What happens when the Claimant/ himself does not come to the adjudicator with "clean hands"? What happens if the Claimant has been accused of defective work which has resulted in non-payment by the Respondent? Pay Now, Argue Later will have a bearing on the payment dispute as the adjudicator will be tasked in determining the extent of work done and decide the amount to be paid.
Defective Work In Construction Projects
The nature
of defective work
The nature and type of defects in construction and engineering projects can vary, and not forgetting that the point at which the defects become apparent. On one end of the scale minor defects can easily be corrected before the
building or plant is handed over to the employer, while at the other extreme major or significant defects may occur long after the original work has been completed
and require extensive remedial works to fix.
Some of the defects can arise because the work was not carried out in a
'good and workmanlike manner' in accordance with good practice or a particular
design, or because the wrong materials have been used – matters which would
usually be the responsibility of the building contractor and its supply chain.
Alternatively a particular design is
not working in the manner that it should as the designer could be at fault.
In the frequently used design and
build scenario, the contractor would normally have primary liability for both
types of failure – although it may have consequential claims against its
designers and supply chain.
On one view identifying a defect should be easy: something has
usually not been provided in the manner that it should have been, the
foundations of a building could crack and subside, the air-conditioning units
fail or the roof leak. However, in considering 'defects' as a matter of
principle, work may be defective even if it has been carried out with all due
skill and care but it fails to meet a particular specification.
For example,
brickwork may be erected correctly but the wrong type or colour of brick could
have been used in breach of planning permission.
Potentially difficult arguments can arise where work has been
carried out incorrectly by the contractor but the architect or engineer's
design is also at fault. In these situations, the contractor may deny liability
on the basis that even though the work was carried out defectively, it did not
cause the damage complained of. An employer will not be as concerned as the
contractor and architect to get to the bottom of exactly who is at fault for
that as long as it can claim against one or both of the parties and both still
exist.
It is often important to distinguish between patent and latent
defects. A patent defect is one that is detectable either at or before apparent
practical completion or during the defects
liability period. In
the past, the courts have held that patent defects must be apparent on
inspection but need not necessarily have been seen by the people carrying out
that inspection. By contract, a latent defect is one which has been concealed
in the works and may not become apparent for many years.
Typical contractual provisions
The standard form construction contracts contain provisions
dealing with the treatment of defective work during the course of construction,
at completion and during the defects liability or rectification period. By way
of illustration, the contract form may provide that the employer may issue instructions
requiring the opening up for inspection of any work covered up or tests of
materials or goods or executed work. The cost of opening up or testing is added
to the contract sum, unless the inspection shows that the materials, goods, or work
are not in accordance with the contract - the contractor then bears those
costs.
The question of defects often arises in the context of practical
completion (PC), and whether or not completion can be said to have occurred
even though minor defects exist. In the absence of any definition, guidelines
have been developed from case law which broadly state that:
- · at the date of practical completion the work should be complete and free from patent defects;
- · PC will be achieved notwithstanding the presence of latent defects, because such defects are by definition not apparent;
- · any defects which are not apparent at PC which do become evident during the defects liability period may be addressed in that period;
- · discretion usually exists to certify PC when minor work remains to be carried out, although it is possible to insist on completion of all snagging items before PC.
Rights and remedies
An issue which often arises in the context of construction
projects is whether the contractor has a 'right to return' to the site to
remedy defects. However, there is no such right unless one is specifically
conferred upon the contractor by the defects liability provisions or otherwise
in the contract. Where there is no express right for the contractor to return
to the site to attend to remedial works, or the relevant period has passed, an
employer is entitled to employ others to rectify defects. However, where a
third party is appointed and that is thought to be unreasonable in the
circumstances of the case then the employer may be criticised for failing to
mitigate its loss.
The standard forms use different terminology for the defects
rectification period, including 'rectification period', 'maintenance period'
and 'defects correction period'. The nature and scope of such periods depend on
the mechanism adopted in the particular contract, and they are typically seen
as applying to the whole of the works, the relevant part or section. The length
of the period will be negotiated by the parties and the nature of the works to
be undertaken.
In circumstances where defective work is present, several legal
remedies may exist. Starting with remedies in contract, where defective work is
present as a consequence of a breach of contract then a claiming party is
entitled to be put into the position it would have been if the work had been
correctly carried out. This is achieved by a monetary award. The claiming
party's losses may be assessed on the basis of:
- · the reasonable cost of repair of the defect work;
- · the difference in value or loss of amenity of the relevant work.
In strict legal terms the date for assessment of the loss is
when the defect is noticed, but when considering the cost of repair the date of
assessment is usually taken as when it is reasonable in the circumstances to
undertake the relevant works. A party seeking to bring an action for breach of
contract in relation to defective works has six years to do so if the contract
is executed under hand (signed by a single, authorised representative) or 12
years if the contract is executed by deed. Those periods run from the date of
the breach of contract. In the case of patent defects this should be obvious,
as it is the date when the defective work is carried out, but for latent
defects the date of cause in action is usually taken as being the date on which
PC is certified or given. Similar considerations would arise in relation to
allegations of defective design.
