for which the work is required and the owner will be unable to complain if the unsuitability of the final result is due solely to exact compliance with that design subject, in cases of very obvious prospective unsuitability, to a duty of the contractor to warn the owner or his architect or engineer’.

Builders’ “defences”

When there is clearly some element of defect in goods or workmanship, contractors will often try to run one or more of the following arguments:

1. that the defect was not a breach of contract but simply “a temporary disconformity”, i.e. a temporary hiccup of the sort that may be expected in works of this kind and that the builder always intended to clear up in advance of the contract completion date or practical completion;
2. that the works were simply not buildable;
3. that the works had been accepted – either by occupation and use of the works or by certification and approval either by the architect or building owner.

Of these three “defences” the buildability defence is simply not a runner.  If a builder undertakes to carry out certain works to achieve a certain result, the fact that that result cannot be achieved is his problem.  The builder warrants that he will be able to do what he has said he will do.  This general principle is, of course, subject to express contractual terms to the contrary.  The “buildability” argument is also a separate issue from the issue of “frustration” or impossibility of performance, where subsequent events conspire to make the original scheme impossible (such as an indefinite stop on the work due to a Government order).

The “temporary disconformity” argument was dealt a severe blow by Ian Duncan-Wallace, the author of the 11^th edition of Hudson’s Building and Engineering Contracts.  This was “the bible” on construction and at various points in the 11^th edition, Mr Duncan-Wallace attacked the temporary disconformity theory:

The temporary disconformity theory arises from a speech by Lord Diplock in the case of P & M Kaye Limited –v- Hosier & Dickinson Ltd 1972 1 Weekly Law Reports at page 165.  He said:

“it might be argued that the temporary disconformity of any part of the works with the requirements of the contract even though remedied before the end of the agreed construction period constituted a breach of contract for which nominal damages would be recoverable.  I do not think that makes business sense.  Provided that the contractor puts it right timeously I do not think that the parties intended that any temporary disconformity should of itself amount to a breach of contract by the contractor”.

What Hudson said to this is:

“on grounds of both principle and practicality, a contractor will be in immediate breach of contract whenever his work fails to comply with the contract descriptions or requirements, although no doubt, as envisaged by Lord Diplock, the damages will be at best nominal in a case where he can show that he intends to rectify it at some more convenient time before completion without affecting the quality of the remaining work.  Subject to this, it is submitted that there is effectively an implied entitlement of the owner to call for prompt and timeous contract compliance, and that refusal to comply would be a repudiation by the contractor entitling the owner to rescind”.

The topic is considered below under the heading “snagging”.

The argument that works have been accepted by a building owner and there is therefore no right to claim for defects is one that is fraught with difficulty.  The position will depend upon the express terms of the contract.  Arguments over acceptance become complicated where there is an architect or engineer who certifies his approval of the works.  As a general proposition, a building owner does not accept the contractor’s works by simply taking occupation.

What is more important from the contractor’s point of view, even if a building owner accepted the work so that he becomes liable to pay for it, that does not, in the absence of a term of the contract making acceptance binding on him, prevent him from showing the work is incomplete or badly done and he can counterclaim or set off damages in an action by the builder.  He can allow judgment to be obtained against him and subsequently sue for those damages caused by defects.  He can also, if sued by the builder, simply state that the value of the works has been diminished by the defects and “abate” – i.e. reduce – the contractor’s claim and then subsequently sue the builder for the other damages that he has suffered – such as a loss of opportunity to rent out the premises.  Payment of the full price for the work is not a bar to a subsequent action by the building owner for defects.

On the other hand, where there is no independent architect or engineer and where the contract expressly says work is to be done to the approval of the building owner and there is no arbitration clause and the building owner gives his approval, the building owner becomes liable for the price of the work and is debarred from complaining of defective work.

Does failure by the architect or engineer to require defects to be remedied during the course of the works in itself prevent the owner from claiming damages for defects later?

The building owner does not waive his right to claim damages and he is not stopped from claiming damages simply because the breaches of contract or defects were visible during the course of the architect’s usual visits to site while supervising the work but no disapproval was then expressed.

