Defective Construction Work

Defective Construction Work and the Project Team

Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

To Mandy and Tom Long after I am gone, this book, like my love for you, will endure.

Defective Construction Work and the Project Team Kevin Barrett

A John Wiley & Sons, Ltd., Publication

This edition first published 2008 © 2008 K. J. Barrett Blackwell Publishing was acquired by John Wiley & Sons in February 2007. Blackwell’s publishing programme has been merged with Wiley’s global Scientific, Technical, and Medical business to form Wiley-Blackwell. Registered office John Wiley & Sons Ltd, The Atrium, Southern Gate, Chichester, West Sussex, PO19 8SQ, United Kingdom Editorial office 9600 Garsington Road, Oxford, OX4 2DQ, United Kingdom 2121 State Avenue, Ames, Iowa 50014-8300, USA For details of our global editorial offices, for customer services and for information about how to apply for permission to reuse the copyright material in this book please see our website at www.wiley.com/wiley-blackwell. The right of the author to be identified as the author of this work has been asserted in accordance with the Copyright, Designs and Patents Act 1988. All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publisher. Wiley also publishes its books in a variety of electronic formats. Some content that appears in print may not be available in electronic books. Designations used by companies to distinguish their products are often claimed as trademarks. All brand names and product names used in this book are trade names, service marks, trademarks or registered trademarks of their respective owners. The publisher is not associated with any product or vendor mentioned in this book. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is sold on the understanding that the publisher is not engaged in rendering professional services. If professional advice or other expert assistance is required, the services of a competent professional should be sought. Library of Congress Cataloging-in-Publication Data Barrett, Kevin, Solicitor. Defective construction work / Kevin Barrett. p. cm. Includes bibliographical references and index. ISBN 978-0-632-05929-4 (hardback : alk. paper) 1. Construction contracts–England. 2. Liability for building accidents–England. 3. Premises liability–England. 4. Great Britain. Defective Premises Act 1972. I. Title. KD1641.B377 2008 343.42′07869–dc22 2008015415 A catalogue record for this book is available from the British Library. Set in 10/12.5 Palatino by SNP Best-set Typesetter Ltd., Hong Kong Printed in Great Britain by TJ International Ltd, Padstow, Cornwall 1

2008

Contents

Preface Abbreviations 1. Definition and Categorisation of Defects 1.1 Definition of ‘defect’ 1.2 Qualitative defects 1.3 Patent/latent defects 1.4 Reasonable examination 1.5 Importance of the distinction between patent and latent defects 1.6 The ‘purchaser’, the ‘project team’ and other terminology

ix x 1 1 2 3 4 6 6

2. Common Law, Statutory and Contractual Rights 2.1 Common law 2.2 Statute 2.3 Contractual rights

8 8 10 11

3. Contracts: An Overview 3.1 Function 3.2 The basics 3.3 Express terms 3.4 Implied terms 3.5 Exclusion of implied terms 3.6 Exclusion clauses 3.7 Risk allocation 3.8 Model conditions of contract

13 13 14 15 16 20 21 22 22

4. No Contract/Restitution 4.1 Restitution 4.2 Restitution and defects

24 24 25

5. Letters of Intent 5.1 Function 5.2 Legal analysis 5.3 The implications where defects occur

32 32 32 34 v

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Contents 6. Tort: An Overview 6.1 Negligence 6.2 Complex structures 6.3 Economic harm 6.4 Builders and professional consultants

36 36 38 42 46

7. The Defective Premises Act 1972 7.1 Application 7.2 Fitness for habitation 7.3 Exclusion

52 52 54 55

8. Third 8.1 8.2 8.3 8.4 8.5 8.6 8.7

56 57 58 58 59 60 63 64

Party Rights The exception Agency Assignment Novation Statutory third party rights Collateral contracts Tort

9. Statutory Requirements 9.1 The Building Act 1984 9.2 Building regulations 9.3 Construction products 9.4 Workplace safety regulations 9.5 CDM regulations 9.6 The relationship with contractual obligations

66 66 67 68 68 69 70

10. The Builder’s Obligations: Design, Workmanship and Materials 10.1 Buildability, durability and maintenance 10.2 Workmanship 10.3 Materials 10.4 Design

73 74 75 82 90

11. The Builder’s Obligations: Defects Before Completion 11.1 Temporary disconformities 11.2 Opening up the work 11.3 Defects and interim payment

93 93 98 100

12. The Builder’s Obligations: Defects at Completion 12.1 Scope of work to be completed 12.2 Completion 12.3 Snagging

106 106 109 113

Contents 12.4 12.5 12.6 12.7

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The effect of practical completion The ICE, NEC3 and MF/1 conditions The JCT Major Project Construction Contract The provision of information prior to practical completion

114 115 115 116

13. The Builder’s Obligations: Defects Post Completion 13.1 The common law 13.2 Defects liability period 13.3 Retention money 13.4 Retention bonds 13.5 Final certificates

118 118 119 124 127 127

14. The Professional Team 14.1 Membership of a professional body 14.2 The structure of the team 14.3 Duties 14.4 Buildability, durability and maintenance

132 132 133 135 140

15. Architects and Engineers 15.1 Design 15.2 Selecting builders and other specialists 15.3 Supervision 15.4 Periodic inspection 15.5 Certification 15.6 Design review 15.7 Defects investigations 15.8 Honest reporting 15.9 Termination of performance

142 143 146 146 148 150 152 155 156 157

16. Project Managers, Surveyors and Others 16.1 Project managers 16.2 Quantity surveyors 16.3 CDM coordinators 16.4 Clerk of works/engineer’s representative

158 158 160 163 163

17. Compensation 17.1 Abatement 17.2 Set-off 17.3 Compensation 17.4 Betterment 17.5 Mitigation 17.6 Parasitic losses 17.7 Distress and inconvenience

164 164 166 167 172 173 174 176

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Contents 17.8 Contribution 17.9 Contributory negligence 17.10 Enforcement of performance

177 178 178

18. Termination 18.1 Breach of condition 18.2 Repudiation 18.3 Express termination provisions

180 180 180 181

19. Limitation 19.1 Contract 19.2 Tort 19.3 Contractual limitation provisions 19.4 Limitation and contribution proceedings 19.5 Defective Premises Act

183 183 184 188 189 189

20. Dispute Resolution 20.1 Litigation 20.2 Arbitration 20.3 Adjudication 20.4 Expert determination 20.5 Alternative dispute resolution

190 190 192 193 194 194

Bibliography Table of Cases Table of Statutes Regulations, Directives, Reports, Rules of Court, Treaties Index

196 197 208 209 210

Preface

Maison D’Or took three years to build, but for a further three years stood empty above the harbour of St Aubin, where the hillside properties enjoy wonderful views across the bay. It no longer stands there. Its short life ended when the man who lavished more than £1.7 m on its construction chose to demolish it and start again. He considered it so badly designed and built that he sued his builder, his architect, his structural, electrical and mechanical engineers, his quantity surveyor and his project manager for compensation. He wanted £3.6 m for the cost of demolition and rebuilding, or £2.5 m for the cost of repairing the individual defects. After a trial lasting 24 days the court issued a 156 page judgment awarding £600,000 against some of the defendants. The judgment in McGlinn v. Waltham Contractors (2007) tells a sorry tale of construction procurement, and is a painful reminder of the importance of putting the legal relationship with the project team on to a sound footing, and of the inevitability that those who suffer harm – whether physical, financial or aesthetic – as a result of poor building work will look to the project team for compensation. Only by properly discharging their respective – and sometimes overlapping – responsibilities will the individual members of the project team avoid liability when defects occur. This book sets out to examine those responsibilities, and the consequences if they are inadequately discharged. For convenience, the masculine has been habitually used in this book, but this is done in the spirit of section 6(a) of the Interpretation Act 1978, which provides that ‘words importing the masculine gender, include the feminine.’

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Abbreviations

CDM regulations CPR HGCRA ICE conditions JCT JCT DB conditions JCT conditions JCT C/CMA conditions JCT SBC conditions JCT SBCSub/C MF/1 conditions

NEC3 RIBA RIBA CE/95 RIBA conditions

RIBA Schedule TCC

x

Construction (Design and Management) Regulations 2007 Civil Procedure Rules Housing Grants, Construction and Regeneration Act 1996 ICE Conditions Measurement version, 7th edition Joint Contracts Tribunal the JCT Design and Build contract 2007 the suite of contracts published by the Joint Contracts Tribunal the JCT Construction Management Agreement 2007 the JCT Standard Building contract 2007 JCT Standard Building Sub-Contract Conditions 2007 the Model Form of General Conditions for use in connection with home or overseas contracts for the supply of electrical, electronic, or mechanical plant with erection recommended by the Institution of Mechanical Engineers, the Institution of Electrical Engineers and the Association of Consulting Engineers 2000 edition (Rev 4) The New Engineering Contract, 3rd edition Royal Institute of British Architects RIBA Conditions of Engagement for the Appointment of an Architect 1995 RIBA Standard Conditions of Appointment for an Architect (CA-S-07-A) 2007 edition (a component of the Standard Agreement for the Appointment of an Architect (S-Con-07-A) RIBA Schedule of Role Specifications (SS-RS-07) 2007 edition Technology and Construction Court

Chapter 1

Definition and Categorisation of Defects

In 1987 Mr Steven Forsyth discovered that his recently constructed swimming pool was shallower by 9 inches than the specification called for. Despite the workmanship and materials conforming in all other respects with the quality requirements of the specification, the pool was nonetheless, in law, defective. Mr Forsyth sued for compensation, and ultimately found himself before the House of Lords, in Ruxley Electronics & Construction Ltd v. Forsyth (1995), where he lost an appeal about the correct approach to the assessment of compensation. Mr Forsyth’s complaint about the depth of his pool serves as an illustration that defects can encapsulate more than just bad workmanship and materials, and that quality is just one category of defective work. It is useful therefore to have a general definition of the term ‘defect’, to understand what is meant by ‘patent’ and ‘latent’ defects, and to appreciate the impact of discoverability on the status and legal consequences of defects.