Betterment
Where
repair works result in a better or newer building, a deduction in damages will
not usually be made if the claiming party had no reasonable choice but to
undertake the works in that way. However, if a party chooses to rebuild to a
higher standard than was strictly necessary it may only be entitled to recover
the cost of those works less a credit for the betterment element of it. While
each case will turn on its own facts, if works are said to be unnecessarily
expensive the test to be applied is whether the claiming party acted reasonably
in proceeding in that way. If not, it may struggle to recover the additional
costs.
Pure Economic Loss
Defects in buildings can also pose
significant problems for subsequent owners who take on responsibility for a
building without having procured the relevant work. This is because there would
be no claim in contract, unless separate rights or a warranty had been
conferred on that new owner. If this situation arises and the subsequent owner
has no remedy in contract it raises the question over whether the owner can
recover its costs and losses in any other way, for example in tort. The general
rule is that damage to a building which is attributable to a defect in the
structure of that building is not recoverable – such damage is known as 'pure
economic loss' as the only loss sustained is the fact that the new owner has
paid too much for the property.
In 2011 the Court of Appeal clarified that,
ordinarily, contractors will not owe duties not to cause pure economic loss.
Therefore they will not owe such duties to subsequent owners.
Limited exceptions may apply if the new owner is able to show
that the contractor had assumed responsibility for that loss through the
provision of skilled advice or services or at least some design responsibility,
and that the owner had relied on that advice or services or design. Such
situations have been held to arise, for example, where a specialist
subcontractor provides services to the contractor who employed it and where a
civil engineer provided design services. However, such situations are
complicated and the preferable route would always be to ensure that any new
owner had the appropriate contractual protection to try and guard against its
losses.
Set off, abatement and withholding
Defective work also raises issues relating to certain 'self
help' remedies, including common law set off or abatement and equitable set
off.
Common law set off or abatement: A summary of the legal principles :-
- · in a contract for labour and materials where performance has been defective the employer is entitled to maintain a defence of abatement;
- · the measure of the abatement is the amount by which the product of the contractor's endeavours has been diminished in value as a result of the defective performance;
- · depending on the facts, this difference may be determined by comparing the market value of what has been constructed with what ought to have been built, or by reference to the cost of remedial works (but not the cost of the remedial works themselves);
- · the measure of abatement can never exceed the sum which would otherwise be due to the contractor as payment;
- · abatement is not available as a defence to a claim in respect of professional services;
- · claims for delay, disruption or damage caused to anything other than that which the contractor has constructed cannot feature in a defence of abatement.
Equitable set-off
This is permitted where a party
has a cross-claim which it would be unjust not to take into account. This is a
wide test and will cover any cross-claim 'closely connected' with the claim
being made.
The issues surrounding set off and abatement lead us to the
restrictions on those rights under CIPAA 2012. The Act provides that a party to a construction contract may
not withhold payment after the final due date. Period. Unlike similar statute in the UK which provides that a party may not withhold payment after it becomes due unless it gives an effective
notice of its intention to withhold payment including its grounds for doing so
to the other party. This is to stop contractors abusing their position to
wrongfully withhold sums due to subcontractors who typically have no quick or
cheap means to challenge the withholding.
The "Pay Now, Argue Later" principle of CIPAA 2012 may result in prolonged litigation. The losing party of the adjudication decision will seek to appeal the decision in court and stay the execution of the decision. This will certainly defeat the noble aim of CIPAA 2012 to resolve payment disputes quickly and cost effectively.
Practical issues
As a starting point, it is worth thinking about how defects and
completion issues should be addressed at procurement stage. Whether something
is defective will often depend not so much on whether it is completed
competently from a workmanship perspective but on the precise standard and
specification to be met. Similarly, if specific tests are to be passed these
will need to be provided for contractually, and consideration given to whether
general or liquidated damages should apply in the event of failure. The precise
standard and level of completion required for PC is something which can often
cause arguments, so careful consideration should be given to whether the
completion requirements are clear and what risks they may hold.
It goes without saying that those passing their obligations down
a supply chain should seek the same assumption of responsibility in relation to
defects.
Turning to the execution phase of the contract, the practical
issues tend to focus around evidence and notices. Defects are most likely to be
picked up on site if there is regular monitoring and testing. It will be a
commercial judgement for employers and contractors as to how much they wish to
spend monitoring and testing the works, but what is crucially important is that
if defects are identified that are likely to have implications for the project
then comprehensive records will need to be taken. Similarly, if it is intended
to reduce a payment or advance a claim as a result of a defect, then
consideration should very rapidly be given to the basis of the claim. It is
also not uncommon for issues to arise as to whether an employer waived or
agreed to allow a defect to remain. Again, evidence of agreement or waiver
should be obtained.
Post completion, if a defect occurs within a defects liability
period under a contract then in all probability the employer will be entitled
to require the contractor to correct the defect. In some forms this is the case
even if it is not clear that the defect is the contractor's responsibility,
although the contractor will be entitled to payment if it is proved the defect
is not one for which is it responsible.
Clearly, early consideration should be given to the contractual
procedures and relevant notices. Even if the defects liability period has ended
the contractor will in the vast majority of cases remain liable in damages.
