Clause 2.30 of the JCT Intermediate Contract 2005 deals with the remedying of defects by the Contractor during the Rectification Period. It states as follows:
“Any defects, shrinkages or other faults in the Works or a Section which appear and are notified by the...Contract Administrator to the Contractor not later than 14 days after the expiry of the Rectification Period, and which are due to materials or workmanship not in accordance with this Contract, shall at no cost to the Employer be made good by the Contractor unless the…Contract Administrator with the consent of the Employer shall otherwise instruct. If he does so otherwise instruct, an appropriate deduction shall be made from the Contract Sum in respect of the defects, shrinkages or other faults not made good.”
Perhaps surprisingly there has been no legal authority on how the words “appropriate deduction” should be interpreted and on what basis that deduction should be valued. The recent case of Mul v Hutton Construction Limited  has cast some further light on the issue. The question of what was an “appropriate deduction” was referred to Akenhead J in the Technology and Construction Court to decide as part of a trial of a preliminary issue.
The facts in brief
The defendant had been instructed by the claimant to carry out extensive extension and refurbishment works to her property. The original contract sum was just over £3 million but the final sum eventually certified by the contract administrator was just over £4 million.
Practical completion was certified in May 2010 but the certificate had attached to it a substantial list of works said to have been incomplete or defective.
The final account was prepared and the final sum was paid by the Employer, subject to retention. The contract administrator prepared a list of items of allegedly incomplete or defective work running to some 20 pages which the contract administrator had identified as required at the end of the Rectification Period. The Contract Administrator provided a copy of the schedule to the Contractor but subsequently wrote to the contractor stating that they were arranging for the works to be carried out by other contractors.
The Employer subsequently issued proceedings seeking damages for defects as well as for an alleged overpayment – the defects claim was for over £1 million and for all or most of the defects it appears the Employer had arranged for the remedial works to be completed by other contractors.
The Contractor sought to argue that it was at all times ready willing and able to repair the defects and that the “appropriate deduction” which the Employer was entitled to deduct was to be calculated by reference to the contract rates/priced schedule of works.
The question for the court
The court ordered the trial of preliminary issues to determine how the “appropriate deduction” was to be calculated.
The judge’s decision
The judge determined that an “appropriate deduction” under clause 2.30 means:
“a deduction which is reasonable in all the circumstances and can be calculated by reference to one or more of the following, amongst possibly other factors:
- 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.
- The particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.”
As this was only a trial of preliminary issues there are a number of questions still unanswered and it remains to be seen how the trial judge applies this reasoning to the facts of the case when calculating what an appropriate deduction is. The outcome of the full trial will also be of interest as the judge raised a number of issues which remain to be determined including the status of the practical completion certificate given at a time when such a substantial list of work remained outstanding.
Even though this was only a trial of preliminary issues there are some helpful points to consider. Following the decision, one factor which is likely to play a significant role in how the deduction is to be calculated is why it is that the Contractor was instructed not to complete the remedial works. The judge recognised that this instruction might arise for a number of reasons including the Employer wanting to arrange for other contractors to complete the work for convenience or because the Employer has become fed up with the Contractor and wants no more to do with it. There is therefore a spectrum of reasons which will affect the calculation but one which will be of key importance is the extent to which the Employer has acted unreasonably in refusing to allow the Contractor a fair opportunity to put right the defects.
As a result of the judgment each case will still need to be examined on its own facts. However, it is unlikely that Contractors will be able to argue that any deduction can only be limited to the rates in the contract/priced schedule of works. Employers also still need to give careful thought when they are deciding to consent to the Contract Administrator giving an instruction for a Contractor not to complete remedial works. The door remains open for Contractors to limit the amount of the “appropriate deduction” in circumstances where the Employer is found to have failed to mitigate its losses (in accordance with its common law obligations to mitigate) by unreasonably refusing to allow a Contractor to return.
Consistent with our policy when giving comment and advice on a non-specific basis, we cannot assume legal responsibility for the accuracy of any particular statement. In the case of specific problems we recommend that professional advice be sought.