1.1 Definition of ‘defect’ One hundred years before Ruxley the term ‘defect’ was defined, in Tate v. Latham & Son (1897), as meaning ‘a lack or absence of something essential to completeness’. The Tate definition arose in the context of a workman’s compensation claim under the Employers’ Liability Act 1880. In that case a fence intended to protect the operator was missing from a dangerous piece of machinery, so it was defective. Tate is just one of a number of attempts over the years to define the term ‘defect’. Other examples include McGiffin v. Palmers Shipbuilding & Iron Co Ltd (1882), where an obstruction protruding from a furnace (but which was not a part of it) did not render the furnace defective; Yarmouth v. France (1897), where it was decided that a defect in an item of plant included ‘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’; and the curious decision in Jackson v. Mumford (1902), which decided that the word ‘defect’ did not include a design defect. The Tate definition is not sufficiently all embracing – after all, building work can be complete but nonetheless defective – and the Yarmouth definition is potentially too wide, as a building can be unfit for use, yet not be defective in the sense that someone can be held responsible for its Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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Defective Construction Work unfitness. Further, the Jackson decision should be treated with some caution. It was not followed – although, to be fair, it was not cited – in Baxall Securities Ltd v. Sheard Walshaw Partnership (2002), where the Court of Appeal considered that a flaw includes design as well as workmanship. So, Jackson (which concerned the interpretation of an agreement) is, perhaps, one of those cases that should be treated as confined to its own special facts – a recurring judicial euphemism for binding decisions that do not sit easily with established principles or a prior line of authority. If the cases do not provide a complete definition of the term ‘defect’, then the dictionaries cannot be criticised if they do no better. For example, Black’s Law Dictionary (7th edition) somewhat enigmatically defines ‘defect’ as meaning ‘an imperfection or shortcoming’, without identifying how the imperfection or shortcoming should be judged. The elusive definition is matched only by the variety of terms used to describe defects. These include: disconformity, non-conformity, noncompliant and incomplete. The phrase ‘temporary disconformity’ is also encountered, and has a special significance (see Chapter 11, section 11.1), as does the commonplace term ‘snagging’ (a much misused term, but one that generally refers to work that is in fact – and in law – defective) (see Chapter 12, section 12.3). None of these labels throws any additional light on the meaning of the term ‘defect’. It is convenient then to return to Mr Forsyth’s pool. The insufficiency of the pool’s depth meant that it did not conform to the specification. The builder was contractually obliged to achieve the requirements of the specification. As he had not done so, he had breached his contract with Mr Forsyth. So, in the context of building work, a more useful definition of the term ‘defect’ is simply to say that something that does not conform to the agreed specification is defective. Mr Forsyth’s pool enjoys some small degree of notoriety for reasons that will be dealt with later, but for the moment the Ruxley decision serves simply to demonstrate that defects come in many guises, as do the terms used to describe them. These guises are essentially qualitative, but sometimes they are concerned with whether defects are patent or latent, and therefore relate to discoverability.

1.2 Qualitative defects Qualitative defects can be categorised in various ways, including:

• work (including design) or materials not of acceptable quality; • work (including design) or materials that are in themselves of accept•

able quality, but which nonetheless do not conform with the specification (as occurred in Ruxley) or the design brief; and work that is incomplete.

Definition and Categorisation of Defects

3

Builders must complete the agreed work using materials and workmanship conforming to the contractual requirements. If they fail to provide anything necessary to bring about completion in accordance with the contractual requirements then the work is – latent defects excepted – incomplete. In this respect the third category (i.e. incomplete work) may encapsulate the first and second categories if the non-conforming work or materials are discovered before completion of the works. Defects falling into any of these three categories may give rise to claims against some or all of the project team.

1.3 Patent/latent defects Defects, whatever their qualitative nature, may be patent or latent. The importance of this distinction is dealt with in section 1.5 below, but broadly the consequences may differ depending on whether defects are patent or latent. The fact that there may be different consequences means that it is important to be able to decide when a defect is patent and when it is latent. The starting point, in terms of the case law, is Yandle & Sons v. Sutton, Young and Sutton (1922), which decided that a defect is patent if it is open or visible to the eye. But later, in Sanderson v. National Coal Board (1961), a defect was said to be patent if observable, whether or not actually observed. Latent defects, on the other hand, are those that are hidden and, as a corollary to Sanderson, not observable. In Baxall it was explained that whether a defect is latent is determined by reference to the inadequacy of the work or materials: ‘The concept of a latent defect is not a difficult one. It means a concealed flaw. What is a flaw? It is the actual defect in the workmanship or design . . .’ But when is a concealed flaw in workmanship or design (and for that matter materials) to be regarded as observable even though not actually observed? Sanderson confirms that answering this question is an exercise that must be approached objectively. For example, in Riverstone Meat Pty Ltd v. Lancashire Shipping Company Ltd (1961) – a case that concerned the carriage of goods by sea – it was decided that defects were not latent if discoverable by the exercise of due diligence. Similarly, in Prudent Tankers Ltd SA v. The Dominion Insurance Co Ltd (The Caribbean Sea) (1981) – a case that concerned the terms of a marine insurance policy – the same conclusion was reached. Subsequently, in Rotherham MBC v. Frank Haslam Milan & Co Ltd and M. J. Gleeson (Northern) Ltd (1996) – a building case concerning the suitability of materials – the term latent defect was described as meaning ‘in its widest sense a . . . failure in work or materials to conform to contract in a respect not apparent on reasonable examination’. In this case it was not appreciated by the specifier or builder at

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Defective Construction Work the time of specification or supply – and could not have been ascertained by the customary examination available – that the specified materials suffered from an inherent characteristic that rendered them unsuitable for the purpose for which they had been specified. The defect was therefore truly latent.

1.4 Reasonable examination In Baxall it was decided that: ‘a defect is not latent if it is discoverable by the exercise of due diligence whether or not due diligence was in fact exercised.’ This approach, while consistent with the earlier authorities, gave rise to a curious result when applied to the facts of Baxall – where the Court of Appeal had to decide whether an architect who had designed a warehouse was liable in the tort of negligence (see Chapter 6) to a subsequent owner of the warehouse for loss caused by flooding when the warehouse drainage system was overwhelmed during a storm. The defect that caused the flood in Baxall was found to have been discoverable upon a competent inspection by a third party surveyor advising a subsequent owner prior to purchase of the warehouse. The defect was found to have been patent because it could, with reasonable care, have been discovered by the surveyor before the flood occurred. In these circumstances the court decided that the architect was not liable to the subsequent owner, who could and should have discovered the defect and therefore have done something about it before the storm occurred. Some caution must be exercised, however, about the Baxall decision, which has been called into question by the subsequent decision of the Court of Appeal in Pearson Education Ltd v. Charter Partnership Ltd (2007). This latter decision exposes the limited applicability of the ‘reasonable examination’ aspect of the definition. In Pearson the court of appeal carefully examined the underlying basis of Baxall, and concluded that it could be justified only on one of two possible bases either: (a) that no duty of care arose; or (b) the chain of causation was broken, in respect of those defects that a reasonable examination would reveal if it was reasonable to expect a prospective occupier to inspect the premises before going into occupation. However, the court, in Pearson, declined to adopt either justification. It is important to note, in this respect, that the Pearson court could not overturn Baxall (as the Court of Appeal cannot overturn its own decisions), so it distinguished it on its facts instead. Nevertheless, in so doing the court commented that it did not regard it as fair, just or reasonable that an architect charged with producing a safe design should be absolved from his failure to do so on the ground that someone else could reasonably be expected to discover the shortcomings in his design (but didn’t). Further,

Definition and Categorisation of Defects

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the court in Pearson was unable to extract any rational justification for the failure to carry out a proper inspection doing any more than amounting to contributory negligence rather than breaking the chain of causation. The conclusion in Pearson was that there was no reason for the architect to expect that an inspection would be carried out by a prospective occupier that would reveal the design defect, and there was no reason why the prospective occupier should have investigated the adequacy of the rainwater system in the absence of knowledge that it had failed before. The attack on the correctness of Baxall does not undermine the definition of patent defects that it enunciated. Rather it shows that the mere fact that a defect may be patent to a third party does not of itself absolve the wrongdoer architect or builder from liability for failing to detect it before completion. In these circumstances the Baxall definition is right for the purpose of deciding whether a defect is patent or latent, but not necessarily for the purpose of deciding whether an inspection should be undertaken. The Baxall case also makes the point that it is sometimes necessary to make a distinction between defects in workmanship or design (and, presumably, materials) and the danger they present. This distinction may, however, mean little more than that, if a reasonable investigation does not reveal the true nature of a defect, then the danger it presents remains latent. This is what occurred in Nitrigin Eireann Teoranta v. Inco Alloys Ltd (1992), where cracking to recently installed pipework was discovered and repaired in 1983. Unfortunately, despite reasonable investigation the true nature of the cause of cracking – and the danger it presented – went undiscovered, so that the real defect was not rectified. The defect subsequently caused an explosion that damaged adjacent property. By the time proceedings were issued the contractual limitation period had expired, thus barring a claim under the contract, so a claim was pursued in tort. The defendant insisted that the cause of action accrued when the cracking first appeared, so that the tort claim was also barred. The injured party contended that the cause of action accrued when the explosion occurred, and that the proceedings were therefore issued within the limitation period. The court concluded that although the injured party ‘may have known that there was damage in 1983 . . . they were unaware of the cause . . . despite reasonable investigation and accordingly were not aware of the defect.’ So in this instance the mere discovery of some damage was not enough to alert the purchaser as to the true nature of the problem, and therefore did not start time running – or indeed break the chain of causation – for the purposes of a claim in tort (see Chapter 6). What constitutes reasonable examination and when it should take place – where these are relevant issues – depends on the circumstances, but it is not necessarily limited to visual inspection. It may include

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Defective Construction Work analysis or microscopic examination (see Pinnock Bros v. Lewis & Peet Ltd (1923)) or known or customary tests (see Parente v. Bayville Marine Inc (1975)). Ultimately, the nature of the inspection depends upon either the contractual stipulations or good practice.

