In the following case, the employer sought to recover, by way of damages for breach of contract, the costs it incurred in engaging third parties to investigate, advise on and carry out remedial work to rectify defects discovered during the warranty period under the construction contract.
One of the issues in dispute related to quantum: had the employer (as the contractor claimed) failed to mitigate its losses?
Maersk Oil UK Limited (formerly Kerr- McGee Oil (UK) plc) v Dresser-Rand (UK) Ltd  EWHC 752 (TCC)
The contractor agreed to design, fabricate and supply a compression facility for the employer’s offshore oil field. The equipment was allegedly defective. Without notifying the contractor of this or giving the contractor an opportunity to remedy the defects, the employer proceeded to engage third parties to investigate, advise on and carry out remedial work; and claimed the costs it incurred from the contractor.
The contractor argued that the employer had failed to mitigate:
first, because it had failed to deploy the expertise of the contractor (which had resulted in delay and additional expenses); and
secondly, because it had engaged third parties to carry out unnecessary and therefore unreasonable work.
Analysing these arguments in turn:
The failure to notify or use the contractor for the remedial works
The contractor argued that, where the employer had carried out work during the warranty period without giving the contractor a proper notification and/or without allowing the contractor the opportunity to rectify, it could only recover the amount which it would have cost the contractor to carry out the relevant rectification works.
The contractor relied upon a Court of Appeal decision - Pearce and High v Baxter and Baxter (1999) BLR 101- in which the court had limited the contractor’s right to recovery to the amount which it would have cost the contractor to carry out the works itself.
The court rejected the contractor’s argument on the grounds that, in Pearce, the defects liability provisions (in the JCT Minor Works Form) gave the contractor a contractual right to return to the site to remedy defects. The situation in the present case was different. The contractor had no contractual right to return to the site to remedy the defects.
However, the court noted that a failure to notify the contractor of defects could, in some circumstances, be relevant in relation to mitigation. For example, if the contractor had offered the employer a particular resource (such as a software programme) which, if utilised, would have shortened the time required to investigate the defects (and therefore the cost involved in doing so), then the employer’s failure would be relevant. But there was no evidence that this was the case here; and it was trite law that the burden of establishing a failure to mitigate falls on the defendant (here, the contractor).
The engagement of third parties
The contractor claimed that the employer’s decision to seek third party advice was unreasonable; and, as a result, the costs incurred in obtaining and acting upon such advice were unforeseeable and irrecoverable.
The court considered the authorities which demonstrated that the real issue was one of causation: was the advice of the third parties such a completely inappropriate response that it would break the chain of causation?
In the present case, the court held that the chain of causation had not been broken; and that the costs claimed were recoverable. This applied even where the employer had incurred costs carrying out investigations which had led nowhere and had been abandoned, on the basis that the investigations in question had been sensibly undertaken by a competent professional and, although the results of the investigation were spurious, the line of inquiry had been a proper one for the employer to have followed.
The case illustrates the following points:
- In certain cases, it may be advantageous for an employer not to give the contractor a contractual right to return to the site to investigate/remedy any defects during the warranty period. Contractual provisions to this effect would provide for the employer to have the right, but not the obligation, to require the contractor to remedy defects. Here, the contractor had been unable to complete the works on time and had closed the factory that had produced the defective equipment. When defects arose during the warranty period, the employer, understandably ,did not wish to exercise its contractual right to require the contractor to remedy the defects and preferred, instead, to engage third parties to advise on the extent of the defects and to carry out the remedial action required.
- In other cases, it may be advantageous for a contractor to have a contractual right to return to the site to investigate remedy any defects during the warranty period. It may be cheaper for the contractor to investigate and carry out the remedial works itself, rather than being liable to pay the costs incurred by the employer in engaging a third party to do so. The contractor’s liability will, in particular, be much greater if (as in this case) the contractor is liable for works carried out on behalf of the employer which were unnecessary/ inappropriate but were not a “completely inappropriate response”, and did not therefore break the chain of causation.
- The contract should make it clear whether or not the Employer has the option, whenever defects are discovered during the warranty period, to require the contractor to carry out the remedial work or to engage a third party to do so (or make a deduction from the contract price).
In this case, the judge considered that:
in Pearce, (under the JCT Minor Form) the contractor had the right to carry out the remedial work (so the employer was obliged to let the contractor carry out the remedial work); whereas
- in the present case (under a bespoke contract) the contractor had no such right (so the employer could elect to engage a third party).
Whilst the contractual provisions in Pearce and the present case differ, we find it difficult to see why the judge concluded that, in Pearce, the contractor had the right to carry out the remedial work, whereas in this case, the contractor did not have such a right. Unfortunately, the judge did not explain his reasoning. Contractual provisions should therefore put the position beyond doubt.