Lord Upjohn in the case of East Ham Corporation –v- Bernard Sunley& Sons [1966] AC 406 said:

“it seems to me to be unreasonable … to let (the contractors) shelter behind the architect’s failure to detect faults in the course of his visits during the progress of the works.  The architect's duty is to the employers and not to the contractors …Prima facie the contractors should be and remain liable for their own breaches of contract and should not have a general release from liability in respect of all breaches which the architect should have detected but failed to detect throughout the currency of that contract".

However, although an architect's failure to issue instructions in relation to defects does not let the contractor "off the hook", a positive certification by an architect that works meet his approval, or an instruction by the architect to leave the non-complying work as it is, may provide the contractor with vital ammunition to reduce the level of damages payable or (in the case of a final certificate) raise a complete defence.  Although an architect's failure to condemn defects during the course of the works would not give the contractor a right of action in negligence against the architect (since the architect owes no duty of care to the contractor) if the contractor is sued in negligence for the defects in the works it is possible that the contractor may be able to claim an indemnity or contribution from the architect, even though the employer had not sued the architect directly.  He would do this by joining the architect into the action and claiming a contribution or indemnity under the Civil Liability (Contribution) Act on the grounds that the architect had caused loss to the employer and that the same damage had been caused to the employer by both the architect's fault and the contractor's fault but only the contractor had been sued and it was therefore reasonable for the contractor to obtain an indemnity or contribution from the architect.

Clause 3.18  of the SBC/Q form of contract

Clause 3.18 says as follows:

If any work, materials or goods are not in accordance with this contract the architect/the contract administrator in addition to his other powers, may:

1. issue instructions in regard to the removal from site of all or any of such work, materials or goods; and/or
2. after consultation with the contractor and with the agreement of the employer, allow all or any of such work, materials or goods to remain (except those which are part of the Contractor’s Designed Portion) in which event he shall confirm this in writing to the contractor but that shall not be construed as a variation and an appropriate deduction shall be made from  the contract sum;
3. after consultation with the contractor issue such instructions requiring a variation as are reasonably necessary as a consequence of any instruction under clause 3.18.1 and of any  confirmation under clause 3.18.2 (but to the extent that such instructions are reasonably  necessary no addition shall be made to the Contract Sum and no extension of time shall be given); and/or
4. having had due regard to the code of practice appended to these conditions, issue such instructions under clause 3.17 to open up for inspection or to test as are reasonable in all the circumstances to establish to the reasonable satisfaction of the architect/contract administrator the likelihood or extent, as appropriate to the circumstances, of any further similar non-compliance.  To the extent that such instructions are so reasonable, whatever the results of the opening up, no addition to the contract sum shall be made but clauses 2.28 and 2.29.2.2 shall apply unless the inspection or test shows that the work, materials and goods are not in accordance with this Contract.

The architect therefore has the power to require removal of defective works or to allow the works to remain and where they are allowed to remain to instruct the quantity surveyor to make an appropriate deduction from the contract sum.

One legal point to note is that in the case of Holland-Hannen & Cubitts (Northern) Limited v Welsh Health a similar clause to clause 3.18 was interpreted to mean that the architect's power was simply to instruct the removal of work or materials as not in accordance with the contract.  Therefore, a notice that did not require anything to be removed was not valid - so that an architect could not simply say "put right ingress of water".  He must direct specifically what was to be removed and replaced.  Under clause 2.10 SBC/Q there is also a power for the architect to instruct that errors in setting out shall not be amended and an appropriate deduction shall be made from the contract sum.  

The exercise by an architect of his powers under clause 3.18 (and 3.19 relating to defective workmanship) is of great significance to both main contractors and sub-contractors.

Often a decision about what should be removed appears drastic at the time but in the context of the project as a whole, retrospectively it turns out to be the right thing to do.  A failure to order works to be removed often results in very significant "knock-on" consequences to the job as a whole, causing massive disruption and delay.

From the point of view of a sub-contractor, no decision by the architect under clause 3.18 can be powerful evidence that he can use against a main contractor who refuses him payment.  The main contractor is perfectly entitled to say that he does not have to pay for work that is not properly executed.  On the other hand, if the main contractor has had the opportunity to draw defective works to the attention of the architect and the architect has not condemned the works and required them to be removed or to remain subject to a deduction in the contract sum, then any set-off made by the main contractor on the grounds of defective works is open to question and is certainly challengeable in an adjudication.