1.5 Importance of the distinction between patent and latent defects Defects are of fundamental importance because they affect the value of work done (and therefore the obligation to pay, or the right to receive payment); they may prevent work being regarded as complete; they may entitle purchasers (and sometimes third parties) to compensation; and they may even entitle purchasers to terminate the building contract or the appointment of professional consultants. The importance of the distinction between patent and latent defects often depends on the contractual terms. For example, it may not be permissible to certify completion if there are patent defects, or it may be that liability for loss is excluded in respect of latent, but not patent, defects. Further, whether defects are patent may be relevant to the duty to mitigate loss, and may engage the defence of contributory negligence. Finally, whether a defect is patent or latent may sometimes be relevant to the commencement of the relevant limitation period.

1.6 The ‘purchaser’, the ‘project team’ and other terminology There is no precise definition of the term ‘project team’. It always includes the builder and the professional consultants, but it may sometimes include the purchaser, who may be very actively and directly involved. However, for the purposes of this book references to the project team mean those builders and professional consultants employed by purchasers to manage, design, oversee and build the project in question. The project team may itself be subdivided into the building team (i.e. the builder and his sub-contractors who supply and construct the works) on the one hand, and the professional team (i.e. the professional consultants who provide expertise and advice in relation to design and management) on the other. While the professional team may be wholly or partly engaged by the purchaser this is not invariably the case – it depends on the procurement method used. Purchasers of building work may variously be described as ‘the owner’, because they own the building or land where the work will take place, or ‘the employer’, because they employ the builder and perhaps others engaged in connection with the building work. In this book the term ‘purchaser’ is generally used to describe the person who commis-

Definition and Categorisation of Defects

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sions building work, because this term recognises that the commissioner does not necessarily own the land, or employ all of the project team. However, the members of the professional team tend to regard the person by whom they are engaged as their client, and so this term has been used where appropriate. In addition, ‘builder’ is generally used instead of ‘contractor’. Finally, the conditions of contract published in the United Kingdom by various industry associations and professional bodies (see Chapter 3, section 3.8) are generally referred to in this book as ‘model’ rather than ‘standard’ conditions.

Chapter 2

Common Law, Statutory and Contractual Rights

In England and Wales there exists a system of rights, obligations and remedies that can be enforced by legal action. These rights, obligations and remedies arise under the common law, or by virtue of statute, or by virtue of contractual agreements. It is useful to understand the function of each of these sources of rights, obligations and remedies – and how they interact with one another.

2.1 Common law The common law is the ancient system of judge-made doctrines and principles that continue to this day to regulate much of social and commercial life. The common law is itself subject to certain principles of equity that moderate the rigidity of the common law in appropriate circumstances. Put simply, these equitable principles prevent the overrigid application of the common law in circumstances that would otherwise lead to injustice. Precedent (i.e. previously decided cases) is the principal source of the common law in England and Wales – because case law is where judges record their findings. The system of precedent is based upon the decisions of the superior courts, which term broadly – and in ascending order of importance – means first the High Court, second the Court of Appeal, and finally the Judicial Committee of the House of Lords (not forgetting the Privy Council, which performs the same judicial role as the House of Lords in relation to appeals from some Commonwealth jurisdictions). The House of Lords is soon to give up its appellate role and be replaced – as the final domestic appellate court – by the soon to be created Supreme Court. It may seem to be something of an anachronism that significant parts of life in the 21st century are regulated by doctrines and principles that were sometimes established centuries ago. Nevertheless, the common law has shown itself to be an admirably flexible tool that often, though 8

Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

Common Law, Statutory and Contractual Rights

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not always, adapts to modern conditions, because many of its principles are enduringly sensible. Sometimes, however, aspects of the common law may be abolished or modified by statute if they come to be seen as unjust or no longer compatible with modern conditions. So, for example, the Contracts (Rights of Third Parties) Act 1999 has modified the common law doctrine of privity of contract. The common law is (at least in so far as it concerns the actions of public authorities) subject to the Human Rights Act 1998, which requires public authorities not to act in a manner incompatible with the European Convention for the Protection of Human Rights and Fundamental Freedoms 1950. However, even before the advent of the Human Rights Act the courts had signified a willingness to resort to the Convention as an aid to resolving ambiguities and uncertainties in UK domestic legislation and the common law (see Attorney-General v. Guardian Newspapers (No 2) (1990) and Dobson v. Hastings (1992)). The common law must also, as a result of the European Communities Act 1972, yield to European Union law in the areas of competence assigned to the European Union. The primary source of rights in relation to defects in construction work is the law of contract. The formation and discharge of contractual rights are matters that are governed by the doctrines and principles of the common law, although some of these doctrines and principles may in some circumstances be overridden by agreement or by mandatory statutory requirements. So, for example, the essential requirements to form a contract, i.e. offer, acceptance, consideration and the intention to create legal relations, are all the creation of the common law. Similarly, the performance requirements of a contract, and remedies for its breach, are regulated by the common law unless the relevant contract (or statute) makes express provision to the contrary – and in so doing excludes the common law requirements. The common law also provides a body of non-contractual rights that arise under the law of tort. The most important of these torts in relation to defects is the law of negligence (see Chapter 6), which creates a right to be kept free from physical and economic harm in some circumstances. The law of tort stands independently alongside the law of contract and sometimes gives rise to concurrent rights and remedies, although where it does this the tort-based rights and remedies may be circumscribed by the relevant terms of any contract that exists between wrongdoer and injured party: so, for example, a clause in a contract circumscribing a contractual duty of care may similarly circumscribe any equivalent duty in tort. In addition, the common law provides a law of restitution that regulates non-contractual transactions in some circumstances, principally with the aim of preventing unjust enrichment (see Chapter 4).

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Defective Construction Work

2.2 Statute Statutory law consists of those domestic laws enacted by the United Kingdom Parliament, and those European laws enacted by the institutions of the European Union. Domestic laws fall into two basic categories: primary legislation, i.e. Acts of Parliament; and secondary (sometimes referred to as ‘delegated’) legislation, e.g. regulations made pursuant to primary legislation. Primary legislation is enacted by Parliament, whereas secondary legislation is created under a power established in primary legislation. So, for example, the Building Act 1984 (i.e. primary legislation) delegates to a minister of the Crown a power to make regulations (i.e. secondary legislation). Under this delegated power the relevant minister has made the Building Regulations 2000. Secondary legislation that has not been validly made in accordance with the delegated power will not be enforced by the courts. Since the advent of the Human Rights Act 1998, domestic legislation should not be incompatible with the European Convention for the Protection of Human Rights and Fundamental Freedoms 1950; nor, since the European Communities Act 1972, should it be incompatible with European law. In the UK it has not been the constitutional practice to codify all of the law in all areas of life – hence the enduring importance of the common law. Nevertheless, Parliament has seen fit to regulate some aspects of life that were once regulated wholly by the common law. In the field of construction defects some of the most important statutes are:

• the Building Act 1984, which sets standards for building work; • the Sale of Goods Act 1979 and the Supply of Goods and Services Act • • •

1982, which respectively codify, with modifications, the pre-existing common law in relation to the sale and transfer of goods; the Defective Premises Act 1972, which creates a statutory right of action against developers, designers and builders in relation to defective domestic premises; the Unfair Contract Terms Act 1977, which curbs the common law doctrine of freedom of contract in relation to exclusion clauses; and the Contracts (Rights of Third Parties) Act 1999, which modifies the common law doctrine of privity of contract.

European law consists of the Treaties establishing what is now called the European Union and the legislative measures (i.e. Directives, Regulations and Decisions) made by the European institutions in accordance with the powers – and limited to the areas of competence – conferred by the Treaties. Some of the provisions of the Treaties and

Common Law, Statutory and Contractual Rights

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some European legislative measures confer rights that may be directly asserted before national courts, where they must be given effect. However, some European legislative measures depend on domestic legislation for implementation such that the rights created may not be given effect in national courts until the necessary domestic legislation is in force. As a result of the European Communities Act 1972 (a piece of domestic legislation) the Treaties and European legislative measures take precedence over domestic legislation in the areas of competence created by the Treaties. The European Court of Justice (ECJ) was created by the Treaties and is charged by them with interpreting and ensuring the uniform application of the Treaties across the Union. This means that within its area of competence the decisions of the ECJ take precedence over those of UK national courts, including the House of Lords. The ECJ has a dual role, as a court of original jurisdiction where citizens may seek a determination of their rights in some circumstances, and as a court of reference for the purposes of issuing guidance to national courts on legal issues arising from the Treaties and European legislative measures. There are several European legislative measures that affect the construction industry including, for example, the Construction Products Regulations 1981 (i.e. domestic secondary legislation made under the Building Act 1984, to implement the UK’s obligations under the Construction Products Directive 89/106/EEC, which is a European legislative measure made pursuant to the Treaties).

