France Telecom: lessons for UK employers following 'institutional harassment' ruling
Out-Law Guide | 16 Aug 2011 | 10:31 am | 10 min. read
The nature of defective work
In construction and engineering projects the nature and type of defects can vary dramatically, as can the point at which they become apparent. At 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 significant defects may occur long after the original work has been completed and require extensive remedial works to fix.
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 the designer could be at fault, because a particular design is not working in the manner that it should. 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 JCT form provides 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:
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:
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. For more information, see our separate OUT-LAW Guide to limitation periods.
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 here was set out by Mr Justice Jackson in 2006:
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 the Housing Grants, Construction and Regeneration Act. The Act provides that a party to a construction contract may not withhold payment after the final due date 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.
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.
France Telecom: lessons for UK employers following 'institutional harassment' ruling