Under the DOM/1 conditions (subsequently DSC/C and now SBC/Sub) the contractor can order the removal of non-complying work or its rectification on his own authority, but unless that order follows on the architect's instruction under clause 8.4 (now 3.18 of SBC) of the main contract ordering the removal of the works, the main contractor must consult with the sub-contractor and have regard to the code of practice known as Code of Practice A attached to the DOM/1 conditions.  Under this code of practice, regard has to be had to various matters including any technical advice that a sub-contractor has obtained in respect of the non-complying work, current recognised procedures and other relevant matters in general.

Furthermore, DOM/1 and DSC/C and SBC/Sub provide that the main contractor cannot issue an instruction for removal, rectification or consequential variation to the sub-contract works if the approval of the quality of the work is a matter for the opinion of the architect under the main contract unless the architect has issued an instruction under the main contract saying what is to be done about the work  (this instruction will now be under SBC 3.18 or 3.19 supported by reasons under 3.20).

Supposing the main contractor does not order the removal of the non-complying sub-contract work but instead following on the decision of the architect under the main contract, he allows the work to remain.  In that case, the DOM/1 form of sub-contract provides that the main contractor must notify the sub-contractor in writing that the architect has allowed the works to remain and "an appropriate deduction shall be made from the sub-contract sum" (this also applies to SBC/Sub).

If the architect does issue instructions under clause 3.18 that require the work to remain subject to a deduction in the contract sum, then the sub-contractor is entitled from the main contractor to the benefits of the main contract.  He is therefore entitled to know what deduction is being made under clause 3.18 because of his allegedly defective work and to receive fair payment after that deduction has been ascertained.

If the architect orders that the sub-contractor's works are removed then there are potentially dire consequences for the sub-contractor since he may face not only the costs of removal and rectification, but also claims from the main contractor based on delays and disruption to other trades.  Nevertheless, the sub-contractor then has the opportunity to accelerate so as to make good any time lost by his defects.

From the main contractor's position, a decision under clause 3.18 to remove the works and replace them may, but will not necessarily, entitle him to make a set-off against his sub-contractor.  He will not have to pay the sub-contractor for the defective works, but once they are made good he will have to demonstrate that he has suffered real loss in order to have a valid set-off.  In light of the case of Chatbrown -v- McAlpine, it is unlikely that he will be able to set-off delay losses unless and until he is himself in actual delay under the main contract and suffers actual losses in consequence.

Where the decision is that the works should be left as they are and a deduction should be made in the contract sum, then there is plenty of scope for argument as to what the deduction should be and how the defective works should be valued (see below) and.

Practical completion

Even though the expression “practical completion” has for a long time been incorporated into many of the standard forms of building contract, and in particular the JCT forms, the contracts have failed to define the term clearly (except in the case of the Major Projects form).

The reality, of course, is that building projects are complex and that the moment at which practical completion is achieved must be considered in all the circumstances of each individual project.

Therefore, the meaning of practical completion derives more from its significance as a particular point or stage in the contract than from any general analysis of when that stage is deemed to have been achieved.

The significance or practical completion

1. Practical completion operates as a milestone and watershed in building contracts.  Its position in time relative to the date stipulated in the contract for “contractual” completion or any extension to that date is of fundamental importance.  If the contract works achieve practical completion after the contractual completion date, or any extension to it, then assuming that the formalities of the contract have been complied with, the employer will be entitled to deduct liquidated and ascertained damages.
2. If practical completion precedes the contractual completion date, there will be no liability for liquidated and ascertained damages.
3. Where practical completion occurs after the contractual completion date or any extension to it, then achieving practical completion brings to an end the contractor’s liability for liquidated and ascertained damages.
4. Practical completion, where the contractor is responsible for insuring the works, brings to an end the contractor’s responsibility for insurance of the works.
5. As a general rule, the first half of the retention monies falls due for release on practical completion.
6. The date on which practical completion is achieved marks the beginning of the defects liability or rectification period that will be defined by the contract but is usually a specific period of 6, 12 or 24 months commencing with practical completion.
7. Practical completion may be achieved by certification (under the main JCT contracts) or by notification by the domestic sub-contractor without objection from the main contractor, or alternatively by agreement between the main contractor and domestic sub-contractor on the proper date, or else it is deemed to be the date of practical completion under the main contract.
8. The inter-relationship between practical completion and contractual completion will also affect a main contractor’s right to set off under the JCT Domestic Form of Sub-Contract SBCSub (see Chatbrown -v- Alfred McAlpine Construction (Southern) Limited 35 BLR 44).  Even if a domestic sub-contractor achieves practical completion after his subcontract completion date, the main contractor may still not be able to set off delay damages unless and until practical completion under the main contract is delayed beyond the contractual date in the main contract.