2.3 Contractual rights Most commercial relationships are regulated by private agreement between the participants – that is to say, a binding legal contract. Under the common law doctrine of freedom of contract (which simply recognises that the UK is a liberal market economy) everyone is free to sell their labour and possessions at the best price and upon the best terms they can get in the open market. Provided that a contract is made for a lawful purpose, it is not for the courts to interfere in the bargains that people freely make, even if someone has made a bad bargain. The parties are free to adopt whatever terms they wish, and in doing so may choose to regulate their arrangements in a manner that is different from common law or statutory requirements, unless a particular requirement is mandatory or a particular term unlawful. The courts in the UK confine themselves to enforcing contractual rights by granting remedies for breach in appropriate cases, such as damages (i.e. compensation) injunction or specific performance. To the extent that a private agreement is incompatible with any of the mandatory requirements of the common law or statute it will not be

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Defective Construction Work enforced. So, for example, the courts will not enforce a contract for an illegal purpose. Also, sometimes the ability of the parties to supply their own terms may be constrained by the need to conform with relevant mandatory statutory requirements. An example of this approach can be found in the Housing Grants, Construction and Regeneration Act 1996, which allows the parties to qualifying contracts to supply their own terms in relation to the matters covered by the Act, but which provides a default arrangement if they do not. In some instances it is not possible to exclude statutory requirements at all; in this respect all building work must comply with standards laid down in the Building Act 1984. It is also the case that if a contractual provision is incompatible with a mandatory common law or statutory requirement then, unless the contract itself is rendered void, the offending provision may be treated as void and the relevant common law or statutory provision applied instead. If a private agreement fails to make provision for important matters, then the common law or statute may imply suitable terms (see Chapter 3, section 3.4). The starting point therefore when analysing any commercial dispute – including one about defective work – is to establish the terms that the parties have agreed upon and to give effect to them provided they are not incompatible with mandatory common law or statutory requirements. The existence of a valid contract does not rule out a role for the common law or statute. In this respect it may be necessary to resort to the common law if the contract is silent in relation to important matters, or it may be necessary to establish the existence of a duty of care in the tort of negligence in order, for example, to avoid the consequences of a contractual limitation period; or it may be desirable to rely upon a statutory duty, such as the duty under the Defective Premises Act 1972, in addition to any contractual rights. Finally, in the absence of a contract, the tort of negligence, and to a lesser extent the law of restitution, may provide the only route to a remedy.

Chapter 3

Contracts: An Overview

The principal source of remedy in relation to defective building work is the contract between the parties, if there is one. It is the primary source of the parties’ rights and obligations, because it sets out the agreed terms, and is therefore the starting point for any enquiry about the adequacy of building work and the entitlement to compensation (or any other remedy). In those relatively rare instances where building work is carried out despite the absence of a contract the injured party – that is to say, the person suffering harm as a result of defective work – may have a remedy in tort (see Chapter 6) or restitution (see Chapter 4), but these latter sources of rights often give rise to a more restricted and less certain remedy than contractual rights provide. The law of contract is a vast subject, and one that is beyond the purview of this book, which must confine itself to some basic points about the function of contracts and how they and their terms come about.

3.1 Function The existence of a contract has the advantage, and the function, of providing certainty. As a minimum a contract provides certainty as to the parties, the work and the price. But there will usually be certainty about a great deal more, as the rights and obligations of the parties if not expressly spelled out will be spelled out implicitly – even though the degree of precision of the contractual terms may vary. In relation to building projects there is often – especially in relation to high-value commercial and public projects – a multiplicity of relationships, with the result that the precise contractual framework will vary depending on the method of procurement adopted, but purchasers invariably enter into contracts with their builders and may directly engage some or all of the professional consultants whose services are required. The procurement method may also involve a variety of collateral contracts linking purchasers and/or interested third parties to each member of the project team. These interested third parties may include funders, prospective purchasers and/or prospective tenants of the completed works, and even the landowner (if this latter person is not the purchaser of the building work and related services). Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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Defective Construction Work The reason why a contractual framework is essential is that, without one, the rights of persons interested in the satisfactory completion of building projects will be dependent on establishing the existence of a non-contractual right, with all the attendant uncertainties this may entail. In these circumstances it is unwise, especially for purchasers, to embark on a building project without first putting all of the relevant relationships on a sound contractual footing.

3.2 The basics Most building work and most ancillary professional services are carried out under a contract, even if the parties do not appreciate its existence – or even all of its terms. Over the space of little more than 200 years the courts have laid out the common law framework for identifying the existence of a contract, its terms, the performance requirements, and remedies for failure to perform. Contracts are divided into two basic types. They are either simple, or they are specialties. The two types have slightly different attributes. It is worthwhile to state some basic concepts for each of these two types of contract.

3.2.1 Simple contracts A contract may be entered into orally or under hand (i.e. in writing, but signed only), or partly orally and partly by writing. A contract so made is known as a simple contract. The making of a simple contract requires four basic ingredients: an offer capable of acceptance; an unequivocal acceptance of the offer; consideration moving from the promisee; and an intention to create legal relations. The terms of a contract so made will (subject to proof) consist of the matters expressly agreed upon by the parties, although in appropriate circumstances terms may be implied. So, for example, if the parties do not agree upon the price to be paid for the requested work, the law will imply a term that a reasonable price must be paid. Similarly, if a date for completion of the work is not expressly agreed upon by the parties, a term will be implied that the work must be completed within a reasonable time. Other terms may also be implied (see section 3.4 below). If a builder executes work upon request, that will generally be sufficient to found a binding contract (because the four ingredients will generally be present), even though issues such as price and completion date may not have been addressed, let alone agreed. The effect in practice is that building work is rarely carried out, and building services rarely provided, in the absence of a contract between the parties.

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3.2.2 Deeds A contract may be executed as a deed, i.e. ‘under seal’. The correct term for such a contract is a ‘specialty’. Specialties are always in writing, and must comply with certain formalities as to execution – although since the Law of Property (Miscellaneous Provisions) Act 1989 the old requirement for the affixing of a seal is no longer essential. Specialties do not have to be supported by consideration, although they usually are because equitable remedies (such as specific performance) are not available in the absence of consideration.

3.2.3 Distinction between simple contracts and deeds The key distinction between simple contracts and specialties, at least for the purposes of defects, is the resultant limitation period. For simple contracts the limitation period is 6 years from accrual of the cause of action, whereas for specialties it is 12 years (unless, in either case, the contract expressly provides otherwise). After the expiry of the relevant limitation period the right to bring a claim under the contract is barred. It is important to note, however, that the expiry of the limitation period bars the remedy, not the right. This means that a cause of action that has become statute-barred may not be used as the basis of a claim, but it may be set up as a defence to a claim (to the extent that it would, but for the expiry of the limitation period, have constituted a defence: see Filross Securities Ltd v. Midgeley (1988)).

3.3 Express terms A contract does not have to be extensive or complicated. The parties may have discussed and agreed little more than the scope of work and price, and they may or may not have reduced their bargain to writing. If the parties have agreed upon other things (such as the completion date, who shall take particular risks, or payment on account) then these things become the express terms of the contract, and they may be written or oral. Often, however, elaborate and compendious written contracts are produced that incorporate, or at least are based upon, one of the many model conditions published for use in connection with building projects (see section 3.8 below). The express terms of a contract may be classified by their importance as conditions, warranties or innominate (sometimes called ‘intermediate’) terms. Conditions are terms that, if breached, entitle the innocent party to treat himself as discharged from further performance and to

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Defective Construction Work sue for compensation. Warranties, on the other hand, give rise to a right to damages only. Innominate terms are those that cannot be classified until breached, when the nature and impact of the breach will determine whether the term may be treated as a condition or merely as a warranty. Contractual terms are construed by ascertaining the common intention of the parties, which is usually achieved by examining the background context of the contract (see Investors Compensation Scheme v. West Bromwich Building Society (1998)).

3.4 Implied terms It is not unusual for the parties to a contract not to discuss, let alone reach agreement upon, all sorts of important issues – such as the price, the completion date and the quality requirements for the work to be undertaken. When this occurs, the common law and/or statute will sometimes supply appropriate terms. The common law achieves this by a process of implication in accordance with a recognised set of principles, whereas each statute that supplies terms will set out its own rules as to the circumstances when the terms it creates may be implied. For the purposes of defects in building work the statute of principal concern for the purpose of implying terms is the Supply of Goods and Services Act 1982. However, although not directly concerned with defects, the Housing Grants, Construction and Regeneration Act 1996 may, through the terms it implies, have an indirect effect upon the rights of the parties when defects arise.

3.4.1 Common law terms The common law will imply terms only in restricted circumstances. First, as Lynch v. Thorne (1956) confirms, terms will be implied into a written contract only ‘under the necessity of some compulsion.’ The court did not feel compelled to imply terms in that particular case, which has since been described, in Plant Construction Plc v. Clive Adams and JMH Construction Services Ltd (2000), as both problematic on its facts and one that should be treated as ‘an example of the principle that terms are less readily implied in a contract containing detailed express terms and that you cannot normally imply a term which is inconsistent with an express term’. Second, and subject to the Lynch constraint, the implication of terms into a contract will, as set out in Liverpool City Council v. Irwin (1977), generally occur only when it is reasonable to do so:

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• to give effect to the presumed (i.e. obvious, but unexpressed, inten• •

tion of the parties); or of necessity to give business efficacy to the contract (i.e. because without the implied term the contract will not work); or where it is customary in a particular trade, or a legal incident of a particular type of contract.

If a proposed term does not fall within one of these three categories, it may not be implied. It is particularly important to appreciate that a term may not be implied merely because it is considered reasonable. Indeed, the Liverpool decision makes it clear that there is no basis for the implication of ‘reasonable terms’ into a contract. The general approach to the implication of terms and the application of this approach in a building contract context can be found in London Borough of Merton v. Stanley Hugh Leech Limited (1985). Terms relating to the quality and standard of work that have been implied into building contracts under the common law rules (and are therefore relevant to defects) include terms that a house must be reasonably fit for human habitation on completion (Hancock v. BW Brazier (Anerly) Ltd (1966)), and that work should upon completion be reasonably fit for purpose in appropriate circumstances (Independent Broadcasting Authority v. EMI Electronics Ltd and BICC Construction Ltd (1980)). Further, although the courts have also implied terms concerning the merchantability of goods supplied (Young & Marten v. McManus Childs Ltd (1968)) and the need for work to be carried out in a good and workmanlike manner (Hancock, above), these terms have been largely superseded by implied terms supplied under the Supply of Goods and Services Act 1982.

3.4.2 Supply of goods and services act 1982 During the course of the 19th century the common law developed a series of terms that would be implied into contracts for the sale of goods which, at the end of that century, were codified (with modifications) when Parliament enacted the Sale of Goods Act 1893. This codification of the law was re-enacted with further modifications by the Sale of Goods Act 1979, which has itself been subject to revision, in particular by virtue of the Sale and Supply of Goods Act 1994. The implied terms and other rules codified in 1893 and 1979 did not apply to building work, because contracts for building work are concerned with the supply of work and materials rather than the sale of goods (the 1979 Act is still relevant to transactions between builders and their materials suppliers). For work and materials contracts it was left to the common law (after 1893) to fill the gap whenever the parties

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Defective Construction Work failed to address important issues, and this it did by implying appropriate terms broadly similar to those it had applied to the sale of goods only. In particular it was recognised in Randall v. Newsom (1877) that under the common law terms concerning description, quality and other matters will be implied where necessary. Eventually, the common law concerning contracts for work and materials was itself substantially codified by Parliament with the enactment of the Supply of Goods and Services Act 1982. This Act has also been amended by the Sale and Supply of Goods Act 1994. The result is that certain terms will now generally be implied as a matter of course into contracts that are not sale of goods contracts but ‘under which one person transfers or agrees to transfer to another the property [i.e. ownership] in goods’. The 1982 Act applies to such transfers whether or not services (i.e. work) are also supplied, and it also applies if services are carried out without any transfer of goods. So it applies to work and materials contracts, to design and build contracts, and to contracts for services only (such as design). Where the 1982 Act applies various terms will be implied, without recourse to the common law rules for importing terms, unless such implication is excluded in accordance with the rules laid down in the 1982 Act itself. These statutory implied terms require, among other things, that:

• goods and materials should conform with any description applied to • • • •

them; goods and materials should conform to any sample as may have been provided; goods and materials should conform to an objective quality standard; goods and materials should, in appropriate circumstances, be reasonably fit for their intended purpose; and reasonable skill and care should be exercised in relation to any services supplied.

Only the last of these terms will be implied in relation to contracts for the provision of services without any transfer of goods. Despite codification, there may nevertheless be circumstances when the common law still has a role, and may be called upon to imply terms into building contracts. This occurred, for example, in Independent Broadcasting Authority v. EMI Electronics Ltd and BICC Construction Ltd (1980), where a designer/supplier was found to have impliedly warranted the fitness for purpose of the completed design (as opposed to the individual components) (see Chapter 10, section 10.4). This implied term continues to apply in appropriate circumstances despite the subsequent advent of the 1982 Act.

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3.4.3 Housing Grants, Construction and Regeneration Act 1996 Another source of implied terms is Part II of the Housing Grants, Construction and Regeneration Act 1996 (HGCRA). This Act supplies terms only in relation to ‘construction contracts’ for the carrying out of ‘construction operations’. The definition of these terms as used in Part II of the Act limits its scope to the building industry. In this respect a construction contract is one that involves the arranging, the carrying out or the provision of labour for construction operations, and includes agreements for architecture, design, surveying and advice on building, engineering, decoration and landscaping so far as they relate to construction operations. Construction operations consist of works of construction, alteration, repair, maintenance, extension, demolition or dismantling of buildings or structures or works forming or to form part of the land, as well as installation and fitting-out work and operations that are an integral part of or preparatory to or for rendering complete such work, including painting or decorating. This broad definition is subject to a number of expressly excluded categories of work that relate to oil and gas, mining and tunnelling, nuclear processing, power generation, water, chemicals, pharmaceuticals, foodstuffs and artistic works. Contracts for the sale of goods only are also excluded from the operation of the HGCRA, as are (pursuant to the Construction Contracts (England and Wales) Exclusion Order 1998) agreements for highway and sewerage adoption, for planning matters under the Town and Country Planning Act 1990, for the Private Finance Initiative, and for development of land (where the development agreement also involves the disposal of an interest in the land in question). Finally, the Act also excludes from its ambit contracts with residential occupiers. Despite these exclusions, the vast majority of non-domestic building work carried out in England and Wales will be subject to the requirements of Part II of the Act. The main thrust of Part II of the HGCRA is to provide a right to refer disputes to adjudication and a right to payment on account except where the work duration is, or is estimated to be, less than 45 days. The Act prescribes that every construction contract shall provide an adequate mechanism for determining what payments become due and when, and shall provide for a final date for payment of sums due. It also restricts the right to withhold payment of any sum due, provides a statutory right to suspend work for non-payment of sums due, and prohibits certain conditional payment provisions. If a construction contract does not provide adequately for payment on account, or does not comply with the restrictions on withholding payment, then the relevant provisions of the Scheme for Construction Contracts (England and Wales) Regulations 1998 will apply to the contract as an implied term.

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Defective Construction Work The importance of the requirements of Part II of the HGCRA in relation to defects is that the purchaser may be obliged to pay for defective work if he fails to comply with the notice requirements relating to the withholding of payment, or if an adjudicator wrongly decides that work is not defective when, in fact, it is.

3.5 Exclusion of implied terms It was confirmed in G.H. Myers & Co. v. Brent Cross Service Co. (1934) that the common-law-implied terms as to description, sample, quality and fitness would exist ‘unless the circumstances of the contract are such as to exclude any such warranty.’ The position is similar under the Supply of Goods and Services Act 1982, which creates a rebuttable presumption that the terms set out in the Act will be implied into contracts for work and materials or for services. However, this presumption may be rebutted and the terms negatived or varied by express agreement, or by the course of dealing between the parties, or by such usage as binds both parties to the contract. Further, the 1982 Act makes it clear that an express term does not negate a statutory implied term unless inconsistent with it. Terms that purport to exclude the statutory implied terms will be construed strictly (see Andrews Bros (Bournemouth) Limited v. Singer & Company Limited (1933)). To be excluded by a course of dealing it is necessary to demonstrate that the parties have consistently on former and similar occasions adopted a particular course of dealing, such as the exclusion of the statutory implied terms, and that it was the intention of the parties to adopt that course of dealing on the occasion in question. To exclude a statutory implied term by usage involves proof of a particular custom or trade practice and of an intention to adopt the custom or practice. An exclusionary clause may itself fail if it offends the requirements of the Unfair Contract Terms Act 1977, which provides that the implied conditions as to description, sample, quality and fitness may not be excluded where:

• the buyer is a consumer as defined in the 1977 Act; • the buyer is not a consumer, but the exclusion or restriction of the

statutory implied terms does not satisfy the test of reasonableness as laid down in the 1977 Act.

Further, consumers may rely upon the Unfair Terms in Consumer Contracts Regulations 1999 where contract terms have not been individually negotiated – but this requirement will not help consumers who impose

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terms of contract upon their builder, for example by stipulating the use of particular model conditions (see Bryen & Langley Ltd v. Boston (2000)). If the regulations apply, a term will be regarded as unfair if, having regard to the requirement of good faith as described in the regulations, it causes a significant imbalance to the detriment of the consumer. If a term is found to be unfair pursuant to this test, then it is not binding upon the consumer.

3.6 Exclusion clauses The express terms of a contract may exclude or restrict the liability of one or more of the parties in the event of breach of contract and/or breach of duty. Exclusion and restriction clauses must be brought clearly to the notice of the other party (see Parker v. South Eastern Railway (1877)). Nevertheless, it was confirmed in Shepherd Homes Ltd v. Encia Remediation Ltd (2007) that the person relying on such a clause need only do what is reasonable fairly to bring the onerous clause to the attention of the other party, which does not necessarily require that the clause be specifically drawn to the attention of the other party. Although exclusion and restriction clauses are always strictly (i.e. narrowly) construed, this does not render every exclusion and restriction invalid. Invalidity occurs only if the exclusion or restriction does not satisfy the reasonableness test laid down in the 1977 Act. Such unreasonableness may render the exclusion or restriction ineffective, not only in the circumstances indicated in section 3.5 above but also where the term excludes or restricts liability for breach of contract, and where it allows performance that is different in substance from that which the contract envisaged, or no performance at all. In this respect it was accepted in Shepherd that there is nothing unusual about a clause that restricts liability to the contract price, and that such a clause is not of itself contrary to the 1977 Act. Some model conditions contain express exclusion and restriction provisions. In this respect the JCT SBC conditions (and the JCT DB conditions) limit the builder’s liability for design to losses arising from lack of skill and care, and make provision for the parties to specify (if they so wish) that the liability for those losses shall be limited to a stipulated maximum amount except where the Defective Premises Act 1972 applies, or where liquidated damages for delay apply. The MF/1 conditions also expressly limit the liability of the builder in certain circumstances. Likewise, the RIBA conditions similarly make provision for the parties to specify a cap on the compensation payable in the event of breach by the architect.

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Defective Construction Work

3.7 Risk allocation Contracts effect an allocation of risk as between the parties. Put simply, builders must, in the absence of contrary terms, complete their work on time for the agreed price – as must professional consultants. Events that prevent timely completion, or which increase the cost of the work, are generally at the builder’s risk. So, for example, adverse weather or damage to the work that delays completion and/or increases the cost of the work is at the risk of the builder. However, subject to any express contrary terms, delay and extra cost will be at the purchaser’s risk if caused by the purchaser. For example, instructions to change the work are at the purchaser’s risk. The result is that instructed changes that delay completion or increase the cost will, subject to the terms of the contract, oblige the purchaser to compensate the builder. The manner in which the law allocates risk does not always meet the needs of commerce. The result is a tendency either to adopt a written model – or standardised – conditions of contract that balance the commercial interests of the parties, or to adopt ad hoc terms. In the latter instance this may involve the use of ad hoc or standard terms produced by one of the parties and which reflect the demands and bargaining strength of that party.