If you are an end user who did not employ the contractor or design
team then you will want to consider whether you have the benefit of any
assignment of the relevant building contract or professional appointments, or
alternatively whether you have collateral warranties or third party rights.
YONG
MOK HIN v. UNITED MALAY STATES SUGAR INDUSTRIES LTD
[1964] 1 LNS 230
DW3, a civil and structural engineer,
who inspected the work at the end of the same year also testified about the
defective work as enumerated in para. 7 of the statement of defence. The
plaintiff sought to argue that the architect had supervised the work and had
issued the certificate Exh. P2, had signed in the plaintiff's pass book, and
lastly the defendant company had by their letter stated that the work was
satisfactory. In my judgment such certificate or letter only represents the
approximate value of the work done or materials used. It is not conclusive on
the parties as an expression of satisfaction with the quality of the work or
materials. That is subject to readjustment upon the issue of the final
certificate. Having considered the evidence, I am satisfied that the work was
defective and was due to bad workmanship.
The defendant company opted to accept
repudiation and sue for damages for incomplete and defective work. The law with
regard to the measure of damages is adequately stated at p. 442 of the 9th Edn.
of Hudson on "Building and Engineering Contracts".
... the direct measure of damage will
be the difference between the reasonable cost to the employer of repairing the
defects or completing the work, together with any sums paid by or due from him
under the contract, and the sums which would have been payable by him under the
contract if it had been properly carried out. (Where the former does not exceed
the latter, only nominal damages would be recoverable). Such damages are
clearly recoverable within the first branch of the in Hadley v. Baxendale
[1854] 9 Ex 341 as likely to arise in the usual course of things from the
breach".
The editor cited several authorities and
I think it would be sufficient if I only cite the case of Hirt v. Hahn [1876]
61 Missouri 496.
B agreed to erect a house for the
plaintiff according to plans by a certain day. The defendants were B's
sureties. After partly completing, B ceased work, and the plaintiff, after
giving notice to the sureties, entered and completed and sued the sureties.
Held, that the measure of damage was what it cost the plaintiff to complete the
house substantially as it was originally intended, and in a reasonable manner,
less any amount that would have been due and payable to B by the plaintiff had
B completed the house at the time agreed by the terms of his contract".
That is an American case but the
principle enunciated was approved by the Court of Appeal in Mertens v. Home
Freeholds Co [1921] 2 KB 526 at p. 535 where Lord Sterndale said:
It is true that that is an American
case. Though I cannot put my finger on them for the moment I feel satisfied
that there are English cases which fix the same measure of damages. At any rate
for the purpose of this case it is sufficient to say we all consider that the
proper measures of damages for the breach of a building contract such as
this".
However, the cost of completion means
the cost of completing the contract work, but not different work. Thus in
Milwaukee City v. Shailer [1898] 84 Fed Rep 106 another American case, Shailer
contracted to construct a tunnel for the city. The contract provided that in
case of default, the city should be entitled to complete the work at Shailer's expense.
On Shailer's default the city constructed a tunnel which was essentially
different in plan and cost of construction from that contemplated by the
contract. It was held that the city was not entitled to recover damages from
Shailer.
Mr McDonald, a quantity surveyor,
testified that a total sum of $377,221.92 would be the cost of remedying
defective work and completing the project from where the plaintiff had left it.
He based his valuation on the current and appropriate building rates for this
quality of work pertaining to this part of Malaysia. It must be borne in mind
that the original contract price was $187,500, and the figure quoted by DW6
would therefore include the cost for the variation and remedying defective
work. The cost of putting right defective work, he stated, was $21,095.75.
Therefore, arithmetically, $168,720 would be the cost of the extra work. In
this connection the cost of extra work must be considered in the light of all
the surrounding circumstances. Thus an employer may have deliberately chosen a
small-time contractor with limited resources of capital, plant and labour to do
the work in the hope of getting a cheaper job. The plaintiff is a class 'E' PWD
contractor with a ceiling of $50,000. As no fixed amount was agreed upon in respect
of extra work, and considering that work was to be done by a contractor of the
same class as the plaintiff, and in view of the principle enunciated in
Milwaukee City v. Shailer, supra, I would consider a sum of $126,540 (750f
$168,720) as reasonable. In the circumstances, the amount that would cost the
defendant company to complete the work and remedy defects would be $335,135.75.
As against that amount must be deducted
the contract price as varied that would represent the costs which the plaintiff
would have expended on the whole project as varied. I assess that figure in the
following manner:
Original contract price $187,500
Extra work 74,000
;$261,500.00 ($74,000 is made up of
$24,000, the cost of alteration from zinc walls to 9" brick walls; $40,000
for a third store; and $10,000 for labour and miscellaneous expenses). From the
amount of $261,500 must be deducted the sum of $36,000 as representing the
fifth progress payment. Therefore the amount which would be due to the
plaintiff would be $225,500.
The measure of damages would be the
difference between the reasonable costs of completing the work as varied and
the amount that would have been due to the plaintiff had he completed the work
as varied, and that is $109,635.75.
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