Attempting to define practical completion

Hudson, 10^th edition at page 254 stated:

“Since the maintenance provisions contemplate that there may be defects needing to be put right during the maintenance period, and liquidated damages provisions contemplate that the Employers damage due to delay in completion has come to an end, it seems clear that practical completion means a sufficient degree of completion to permit occupation and use of the Works by the Employer and the departure of the Contractor from site, but not a complete and perfect discharge of every last contractual liability of the Contractor with regard to the quality or finish of the Work”.

Although this was a sensible definition it is no longer really sound.  Several later cases indicate that practical completion occurs not when beneficial occupation is possible but when all but very minor defects are made good.

Emson Eastern Limited -v- EME Developments Limited 55 BLR 117

This case is of interest since it examines the question “What does practical completion mean?”

Judge Newey, the presiding judge, looked at the following cases:

1. Jarvis -v- Westminster Corporation (1969).  This case went to the House of Lords.  In the Court of Appeal, Salmon LJ said of “practical completion”:

“I take these words to mean completion for all practical purposes, that is to say for the purpose of allowing the employers to take possession of the works and use them as intended.  If completion in clause 21 meant completion down to the last detail, however trivial and unimportant, then clause 22 would be a penalty clause and as such unenforceable”.

Judge Newey in the Emson case then quoted the words of Lord Dilhorne in the House of Lords in the Jarvis case:

“The contract does not define what is meant by ‘practical completion’.  One would normally say that a task was practically completed when it was almost, but not entirely finished, but ‘practical completion’ suggests that that is not the intended meaning and what is meant is the completion of all the construction work that has to be done”.

1. Judge Newey then referred to his own judgment in the case of H.W. Nevill (Sunblest) Ltd -v- William Press & Son  Ltd (1981) in which he said:

“I think that the word “practically” in Clause 15(1) [of JCT 63] gave the architect a discretion to certify that William Press has fulfilled its obligation under Clause 21(1), where very minor de minimis works had not been carried out, but that if there were any patent defects in what William Press had done the architect could not have given a certificate of practical completion.”

Judge Newey concluded that the standards of practical completion discussed by Lord Justice Salmon and by Lord Dilhorne in the Jarvis case were different.  He concluded that in the Nevill Sunblest case, he had sought a balance between the two positions and he felt that this was right.  It is questionable whether Judge Newey was entitled to seek a balance between the judgment of the Court of Appeal and the House of Lords in the Jarvis case.  Strictly, he should have followed the judgment in the House of Lords.  Nevertheless, Judge Newey’s view that practical completion occurs where all but very minor de minimis works have been done now seems to prevail and it is probably no longer right to equate practical completion with beneficial completion.

Patent and latent defects and practical completion

It seems obvious that the presence of latent defects at the time of practical completion will not affect the validity of the practical completion certificate, albeit that the latent defects manifest themselves at a later stage (whether during the defects liability period or after the final certificate).  It is in the nature of latent defects that they are unknown.  If they manifest themselves during the defects liability period they can be corrected during this period or within a reasonable time thereafter, if so instructed.  A list of defects is often required to be prepared by or on behalf of the employer 14 days after the period ends.

The position with regard to patent defects present before practical completion is more difficult.  Judge Newey said in the Nevill (Sunblest) case, that if there were patent defects other than de minimis work, the architect could not have given a certificate or practical completion (validly).