3.8 Model conditions of contract Although English law does not require contracts to be in writing, building projects are procured mainly under a written contract. Often the parties will utilise one of the many model conditions published for use in connection with construction projects. Various construction industry associations and professional institutions have drawn up model conditions for use in connection with construction projects. These organisations include the Joint Contracts Tribunal (JCT), the Institution of Civil Engineers (ICE), the Institution of Mechanical Engineers (IMechE), the Institution of Engineering Technology (IET), the Institution of Chemical Engineers (IChemE), the Association of Consulting Engineers (ACE), the Royal Institute of British Architects (RIBA), the Civil Engineering Contractors Association (CECA), the Royal Institution of Chartered Surveyors (RICS), and the International Federation of Consulting Engineers (FIDIC). The model conditions published by these bodies relate to the range of procurement methods in use in the UK, from work and materials contracts, to design and build, management contracting, construction management and the relatively new partnering or collaborative arrangements, as well as a variety of appointments for professional consultants.

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Despite many differences there is a remarkable degree of similarity in the structure of the model conditions for building and engineering work published in the UK, although there are some significant differences in the approach to particular aspects. In this book the focus for building and engineering contracts will be upon the JCT conditions (principally the JCT SBC conditions), although with some comparative references to the ICE conditions, the NEC3 conditions and the MF/1 conditions. For professional appointments the focus will be upon the RIBA Standard Agreement for the Appointment of an Architect 2007.

Chapter 4

No Contract/Restitution

Where building work is carried out pursuant to a contract, it is the contract that will primarily determine the rights and obligations of the parties. However, building work may be carried out in circumstances where the parties have not entered into a contract. This can occur in a variety of circumstances. For example:

• work and materials may be supplied even though the applicable

•

• •

terms of contract have not been considered at all or, in circumstances where – despite discussions about the applicable terms – agreement has not been reached; work and materials may be supplied pursuant to a letter of intent, but the intended contract may not eventuate, or work and materials may be supplied in excess of the stipulated financial authority or scope of work; work and materials may be supplied that are outside the contractual scope of work (i.e. in excess of the power to order variations); or (albeit an extreme, and probably rare, example) work and materials may be supplied by an uninvited stranger.

In these circumstances, and despite the absence of a contract, the supplier may nevertheless be entitled to be paid by the person requesting the work and materials in question (or who acquiesces in their being supplied). The right to be paid in these circumstances arises in the law of restitution.

4.1 Restitution Where goods or services are supplied in the absence of a contract it may be unjust for some reason for the recipient not to pay for them. At one time, claims for payment for work done in the absence of a contract were characterised as ‘quasi contractual’ (see, for example, Hudson’s Building and Engineering Contracts, 11th edition, paragraph 1.263). Latterly the tendency has been to characterise such claims as restitutionary, and to eschew the notion of contract altogether (see Goff and Jones, The Law of Restitution, 4th edition, pages 5–12). 24

Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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The underlying basis of restitutionary claims is that of unjust enrichment, although sometimes it may be estoppel or acquiescence. An unjust enrichment occurs when work and materials are supplied in circumstances that show a clear and legitimate expectation of payment, and where the recipient (often, though not exclusively) takes advantage of the absence of the usual contractual formalities either to avoid payment altogether or to limit the sum payable. In these circumstances (and others) the remedy of restitution ensures that the work and materials are paid for if the recipient would otherwise be unjustly enriched, which he will be if he either expressly or impliedly requests the work in question or acquiesces in it being supplied. Consequently the recipient will, in appropriate circumstances, be ordered to pay for work done and materials supplied despite the absence of a contract. If goods or services are supplied in the absence of a contract – but in circumstances that give rise to a restitutionary entitlement – the recipient will be obliged to pay a reasonable sum, often referred to as a quantum meruit, based upon the value of the goods and services. The object of this process of restitution is not to compensate the provider, but to ‘subtract’ from the recipient the benefit by which he has been unjustly enriched, which generally – though by no means exclusively – will be the market value of the work and materials supplied (see Sempra Metals Ltd v. HM Commissioners of Inland Revenue (2007)).

4.2 Restitution and defects Badly done building work may confer little or no benefit upon the recipient. Consequently, a restitutionary claim should not permit the supplier to benefit financially from badly done work (at least not if the defects are patent at the time when the assessment of value is made – see section 4.2.7 below for the position concerning latent defects). It follows that the reasonable sum payable by the recipient ought to reflect the resultant absence or reduction of benefit. This approach is broadly supported by the authorities, although there is not yet a full and coherent analysis to be found among the cases to date. In one of the earliest building cases to consider the impact of defects upon restitutionary claims, Sanjay Lacchani v. Destination Canada (UK) Limited (1996), it was decided that: ‘If the building contractor leaves defective work then, quite obviously, the actual costs incurred by the building contractor must be appropriately adjusted and/or abated to ensure that the owner will not be required to pay more than the goods and services are truly (objectively) worth.’

In assessing the true objective worth it is necessary, according to Sanjay, that the work must be done ‘properly’.

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Defective Construction Work Subsequently, Serck Controls Limited v. Drake and Scull Engineering Limited (2000) nudged matters in the same direction in relation to a restitutionary claim where the reasonable sum was assessed by reference to a ‘costs plus’ basis. In this case it was found that deductions should be made for time spent repairing or repeating defective work. In addition, the court made it clear that: ‘A second distinction is that between defects made good during the course of the work . . . [for which adjustment should be made] . . . and those remaining at completion. There should clearly be a deduction for the latter, if pleaded and proved, whatever the mode of evaluation, simply because the work as handed over is thereby worth less . . .’

This means that the supplier does not get paid for doing bad work in the first place, and may see his payment for good work reduced, on some undefined basis, to reflect defects patent at the time the reasonable sum is assessed.

4.2.1 The standard of work Unfortunately, neither Sanjay nor Serck identified the standard of work that the supplier must provide if a contract has not eventuated. If the recipient is to allege that the work or materials are defective, then it is necessary to identify the standard against which it is to be demonstrated that they are bad or substandard. (Or, putting it another way, it must be possible to identify the standards with which the work must conform before it can constitute a benefit that should be valued.) This difficult issue was addressed in ERDC Group Ltd v. Brunel University (2006), where the court accepted that the relevant standards to apply are to be judged by reference to the terms of the request. As the judge put it: ‘By complying with the request there was accession to that standard.’ In ERDC the builder had commenced work under a letter of intent that fixed a financial cap on the amount the University was liable to pay for work and materials in the event the envisaged contract did not eventuate. The letter also identified the terms of the proposed works and the specification. The builder carried out work up to the value of the authority and then beyond that value at the request of the University. Indeed, the work had progressed significantly towards completion by the time the builder left site. Despite this a contract had not by then eventuated. The builder sought a restitutionary payment for the work done. In response the University contended that the relevant value should be adjusted for defective work. In order to effect an appropriate adjustment the court applied the standards laid down in the specification to all of the work carried out by the builder. The rationale was that

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those were the standards that applied to the requests made by the University in the letter and in its later instructions, and which the builder purported to work to. It is possible that the circumstances and context may also be important – so that, for example, work carried out in high-quality premises may require a high quality of materials and finish. Assessing the value of the benefit by reference to a specification explicitly or implicitly referred to in the request is not only understandable; it is also consistent with the approach to assessing the reasonable sum itself, which, in appropriate cases, is judged by reference to the pricing structure that would have applied had the parties succeeded in concluding a contract. It is also consistent with the passage from Emden’s Construction Law that was cited in the ERDC case: ‘The measure should also have regard to the particular relationship between the parties and any advantages or disadvantages to them which arise out of that relationship. It may also take into account any prior discussions between the parties, and possibly the manner in which the services were performed. And where there is a concluded contract, but it is unenforceable, the contract itself may be good evidence of the value of the services performed.’

All of this points to a requirement to examine what the parties explicitly, or even implicitly, had in mind as the relevant standards – and to apply those standards. The position is, however, problematic if the parties do not address the standard of work at all.

4.2.2 The ‘usual standards’ Not every case will involve the explicit or implicit identification of a sophisticated specification in the manner that occurred in ERDC. Sometimes the specification will be as simple as ‘build a wall’ or ‘provide a new roof’. In these circumstances ERDC indicates that: ‘In the absence of a specification the usual standards would apply – the design and work would have to be a reasonably good quality and, in the case of work designed by ERDC, reasonably fit for its purpose.’

These ‘usual standards’ look suspiciously like the usual implied terms that apply to contractual arrangements (see Chapter 3). Blandly equating a restitutionary claim with a contractual claim is neither helpful nor necessarily consistent with principle. It may be that the correct approach – where there is ‘no contract’ – is to apply, as a minimum, the statutory requirements (see Chapter 10) and, where

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Defective Construction Work appropriate, the duty under the Defective Premises Act 1972. Some support for this approach can be found in the Serck decision, where it was observed that: ‘There may also be more specific duties, for example in relation to compliance with health and safety legislation and the directions of persons having powers under it, but it is not necessary for present purposes to come to conclusions about that.’

