Overview of how defects are a common area for dispute under construction contracts.
Often contracts will define the term "defect"; for example, Core Clause 11.2(6) of NEC 4 provides that a “Defect” is:
- a part of the works which is not in accordance with the Scope, or
- a part of the works designed by the Contractor which is not in accordance with the applicable law or the Contractor’s design which the Project Manager has accepted.
Where there is no definition in the contract, the case of Yarmouth v France  19 QBD 647 provides useful guidance; it provides that a defect is “anything which renders the plant etc. unfit for the use for which it is intended, when used in a reasonable way and with reasonable care”.
The timing of when a defect is discovered has a bearing on how it can be resolved.
Broadly speaking, defects fall into the two following categories:
- "Patent Defect" - A patent defect is one which is detectable upon reasonable inspection and can be notified to the Contractor either before practical completion or during the defects liability or rectification period.
- "Latent Defect" - A latent defect is one that is not apparent or readily detectable until after the expiry of any defect liability or rectification period.
Dealing with these in turn:
Often after practical completion, when the Employer takes possession of the building, there will be a fixed period of time during which the Contractor can be notified of defects that arise. This is often referred to in the contract as the "defects liability period" or "rectification period".
There is usually also a provision in the contract that permits (or obliges) the Contractor to return to rectify any identified defects at no cost to the Employer (often referred to as the "defects liability provision"). Without this express condition in the contract, the Contractor has no right (or obligation) to return to rectify the defect. If this provision is present in the contract, it generally obliges the Contractor to return to rectify the defect promptly. If the Employer refuses the Contractor access to the site and instructs a third party to rectify the defect, then any losses that an Employer might claim for may well be restricted to what it would have cost the original Contractor to rectify the defect. It is, therefore, generally in both parties’ interest to allow the Contractor access to site to rectify the defect.
It is usual for the defects liability period to be either six or twelve months.
Once all of the defects identified on the schedule of defects have been made good by the Contractor, a Certificate of Making Good Defects is issued by the Employer. This usually triggers release of any remaining retention.
Latent defects refer to defects discovered and notified to the Contractor outside of the defects liability or retention period. These tend to be issues that require a period of time to have passed before they are noticeable.
The Contractor usually has neither the right but nor the obligation to rectify a latent defect under the contract (although it will obviously be more cost effective if it did). Carefully balanced against that is the Employer’s duty to mitigate its losses. A refusal to allow a Contractor to remedy defective work may amount to a failure to mitigate, with the result that any recovery will be limited to what it would have cost the Contractor to carry out the work, as was the case in Woodlands Oak Ltd v Conwell  EWCA Civ 254.
It will often be dependent on the facts of the particular case whether an Employer has failed to mitigate its losses. However, Mr Justice Akenhead’s obiter comments in Mul v Hutton Construction Ltd  EWHC 1797 (TCC) provide useful guidance as to when engaging a third party would not be a failure to mitigate. They are as follows:
- where there were such whole scale defects that no reasonable Employer could be expected to have that Contractor back on site
- where there had been fraudulent behaviour on the part of the Contractor relating to the works, and
- the Contractor had made it clear that it was not prepared to return to put right alleged defects.
These grounds are fairly limited, so for an Employer to refuse a Contractor’s offer to rectify defects can be a high risk strategy.
Timing is of the essence; if the parties are still within the defects liability or rectification period, it is a patent defect and contractual provisions will be available to dictate how rectification should take place and who is responsible. If, however, the defects liability or rectification period has lapsed, then it is a latent defect and the contractual mechanisms will not apply. An Employer should be aware of its duty to mitigate its losses.
For assistance determining the type of defect that has been identified, please see the decision tree below: