Appropriate deductions for defects under the JCT forms

How will the court interpret the meaning of ‘appropriate deduction’ for the purposes of defects rectification under a JCT form of contract? Peter Clyde and Nick Lane in the construction team at Mishcon de Reya comment on the first ruling on such interpretation where the court decided the wording must be construed in the light of the circumstances of the case, and not limited artificially to contractual rates and prices.

Original news

Mul v Hutton Construction Ltd [2014] EWHC 1797 (TCC), [2014] All ER (D) 68 (Jun)

The claimant brought proceedings against the defendant contractor for damages for defects and alleged overpayment in respect of work carried out on her country house. In the course of proceedings, the Technology and Construction Court gave a preliminary ruling on the true construction of a clause in a building contract, which provided for any defects to be rectified in a stated rectification period. The court held that an ‘appropriate deduction’ meant a deduction which was reasonable in all the circumstances and could be calculated by reference to one or more factors.

What were the issues raised by this case?

Clause 2.30 of the JCT Intermediate Form of Contract (2005) provides that the contractor must make good defects notified in the rectification period unless the contract administrator (CA) with the consent of the employer shall otherwise instruct. If the CA does otherwise instruct, an ‘appropriate deduction’ is to be made from the contract sum. The issue before the court was a preliminary issue as to the proper interpretation of the words ‘appropriate deduction’ (which also appears in other JCT forms).

The employer argued that the words are not confined to a valuation based on contract prices but mean what is appropriate in all the circumstances, which could be any one of:

(a) the contractual rates

(b) the cost to the contractor of remedying the defect

(c) the reasonable cost to the employer of engaging another contractor to remedy the defect

(d) the factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works

The contractor’s case was that the appropriate deduction should always be calculated by reference to the contract rates or prices. This submission was based partly on the fact that the contractor was being denied its contractual right to carry out the remedial work and that there are other contractual mechanisms under which a different evaluation is used where the contractor fails to comply with an instruction to put right a defect for which it is responsible.

Akenhead J held that ‘appropriate deduction’ as used in the JCT suite must be construed in the light of the circumstances of the case, not limited artificially to contractual rates and prices. Therefore, any of (a) to (d) may be relevant depending on the circumstances.

Is the judgment helpful in clarifying any area of law or in respect of its discussions on any of the issues?

The judgment clarifies that the phrase ‘appropriate deduction’ should be construed in the light of the circumstances. The judge also gave some helpful practical illustrations of what ‘appropriate’ might mean in different scenarios.

The judge also clarified that clause 2.30 does not exclude the employer’s right to damages for defective work (since there is no exclusion in very clear words) and further that the employer must still mitigate its loss. He stated that if the employer had not given the contractor a ‘fair opportunity to put right the defects for which it was culpably responsible, she will probably have failed to mitigate her loss’. The ‘appropriate deduction’ must therefore take into account any failure to mitigate. Indeed, the judge noted that the right to damages and the duty to mitigate would exist even if there was no contractual rectification period at all.

What are the implications of the case?

The answer may appear obvious (and perhaps it was) but the judgment certainly fills a gap in the case law as to how an ‘appropriate deduction’ should be assessed.

As part of the discussion, Akenhead J gave practical examples which may help practitioners assess what an appropriate deduction should be. Two examples were as follows.

Where a piece of defective work was highly profitable in the contract rates but the remedial cost low, the cost of remedial work is likely to be the starting point for an appropriate deduction. The judge gave the example of plastering a wall which is 1mm thicker at the bottom than the top. The plastering may have cost £100 but the remedial work (sanding the plaster with an electric sander) may cost only £40. The latter figure would be appropriate to deduct

Where the remedying of a defect costs much more than the contract price for that work, the starting point is likely be the cost to remedy the defect. The judge gave as an example the situation where finishing work is done over the defective work (eg floor coverings or book cases placed on or done over defective work done by the contractor). The book cases and floor coverings would need to be removed before remedial work could be undertaken. The cost of such removal would not be included in the contract price so the priced document would not be an appropriate starting point.

Does this give rise to any particular issues that lawyers should now watch out for?

The case will assist lawyers advising clients and practitioners on how to approach making an appropriate deduction. Two subsidiary issues are also of relevance to lawyers:

The employer’s request for a preliminary issue to be heard

Akenhead J acknowledged that the employer had won on the preliminary issue but did not award the employer its costs of the hearing (but rather ordered that costs should be in the cause). This was because the trial judge had not been told that there was a live issue that there might have been no clause 2.30 instruction at all, and if he had been told he might not have ordered that the preliminary issue be heard. Lawyers should therefore ensure that they are prepared to address the judge on the merits (or lack of merit) of a preliminary issues hearing if the judge is minded to order one

When lawyers are asked to advise CAs with regard to the proper administration of the contract

The case highlights the importance of following contractual procedures. In the case difficulties arose because the CA ‘purported’ to certify practical completion and attached a substantial list of incomplete and defective works (something which the JCT contract does not provide for). This meant that there was uncertainty about when the rectification period started to run. In turn, it was unclear whether the letter in which the CA omitted the remedial works had been given within the rectification period and the letter (so far as it is possible to discern from what was quoted in the report) did not use the word ‘instruct’ or refer to clause 2.30

One point the judge did not consider (he was not required to) was whether practical completion had been certified. Having regard to the way the CA failed to follow the contractual procedure for certifying practical completion, the rectification period obligations could be said to apply since under the JCT contract the defects machinery only applies to defects arising in the rectification period. All the more so because at least some of the incomplete and defective work arose outside that period. This may be one of the issues that the court needs to decide when the full case is heard along with the issue of whether, and if so, when practical completion occurred.

This is an issue that goes to the heart of whether practical completion can properly be said to have occurred. Certainly, CAs need to be very careful not to open up a can of worms by seeking to qualify practical completion or by issuing a certificate where there is outstanding work. In less extreme situations snagging lists are commonly seen attached to practical completion certificates—but when snagging lists are really a roundabout way of succumbing to contractor pressure to certify practical completion where work is incomplete or patently defective, snagging lists can be dangerous too.

It will be interesting to see whether the employer’s victory on this preliminary issue translates into overall success and some of the issues that will need to be decided, including whether:

  • practical completion took place
  • the employer took occupation
  • an instruction was properly given to omit the remedial works
  • the employer mitigated its losses in the circumstances, are likely to generate further interest if the case does not settle

How does this case fit in with other developments in the law in this area?

The case worked from well-established principles regarding the assessment of damages. As above, though, this is the first case to determine the meaning of ‘appropriate deduction’ in the JCT suite and thus gives helpful guidance.

Interviewed by Nicola Laver. The views expressed by our Legal Analysis interviewees are not necessarily those of the proprietor.  This article was first published in LexisPSL Construction on 26 June 2014. Click here for a free one week trial of Lexis®PSL Construction.

Filed Under: Construction

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