If this approach is adopted it will be seen that regulation 7 of the Building Regulations 2000 is remarkably similar in effect, if not identical, to the statutory implied terms as to suitability and fitness that arise under section 4 of the Supply of Goods and Services Act 1982, and therefore (albeit with one particular limitation – see section 4.2.3 below) a sound basis for applying the ‘usual standards’. It matters not when seeking to rely on the Building Regulations 2000 as the basis for the ‘usual standards’ that Section 38 of the Building Act 1984 – which makes provision for civil liability in the event of non-compliance with the Act – has not yet been brought into force. A tribunal dealing with a restitutionary claim can and should take into account that builders must supply materials and workmanship in conformity with the statutory requirements, and therefore should regard any work or materials that do not comply with those requirements as conferring no benefit at all, or at least a reduced benefit.

4.2.3 Fitness for purpose The device of using regulation 7 of the Building Regulations 2000 to substantially justify the adoption of the ‘usual standards’ when assessing work carried out in the absence of a contract (see section 4.2.2 above) does not justify the proposition that the design prepared by the builder should be fit for purpose – at least not in the absence of such a requirement attaching to the request. In this respect neither regulation 7 of the Building Regulations 2000 nor section 4 of the 1982 Act imposes a fitness for purpose condition on the overall design. In both cases the fitness for purpose requirement is limited to the individual components (i.e. ‘goods’ under section 4, and ‘materials’ under regulation 7). The common law does imply a fitness for purpose term into design and build contracts in relation to the completed work, but it is difficult to see how the imposition of such an obligation can be justified in the absence of a contract. Further, under regulation 7, building work is to be carried out in a ‘workmanlike manner’ (which is equivalent to the requirement under section 13 of the 1982 Act that ‘services’ are to be carried out with ‘rea-

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sonable care and skill’). As ‘design’ is an aspect of workmanship, this suggests that the design service ought – in the absence of a contract – to be subject to a care and skill obligation. Having regard to these points, it is difficult to see how a fitness for purpose obligation can apply to the overall design in the absence of such a requirement attaching to the request for the work to be done. The tort of negligence (see Chapter 6 and sections 4.2.6 and 4.2.7 below) offers some assistance in identifying the standards to apply (where the request does not do so), but even this does not impose a fitness for purpose obligation. On the contrary, it requires builders to exercise reasonable care. In the absence of a contract all of the above factors seem to militate against the recipient of building work being able to assert a broad entitlement to have the benefit valued on the basis that the design – that is to say, the overall design as opposed to the individual materials – should be fit for purpose. Such a consequence can come about only if it is a requirement attaching to the request, or if there is a contract.

4.2.4 The Defective Premises Act 1972 The Defective Premises Act 1972 (see Chapter 7) is a sound basis for identifying the standards with which work must comply, but it has its limitations. It will apply irrespective of a contractual relationship, but it applies only to dwellings. The 1972 Act applies a single broad standard with which dwellings must comply, namely fitness for human habitation. But not all defects will render a dwelling unfit for habitation, so this Act provides only a limited basis for adjusting the value of the benefit – albeit the value may be nil if the dwelling is unfit for human habitation, or the value may be reduced to reflect the cost of remedying those defects that have rendered the building unfit – if the defects are capable of remedy.

4.2.5 Failure to complete Another difficult issue that sometimes arises concerns the consequence if builders do not carry out and complete all of the work that the request envisaged. This problem was touched upon briefly in ERDC, where it was stated that: ‘Since the benefit has to be assessed overall, if, for example, work which was otherwise up to standard cannot be used because other work was not done or was not up to standard then the value must reflect that result.’

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Defective Construction Work This indicates that incomplete work that formed part of the request may have a detrimental impact on the value of completed work.

4.2.6 Cross-claims Sometimes the recipient may answer a restitutionary claim with a crossclaim in respect of costs incurred in connection with the completion of the requested work or associated work. This occurred in Crown House Engineering Limited v. Amec Projects Limited (1989), in which Crown House claimed a reasonable sum in respect of work carried out for Amec. The claim was resisted by Amec, who contended that the objective value should be reduced to reflect, inter alia, the manner in which the work was performed. Amec had incurred costs, including: the cost of work that Crown House had agreed to do but had not done, and which had to be carried out by others; the cost of clearing rubbish and debris left by Crown House; and the cost associated with commissioning and testing. Amec sought to set off these costs against the reasonable sum as if it were based on a claim in contract. Amec’s claims were advanced to rebut Crown House’s application (under Order 29 of the former Rules of the Supreme Court) for an interim payment in respect of the value of work done. The Court of Appeal, in Crown House, declined to deal with the application on the basis that it required full and detailed argument. The court nevertheless drew attention to the important question of law that arises in these terms: ‘On the assessment of a claim for services rendered based on a quantum meruit, may it in some circumstances (and, if so, what circumstances) be open to the defendant to assert that the value of such services falls to be reduced because of their tardy performance, or because the unsatisfactory manner of their performance has exposed him to extra expense of claims by third parties?’

Unfortunately, the only answer the court was prepared to offer was that: ‘this question of law is a difficult one, the answer to which is uncertain and may depend on the facts of particular cases.’ The decision in Crown House left the issue open for future consideration. It was touched upon subsequently in Sanjay and again in Hescorp Italia SpA v. Morrison Construction Ltd and Impreglio UK Ltd (2000), but not resolved. There plainly cannot be a contractually based cross-claim in the absence of a contract. But a cross-claim founded in the tort of negligence cannot be ruled out. The necessary ingredients of proximity, foreseeability and fairness are all potentially present, and so the foundations exist for a duty to exercise reasonable care to avoid causing foreseeable economic harm (see Chapter 6).

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4.2.7 Latent defects The cases to date have tended to concern defects that are patent at the time when the reasonable sum is assessed and paid. But defects may subsequently manifest themselves long after restitution has been made. When this occurs, the opportunity to set off against, or to otherwise adjust, the reasonable sum is lost. In these circumstances the tort of negligence is the obvious route to a remedy for defective work that causes physical harm – and indeed, in appropriate circumstances, economic harm (see Chapter 6 and section 4.2.6 above). In addition, once the builder has been paid, it may be that a cause of action in restitution for mistake will arise so that the payer can claim back all or part of the money paid over on the basis that it was paid under a mistake of fact, i.e. the paying party mistakenly believed that the work was properly carried out (save for defects patent at the time the payment was agreed or determined by legal action). In this respect Goff and Jones, Law of Restitution, 4th edition, on page 130 indicates that restitution should be granted if the payer can demonstrate that payment would not have been made but for the mistake, unless the payer took the risk of mistake.

Chapter 5

Letters of Intent

Building work is often commenced, and sometimes completed, pursuant to a letter of intent. The services of professional consultants are sometimes procured on the same basis. The ‘intent’ is that a contract will be entered into eventually. Sometimes, however, significant work is done without the intended contract ever coming to fruition. This does not necessarily mean that there is ‘no contract’.

5.1 Function A letter of intent generally instructs builders or professional consultants to commence work on the basis that the terms of contract will be agreed upon in due course, or that particular terms will apply if and when the intended contract is entered into. Sometimes it is the intention of the parties that a formal contract will be drawn up and executed promptly after the letter of intent is issued, but sometimes there may be important matters that remain to be agreed (such as the scope of work), or there may exist other preconditions that must be fulfilled before the intended contract can be entered into. For example, there may be planning or funding issues to resolve. In these circumstances a letter of intent may be limited in terms of scope of work or expenditure but otherwise apply the terms of the intended contract – usually coupled with a non-binding expression of intent that the balance of the works will be awarded once the impediment is lifted. Problems tend to occur if the scope of work or financial cap is exceeded, or if the work is abandoned, without the intended formal contract coming to fruition.

5.2 Legal analysis In Turiff Construction Ltd v. Regalia Knitting Mills Ltd (1971), it was said that a letter of intent has two characteristics: ‘one, that it will express an intention to enter into a contract in future and, two, it will itself create no liability in regard to that future contract.’ But this at best tells only a very small part of the story. It does not tell anything about the 32

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position where the builder/consultant gets on with the work but the future contract does not eventuate, especially the position in relation to defects. The legal analysis of letters of intent has shifted quite considerably over the years since Turiff, culminating in Tesco Stores Limited v. Costain Construction Ltd (2003), where the court had to consider whether a contract had eventuated and, if so, what its terms might be. In doing so the court dispelled one particular myth in these terms: ‘It is part of the folklore of the construction industry that there exists a mythical beast, “the letter of intent”, the legal effect of which, if it is acted upon, is that it entitles a contractor to payment for what he does, but does not expose him to any risk, because it imposes no contractual obligations upon him.’

Life was probably breathed into the myth by the Turiff decision itself, where the conclusion was reached that: ‘As I understand it such a letter is no more than the expression in writing of a party’s present intention to enter into a contract at a future date. Save in exceptional circumstances it can have no binding effect.’

But this notion that letters of intent only exceptionally lead to a contract did not survive later scrutiny. In British Steel Corporation v. Cleveland Bridge & Engineering Co Ltd (1981) a much more flexible approach was adopted: ‘There can be no hard and fast answer to the question whether a letter of intent will give rise to a binding agreement; everything must depend on the circumstances of the particular case.’

In fact, very often the true position is much more akin to the position described in Jarvis Interiors Ltd v. Galliard Homes Limited (1999) that: ‘The correct analysis of the legal situation . . . is that a contract came into existence on the terms of the Letter of Intent, either when it was acknowledged by Jarvis . . . or when Jarvis began work, or, at latest, when Jarvis entered onto the site at Galliard’s request . . .’

But the position very much depends on the facts, which may include events that occur after the letter of intent is issued. For example, in G Percy Trentham Ltd v. Archital Luxfer Ltd (1992) the court declined to countenance the notion that a contract had not come into existence when the works had been fully performed. Even adopting the rubric ‘subject to contract’ is not necessarily decisive – it (or at least something like it) was decisive in Jarvis, but was not in Stent Foundations Ltd v. Tarmac Construction (Contracts) Ltd (1999).

