Mul v Hutton Construction Ltd  EWHC 1797 (TCC)
When remedying defects during the Rectification Period (the period beginning on practical completion which normally then runs from 6 to 12 months afterwards) the JCT IFC 2005 provides an option (if the Employer agrees) for the Contract Administrator to instruct the Contractor to not remedy the defects and instead an "appropriate deduction" will be made from the Contract Sum. This seems to be a sensible enough solution at first sight until one has to work out exactly what is meant by "appropriate deduction". How precisely is it calculated? Until now, this has not been clear. However, the position has now changed thanks to welcome clarification on the meaning of this phrase in the recent case of Mul v Hutton Construction Ltd  EWHC 1797 (TCC).
The facts of the case were as follows. The claimant Employer, Ms Oksana Mul (Employer) engaged the defendant contractor, Hutton Construction Ltd (Contactor) under a JCT IFC 2005 (contract) to carry out extensive refurbishment work at her property. Work started in 2008 with practical completion being certified in 2010. Attached to the practical completion certificate was a large schedule of work alleged to be defective which the Employer later calculated to total in the region of £1 million. The Contractor denied responsibility for this work and so the Employer employed other contractors to remedy the defects.
The Employer then commenced proceedings against the Contractor claiming damages for defects and alleged overpayment. Part of the Contractor's defence was that clause 2.30 of the contract provided that if the Contract Administrator instructed the contractor not to remedy defects arising within the Rectification Period then "an appropriate deduction shall be made from the Contract Sum in respect of the defects, shrinkages or other faults not made good". On this basis, the Employer's entitlement was limited to an appropriate deduction which equated to a "sum calculated by reference to the contract rates/priced schedule of works".
Mr Justice Akenhead in the TCC considered as a preliminary issue what constituted an "appropriate deduction". Four options were proposed:
- the contract rates / priced schedule of works / specification;
- the cost to the Contractor of remedying the defect (including the sums to be paid to third party sub-contractors engaged by the Contractor);
- the reasonable cost to the Employer of engaging another contractor to remedy the defect; and
- the particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.
The Contractor argued that the first option was correct but the Employer disagreed, arguing that it could potentially be all of the options.
After a thorough analysis of the relevant case law in this area, the Court found in favour of the Employer, holding that "appropriate deduction" meant "a deduction which is reasonable in all the circumstances" which could be calculated by reference to one or more of the factors listed above "amongst possibly other factors". The Court dismissed the Contractor's argument, holding that clause 2.30 did not exclude or limit the Employer's general right to claim damages for breach of contract.
Interestingly, it was not an agreed fact that the Contract Administrator had instructed Hutton that the defects were not to be made good. Mr Justice Akenhead noted that it was "unclear whether this was pointed out to the Court" when the preliminary issues were discussed and that "there would have been a real chance that Mr Justice Coulson might not have ordered preliminary issues on the Clause 2.30 issue, if he had been fully apprised on the difference between the parties". However, Mr Justice Akenhead did note that the issue would still have had to be argued and that "it is of general importance given that it relates to a standard form".
It is important to be aware that this case only concerned the preliminary issues and the Court made clear that the result of the case once it was heard at full trial might be very different. As the Court noted, the Employer will have to satisfy the usual principles that apply to a claim for damages and in particular show that it mitigated its loss. This case is definitely one to watch should it come to full trial.
The key messages from this judgment are as follows:
- when negotiating JCT clauses which make reference to this phrase, be aware of the guidance in this case as to what this phrase means;
- if you do not want certain factors to be taken into account when using this phrase, then be sure to include clear drafting specifying exactly which factors should be taken into account;
- for Employers, if your contract includes this provision and you want to have the defective work remedied by other contractors, then before instructing the other contractors, make sure that the Contract Administrator follows the procedure laid out in the contract for telling the Contractor not to remedy the defective work.