However, in the case of William Tomkinson & Sons Limited -v- The Parochial Church Council of St. Michael and Others (1990) Construction Law Journal, Volume 6 No. 4 at page 322, His Honour Judge Stannard examined Clause 17 of the Private Edition of the JCT 1980 Main Contract which referred to any defects “which shall appear within the Defects Liability Period” and which required such defects (with some exceptions) to be listed in a schedule by the architect and delivered to the contractor (by way of an instruction to remedy such defect within a reasonable time) not later than 14 days after the expiry of the defects liability period.  Judge Stannard Said:

“The words ’appear within’ are fairly capable of meaning ‘shall be apparent within’ as well as ‘shall become apparent within’.  On this basis the writers of the textbooks, insofar as they have considered the point, have concluded that the … phrase in clause 17  of the main JCT contract (‘appear within the defects liability period’) extends to defects which appear prior to practical completion …This construction avoids absurdities which would arise if the contractual arrangements for dealing with defects were to distinguish between those arising prior to and after the date of practical completion”

This begs the question that if the Contractor is obliged in the defects liability period to remedy patent defects that were present before practical completion, as well as other defects that manifest themselves in the defects liability period, is it wrong for an architect to certify practical completion when patent defects remain outstanding?  Is, for example, the architect entitled to rely upon the fact that the value of the last half of the retention money is sufficient to rectify any defects that remain outstanding when he certifies practical completion?  Another question of considerable practical importance which appears to remain unanswered is whether the practice of certifying practical completion save for a list of excepted items is contractually valid.  There appears to be nothing in the scheme of the JCT contracts that allows for this.  Hudson says:

“Some architects appear to take the view that, in a situation of patent defects during the construction period, they can defer their making good until later under the terms of the defects liability clause and that position has apparently been supported in some textbooks.  Except by ex-contractual agreement, this does not, however sensible, seem possible on the wording of the RIBA/JCT contracts.”

The defects liability period or rectification period

JCT contracts since 2005 refer to the defects liability period as the rectification period.  The old terminology is used here as many cases pre-date the change.

It is generally accepted that the defects liability period gives a contractor a right and an obligation to rectify defects during that period.

However, the contract clauses that create defects liability periods within the standard forms of building contracts are definitely not exclusion clauses.

In the Nevill (Sunblest) -v- William Press case Judge Newey concluded that the defects liability clause merely created a simple way of dealing with the situation created by defective work in breach of contract.  It was not to be read as depriving the injured party of any of his rights.  On this basis, the contractor would remain liable for defects that appeared in the defects liability period as long as claims for those defects were not barred under the Limitation Act.  What is more, to quote Hudson:

“In the absence of express provision, the remedies under these clauses are in addition to and not in substitution for the common law rights, and even where the defects have appeared within the period the owner may sue for damages rather than call on the contractor to do the work, subject, in that event, to the possibility of the owners damages being limited if he has acted unreasonably to the costs to the contractor of doing the work at that time, rather than the possibly greater costs of bringing in another contractor ..

Sufficient notice has to be given to the contractor to give him the opportunity to rectify the defects if the employer does not want to have his measure of damages reduced in the above way.

There is usually no duty on the employer to instruct the contractor as to how to remedy defects.  The contractor cannot refuse to proceed to rectify simply on the basis that he does not have instructions on how to do the rectification.

Measure of damages

In building contracts the measure of damages for defects will normally be the cost of making good and repair.  Where this is unreasonable the lower measure of diminution in value caused by the defect may be allowed.  The measure of damages will also usually include consequential damages such as compensation for loss of use of the building during repairs or liabilities incurred by the employer to third parties including other contractors and sub-contractors.

The employer must be able to show a sufficient link between the breach of contract and the damage to show that the damage was caused by the breach of contract.

Under the well-known case of Hadley -v- Baxendale, the employer would be able to recover:

1. Losses likely to arise in the usual course of things from the breach of contract; but also
2. Losses outside the usual course of things but within the contemplation of the parties at the time the contract was made as a likely result of the breach.

The general rule on compensation is that the wronged party is to be placed, so far as money can do it, in the same position as he would have been in if the contact had been properly performed.

Although the employer has a duty to mitigate his loss (i.e. keep it as small as possible) that duty does not extend to a requirement to detect breaches.

Very basically, where defects are discovered and the employer claims financial compensation, he has three remedies, which are:

1. simply set up the defence that the work has not been done properly and that the contractor is in breach.  Since the builder has the obligation to complete his building works and the standard forms of contract require payment only in respect of works properly executed, this appears to be a good defence.  According to Hudson, “It has been authoritatively held that, where an owner alleges defective or omitted work, or disputes the amount or value of work done, these constitute true defences to a claim for work done and are not set off at all”;
2. rather than rely upon a defence of “works not properly executed” to take the more prudent and commercial course of simply pleading an abatement or reduction in the value of the works caused by the defect;
3. to raise a set off in respect of consequential losses arising out of the defect – e.g. time related losses or loss of revenue.

The general rule that the cost of rebuilding or repair is the appropriate prima facie measure of damages unless it is out of proportion with the injury caused to the employer – i.e. that the employer gets his rebuilding costs unless rebuilding is unreasonable – is what makes the JCT procedure for instructing how to deal with defects so important.

If the architect says that the works should be left as they are, then that is a very clear indication that rebuilding is not a reasonable measure and that diminution in value is appropriate.

Where rebuilding is required, the building owner does not have to give credit for betterment or improvement (Harbutts Plasticine -v- Wayne Tank & Pump Limited [1970] 1 QB) but that applies only where the method of remedying the breach that gives rise to betterment is the only practicable method. Similarly, owners do not have to take into account a profit they make on a subsequent sale of the building (i.e. the builder cannot turn round when the employer subsequently sells the building at a profit and say that the owner has suffered no real loss because of his defective work).

The damages for repairs are assessed at the date of the repair and not at the date of the breach of contract (East Ham Corporation -v- Bernard Sunley & Sons [1966] AC).  At least this is the case in the absence of unreasonable delay by the owner after the discovery of the defect.

There are effectively three different ways of quantifying damages for defects:

1. cost of repair/replacement;
2. diminution in value;
3. the difference in cost to the builder between the actual and the specified work.

The third basis of valuation would apply where, for example, the cost or repair/replacement was not considered reasonable but the builder had deliberately made a substantial cost saving by not complying with the specification and that saving was greater than the diminution in value resulting from the non-complying works.  In that case, the court may effectively order the builder to give back the benefit of the saving that he made by his breach of contract.

The Ruxley case

Ruxley Electronics & Construction Limited -v- Forsyth (73 Building Law Reports page 1) concerns a swimming pool.

Mr Forsyth had a swimming pool built.  He specified that it should be 7 foot 6 inches at the deep end.  It was built only to a depth of 6 foot 9 inches.  He did not pay for the pool.  He was sued for payment and he sought to set off the cost of rebuilding the pool to the right depth against the price of the pool.  The fault could not be remedied without rebuilding the pool, which would have cost £21,000.00.

At the trial, the judge decided that the slight shallowness did not decrease the value of the pool.  He also considered that Mr Forsyth did not intend to rebuild the pool.  He therefore awarded him only £2,500.00 on his counterclaim for loss of pleasure and amenity.  Mr Forsyth had to pay for the pool.

On appeal, Mr Forsyth claimed the full replacement cost of the pool and undertook that he would rebuild the pool if he won.  The Court of Appeal gave him the full replacement costs.  Ruxley appealed to the House of Lords.  The House of Lords restored the decision of the trial judge.

The House of Lords made the following points:

1. Contractual law requires that a person affected by a breach of contract should be given financial compensation that will, so far as money can do, place him in the position he would have been in if the contract had not been broken.  However, this does not enable the wronged person to insist on the money equivalent of performance.  The court has to work out what loss has actually been suffered by the breach of contract and pay him that loss.
2. The reinstatement cost is not the only way of valuing and compensating a loss suffered and it is not the appropriate way where it would be out of all proportion to the breach of contract.  The court can instead award the reduction in value of the finished works, i.e. the difference between the value of the works with the defect and the value without the defect.

