The recent TCC decision in Oksana Mul v Hutton Construction Limited is the first authority on what constitutes an “appropriate deduction” under the JCT form of contract for defective work which an Employer or Contract Administrator instructs not to be made good by the Contractor. The case also provides important clarification as to the extent to which a Contractor’s liability for such defects is to be reduced where it could have made good more cheaply than the Employer or at no cost at all (by calling on its supply chain). These clarifications will be welcomed by employers, contractors and contract administrators alike.
Ms Oksana Mul (the “Employer”) engaged Hutton Construction (the “Contractor”) in April 2008 under a JCT Intermediate Building Contract 2005 edition (with amendments) to carry out extension and refurbishment works to her country house. Practical Completion was certified in May 2014 and the Employer paid the final certified sum (subject to retention) to the Contractor. The Practical Completion Certificate had a substantial list of defects attached to it. The Employer arranged for these (and some further works) to be carried out by other contractors and issued proceedings against the Contractor claiming (amongst other things) damages for the defective work.
The court was asked to determine preliminary issues in relation to the construction of clause 2.30 of the contract, which provided for any defects in the works to be made good during the rectification period by the Contractor unless the Contract Administrator, with the consent of the Employer, instructed otherwise. Such an instruction then required “an appropriate deduction [to] be made from the Contract Sum in respect of the defects … not made good”.
There was a dispute between the parties as to whether an instruction not to make good had been issued by the Contract Administrator under clause 2.30. On the assumption that it had, the Employer argued that an“appropriate deduction” under clause 2.30 should be what is appropriate in all the circumstances. The Contractor argued to the contrary that an “appropriate deduction”should be evaluated by reference to the rates or prices included in the contract documents. The Contractor also argued that its liability for defects should be reduced to nil on the basis that the Employer had prevented it from making good defects which it could have repaired at no cost through its supply chain (i.e. by having the repairs carried out by those sub-contractor’s responsible for the defects). Such an argument had been upheld by the Court of Appeal in a 2011 decision (Woodlands Oak Ltd v Conwell), but has been subject to little further judicial consideration since.
The court agreed with the Employer as to the meaning of the phrase “appropriate deduction” in clause 2.30. The amount should be one which is appropriate in all the circumstances and can be calculated by reference to one or more of the following (amongst other) factors:
- the contract rates/priced schedule of works/specification;
- the cost to the Contractor of remedying the defect;
- the reasonable cost to the employer of engaging another contractor to remedy the defect; or
- the particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.
The judgment also appears to suggest that the“appropriate deduction” should take into account the fact that the Contractor had not been given the opportunity to make good. Where there is no justifiable reason for this (for example, if the Employer has reasonably lost faith in the Contractor’s honesty or ability), then the Employer is likely to have failed to mitigate the loss caused by the defective work. The “appropriate deduction” should therefore reflect the extent to which the Contractor could have repaired the work more cheaply. Of particular note, the judgement appears to confirm that this may require a nil evaluation where the Contractor was able to repair the defects at no cost by calling on its supply chain (as perWoodlands Oak Ltd v Conwell).
Although this judgment relates to the JCT Intermediate Building Contract 2005 edition, it is of general application to other JCT contracts which contain similar provisions to clause 2.30 (such as clause 2.35 of the JCT Design and Build Contract 2011). The judgement makes clear that instructions “otherwise” under such clauses (i.e. for the Contractor not to make good) are unlikely to result in any fundamental change in the financial assessment of defective work. The calculation of the “appropriate deduction” required after such an instruction will still require a broad investigation into the circumstances surrounding the repair of the defect, including any allegation the Contractor may make that it has unreasonably been deprived of the opportunity to make good and that it could have done so more cheaply or at no cost by calling on its supply chain.
The judgement also provides encouragement for Contractors looking to rely on the Woodlands Oak decision in making such allegations. Although the point was not directly considered by the court, the judgement gives no suggestion that the Woodlands Oak decision is to be qualified or limited in any way. Employers should therefore think very carefully before instructing third parties to repair defective work and be aware that by doing so they run the risk of having any entitlement to claim against the original Contractor reduced to nil.
Reference: Oksana Mul v Hutton Construction Limited