Furthermore, Lord Lloyd of Berwick said, “If reinstatement is not the reasonable way of dealing with the situation, then diminution in value, if any, is the true measure of the plaintiff’s loss.  If there is no diminution in value, the plaintiff has suffered no loss.  His damages will be nominal”.

Applying the Ruxley case to commercial building contracts

The facts of the Ruxley case concerned a contract for pleasurable amenity.  Most building contracts are commercial contracts under which loss of amenity would not be awarded.  However, the Ruxley case does have direct relevance to ordinary commercial building contracts.

The case tends to indicate that employers and main contractors who argue that they only have to pay for works that are ‘properly executed’ may be taking an over-simplistic view.  Mr Forsyth’s argument “I want a perfect swimming pool.  I will not pay until I get one”, failed before the House of Lords.

Where works are defective and that results in a reduction in value of the thing that has been built then there is no doubt that the employer and the main contractor if the works are sub-contract works are entitled to an abatement reducing the net valuation.

However, if non-complying work or equipment is non-complying only in the strict sense, without any clear measurable loss of value, then the builder responsible for the defective work may be able to quote Lord Lloyd of Berwick in the Ruxley case and point out that, “if there is no diminution in value, the plaintiff has suffered no loss.  His damages will be nominal”.

In simple terms, the employer or main contractor cannot simply withhold money or reduce his valuation just on the strength of a nominal non-compliance by a sub-contractor.  He must be able to prove actual loss before he can make an appropriate reduction. 

The requirements of the standard forms that payment only has to be made for work that is properly executed also has to be read against the contractual stipulation that where works are allowed to remain, only an appropriate reduction can be made.

Where the contract is a contract for pleasurable amenity then, on top of any actual diminution in value (or on top of nominal damages if there is no actual diminution) the court can award an additional sum representing the loss of pleasure and amenity.

Snagging

Snagging is a builder’s term.  It is not a legal term and it almost certainly has no contractual validity.  It seems to describe the rectification of minor faults and defects – either by the builder of his own initiative or at the requirement of the employer or architect.

The use of the term snagging is a practical recognition that there will be minor flaws and omissions that need to be sorted out when the bulk of building work has been done.

If there is a general recognition of the term “snagging”, that minor defects require putting right at the end of most building contracts, then this lends support to the ‘temporary disconformity’ argument.  However, as we have seen, the argument that a temporary disconformity is not a breach of contract no longer finds favour.  

This raises a practical dilemma.  In practice, there will be snags and they will require to be rectified.  The question is how to allow for this within the scheme of a system of law that makes no allowance for temporary disconformity.

Snags and snagging must be built into contract programmes.

In Walter Lilly -v- Giles Patrick Mackay [2012] EWHC 1773 (TCC) Mr Justice Akenhead decided that snagging is an inevitable part of construction projects, so time spent in snagging is not delay caused by the contractor, unless it is excessive.

It is easy to talk in terms of “temporary disconformities” as being “defects” in the case of non-mechanical works.  Where plant of any kind is being installed and it has to be put into operation, then the act of putting the plant into operation, including its commissioning, is always part of the contractual work.  It must be a very grey area indeed to decide where commissioning ends and “snagging” or rectification of temporary disconformities begin.

The effect of the final certificate

The old position was this:

In the case of Crown Estate Commissioners -v- John Mowlem 70 BLR at page 1, the Court of Appeal heard an appeal from Judge James Fox-Andres who had decided that the issue of a final certificate under clause 30.9.1.1 of the JCT Standard Form, Private With Quantities 1980 was conclusive evidence only as to matters relating to the standard and quality of the works that were expressly left to the subjective satisfaction of the architect.  The question of whether something did or did not comply within an objective standard, such as a British Standard, was not, therefore, finally resolved by the issue of a final certificate.

The Court of Appeal decided that all matters of standards and quality of work and materials were for the reasonable satisfaction of the architect and so were concluded by the final certificate in the absence of a notice of arbitration within 28 days of the issue of the final certificate.

The Court of Appeal’s decision in the Crown Estates case was in line with the earlier case of Colbart  -v- Kumar 59 BLR 89, which dealt with the final certificate in the IFC 84 form of contract.

The Court of Appeal said:

“Where the final certificate does become conclusive evidence, the effect is that any claim in an arbitration (brought after 28 days) which seeks to support some provision of the final certificate is bound to succeed and any claim which seeks to challenge a provision of the final certificate is bound to fail, without any hearing on the merits”.

Notwithstanding this, since the architect could only be satisfied about the patent state of the works and could not possibly know about latent (undiscoverable) defects, a subsequent claim brought after 28 days from the date of the final certificate, but relating to latent defects was not necessarily inconsistent with the final certificate and not necessarily bound to fail.

The current position which has now been effective for some years is this:

The JCT have amended the main contract to make it clear that the final certificate is only conclusive about matters expressly made subject to the architect’s subjective approval.  So the final certificate is nothing like as significant as it was following Crown Estates.  Compliance with objective standards can still be challenged.

The Latent Damage Act 1986 and the limitation period for brining claims in contract

The normal limitation period is six years from the date of the breach of contract where the contract is in writing (but not deed) or oral.  Where the contract is under seal (i.e. a deed), the period is twelve years.

In the tort of negligence, the normal period for bringing a claim is six years from when the damage occurred.

The Latent Damage Act 1986 applies only to actions for damages for negligence, which excludes actions brought for breach of contract.  It allows an alternative limitation period to the traditional six year period for actions in negligence, so that claims can be brought within three years from the date of actual or ascertainable knowledge of the existence of the cause of action.

Therefore, if the claim is brought more than six years after the damage occurred, but within three years of actual knowledge of it, it will be in time subject to the following qualification:-

“there is an overriding “long stop” of fifteen years dating not from the damage but from the relevant breach of duty complained of.  If the claim is brought more than fifteen years after the breach of duty then it is time barred.”

One important point to note about the Latent Damage Act 1986 is that, as regards the three year “knowledge” period, the Act confers a fresh right of action on each successive owner of the property who acquires it within the long stop of fifteen years, provided that no preceding owner had knowledge of the material facts giving rise to the claim.  You cannot, therefore, inherit the residue of the three-year period from a previous owner who knew of the defects but did nothing.

Concurrent liability in contract and in the tort of negligence

After a lot of legal argy-bargy, it now seems to be generally recognized that builders can have a concurrent liability running at the same time in contract and the tort of negligence (see for example Holt –v- Payne and Skillington The Times 22.12.95).

However, the position still appears to be that liability in tort will not be upheld where there is a concurrent liability in contract if the tortious liability would be “so inconsistent with the applicable contract that in accordance with ordinary principle, the parties must be taken to have agreed the tortious remedy is to be limited or excluded” (Henderson -v-  Merrett Syndicates Ltd House of Lords 1995 2 AC 145).

Negligence, economic loss and damage to the thing itself

There is no room for more than a thumbnail sketch of this topic.

However, where, as a builder, you face claims from people in the tort of negligence for alleged negligent work then there are two basic points to note:

1. If you are a main contractor, you are not generally liable for the negligence of your sub-contractors unless the work is of an inherently dangerous nature;
2. If the work that you did (whether as a main contractor or sub-contractor) does not pose a threat to health and safety and has only caused damage to “the thing itself” (i.e. the work that you did was defective but it did not damage other property or other work) then you are not generally liable in negligence.

If the thing that you built is defective, then in English law the argument runs that the injured party has suffered only economic loss and (with some exceptions) there is no right of action for economic loss arising out of negligent acts.

On the other hand, under what is known as the “complex structure theory” a building may be regarded not as a composite whole but as a series of separate parts, each of which constitute separate properties.  If the part of the building that you installed fails but does not damage other parts of the building, then you would not be liable in negligence alone.  On the other hand, if the part of the building that you installed failed and damaged other parts of the same building, then you could be liable in negligence of the other parts (the “other property”) since then you have negligently caused damage to other property.  Damage to that other property would be regarded as physical damage, which is actionable in negligence and not simply economic loss.

The complex structure argument has been challenged and criticized in several cases but is not entirely dead.

The moral is that if you are sued by a third party with whom you are not in contract, then you may escape liability altogether if the work was done by your sub-contractor or the only defects are in your own work, which did not cause damage to other parts of the building.