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Defective Construction Work For now it is enough to say that letters of intent may give rise to a binding contract:

• if that is the effect of the language when objectively construed (as • •

occurred in A C Controls Ltd v. British Broadcasting Corporation (2002)); where an ‘if’ contract arises, i.e. a standing offer of specified remuneration if the builder carries out defined work (as occurred in British Steel); or if the transaction is fully performed and all obstacles to the formation of a contract are removed during the performance of the works (as occurred in Percy Trentham).

5.3 The implications where defects occur Once a contract for the work referred to in a letter of intent is found to exist, identifying the terms of contract presents no difficulties of principle. Often the work carried out under a letter of intent will be subject to the terms of the intended contract (although whether this is so depends on the language of the letter construed against its factual background), so that the standards can be judged by reference to the specification (if there is one) identified in the letter. But, in any event, once a contract comes into existence all the usual implied terms – including the statutory implied terms under the Supply of Goods and Services Act 1982 – will apply where appropriate. The result, for the most part, is that where work is carried out pursuant to a letter of intent a contract comes into existence even though it may not be the intended contract. This contract will contain obligations in relation to the scope and quality of work. This means that if defects are discovered there will be an objective standard, derived either from the terms of the incorporated documents or from the statutory implied terms or both, against which the quality of the work may be judged. This means that compensation will be payable – and easily assessable – even though the intended contract did not eventuate. However, the terms of the intended contract may not always become incorporated into the resultant contract even though referred to in the letter of intent. For example, in Tesco Stores the court found that a contract came into existence after the builder commenced work under a letter of intent that referred to model conditions and other documents that were intended to be included in the proposed contract. However, events after the letter was issued meant that it was a ‘bare’ contract (broadly it identified the parties, price and performance and incorporated relevant implied terms) that did not incorporate all of the terms of the proposed model conditions that Tesco desired. This resulted in

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serious prejudice to Tesco because the bare contract was subject to a limitation period of only 6 years, whereas the intended contract provided for a 12-year period. Tesco’s claim against Costain for damages for breach of contract arising from alleged defects was time-barred as a result. This decision throws into stark relief the danger of not formalising contractual relations at the outset, or at the very least promptly after work has commenced. In addition to the contractual rights that may flow from a letter of intent, there may also arise a concurrent duty of care in tort to avoid physical, and in some circumstances economic, harm (see Chapter 6). Alternatively, on those rare occasions where work is carried out under a letter of intent but ‘no contract’ eventuates, the only scope for a remedy for defects lies in the tort of negligence (see Chapter 6) or restitution (see Chapter 4).

Chapter 6

Tort: An Overview

The law of tort is concerned with non-contractual civil (as opposed to criminal) rights and obligations. Tort is an old Norman French word that means ‘wrong’. In some jurisdictions, such as Scotland, the word ‘delict’ may be used instead of, or interchangeably with, the word ‘tort’. In broad terms someone who commits a civil wrong has to put it right by paying compensation to persons injured as a result. The importance of the law of tort in relation to defects is that it may provide a remedy in the absence of a contract, or if the contractual rights are subject to a limitation bar (see Chapter 19), or where a contribution is sought between wrongdoers under the Civil Liability (Contribution) Act 1978 (see Chapter 17). Whether the law of tort will provide a remedy depends on whether there has been a negligent act by someone who owes a duty of care to the injured party.

6.1 Negligence The law of tort imposes duties the breach of which will, if loss arises, give rise to a cause of action for compensation. There are a number of individual torts, but where defects are concerned it is the tort of negligence that comes into play. This tort is often used as the basis for defects claims against builders and professional consultants by their clients (either alone or as an alternative to claims in contract) and by third parties (such as neighbours and subsequent owners/users of building works who do not have a contractual relationship with the builder or professional consultants). The modern law of negligence sprang into life with the seminal ‘snail in an opaque bottle’ decision of the House of Lords in Donoghue v. Stevenson (1932). Since then the law of negligence has ebbed and flowed, particularly in relation to the obligations of builders. The law of negligence obliges persons to exercise reasonable care not to cause harm to persons to whom they owe a duty of care. It is only when harm results from a failure to exercise reasonable care that the right to compensation arises. If harm arises despite the exercise of reasonable care then there is no right to compensation under the tort of negligence. Many claims 36

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turn on the issue of what constitutes reasonable care. But reasonable care is only one ingredient of the tort of negligence. Another (and prior) ingredient is the existence of a duty to avoid causing harm. Whether a failure to exercise reasonable care will give rise to a right to compensation depends on whether a duty to avoid harm is owed to the injured party. In the absence of such a duty there is no right to compensation. There are two distinct duties that arise in the tort of negligence: first, a duty to avoid causing harm to persons and property; and second, a duty to avoid causing harm to economic interests.

6.1.1 Persons and property The duty to avoid harm to persons and property – which originates from Donoghue – can be summarised as follows: the law imposes a duty to avoid careless acts or omissions that may cause foreseeable physical harm to persons or property. If the duty is breached, the wrongdoer is liable to compensate the injured party for the resultant loss, unless it is a purely economic loss. The latter exception arises because the Donoghue duty does not extend to protecting persons from purely economic harm (it does, however, permit the recovery of economic loss that is parasitic upon physical harm). The wrongdoer may be a builder (in relation to workmanship or materials) or a professional consultant (in relation to design, inspection, supervision etc.). It was explained in Customs & Excise v. Barclay’s Bank (2006) that, in order to determine whether a duty of care is owed to a particular person or in particular circumstances, ‘reasonable foreseeability of harm is usually enough . . . to generate a duty of care.’ This means that the builder/consultant wrongdoer may owe a duty not just to his immediate customer/client, but also to neighbours and visitors to the site, as well as subsequent owners and users of the works, if it is reasonably foreseeable that they will suffer harm if reasonable care is not exercised.

6.1.2 Pure economic loss The duty to avoid harm to persons and property through carelessness is subject to the restriction that if the careless act or omission causes damage to the thing under construction, i.e. the building work and resultant structure, then the cost of putting right the damage is pure economic loss – and is not recoverable in a negligence claim under the Donoghue principle (see D & F Estates Ltd v. The Church Commissioners (1988) – which overturned a number of earlier decisions that suggested otherwise).

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Defective Construction Work Under the Donoghue principle, if a builder carelessly gets the concrete mix wrong then the cost of putting right the defective concrete – and other parasitic damage to the structure – when it manifests itself later on is a purely economic cost, or loss. It is a cost that can be recovered through the contract, if there is one, and provided the contractual limitation period has not expired. But if there isn’t a contract, or if the contractual limitation period has expired, then the Donoghue principle doesn’t offer a route to a remedy for a purchaser against his builder or professional consultants because the loss is purely economic and outside the scope of the remedy. Nor does the Donoghue principle help a third party who has suffered purely economic loss, such as a subsequent purchaser or lessee, as the builder does not owe them a duty to avoid defects in the structure that result in the need to incur expenditure to effect repairs (see Department of Environment v. Thomas Bates & Sons Limited (1990)).

6.2 Complex structures The economic loss restriction was muddied for a time by the now discredited ‘complex structure theory’ or ‘complex structure exception’. There isn’t such an exception, but it is important to understand the jurisprudential concept and therefore the scope of the restriction on the right to recover compensation for purely economic loss. In this respect the complex structure theory, put simply, posited that if one part of a complex structure was carelessly constructed and caused damage to other parts of the same structure, then those other parts should be treated as ‘other property’ so that the cost of repairing those other parts could be recovered from the builder or designer under the Donoghue principle. Despite many valiant attempts to sustain it, the theory was ultimately found to run contrary to the basic principles of tortious liability.

6.2.1 A theory? The complex structure theory was given life by the non-binding observations (obiter dicta) in the speeches of two of the Law Lords – Lords Bridge and Oliver – in the course of their respective judgments in D & F Estates. Lord Bridge posited that: ‘. . . it may well be arguable that in the case of complex structures . . . one element of the structure should be regarded for the purposes of application of the principles under discussion as distinct from another element, so that damage to one part of the structure caused by a hidden defect in another part may qualify to be treated as damage to “other property”.’

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At this point it was a theory, because it was described in the context of setting out two arguable but competing propositions. But this theory didn’t last long. It was not adopted in Warner v. Basildon Development Corporation (1990), where a subsequent purchaser of a house was denied compensation for negligently constructed foundations that led to damage to the superstructure. In that case the court refused to regard the superstructure as other property. Further, the refusal to adopt the complex structure theory in Warner was because it was regarded as inconsistent with the principles that underpinned the D & F Estates decision. Subsequently, the complex structure theory was for the most part rejected by the House of Lords in Murphy v. Brentwood District Council (1990). In that decision Lord Bridge re-examined his own earlier speech in D&F Estates and concluded that the interdependence of the parts of a structure made it difficult to separate them from one another, so that it wasn’t possible to treat parts as separable from the whole: ‘The reality is that the structural elements in any building form a single indivisible unit of which the different parts are essentially interdependent. To the extent that there is any defect in one part of the structure it must to a greater or lesser degree necessarily affect all other parts of the structure.’

This led, in the judgment of Lord Bridge, to a conclusion that appeared to have killed off the complex structure theory: ‘For these reasons the complex structure theory offers no escape from the conclusion that damage to a house itself which is attributable to a defect in the structure of the house is not recoverable in tort on Donoghue v. Stevenson principles, but represents purely economic loss which is only recoverable in contract or in tort by reason of some special relationship of proximity which imposes on the tortfeasor a duty of care to protect against economic loss.’

So, in the opinion of Lord Bridge, for a claim under the Donoghue principle it is not possible to treat parts of an entire structure as separate from one another for the purposes of bringing a claim against the builder or designer. However, if parts of a building are designed or built by separate builders (including sub-contractors) then a tort claim may lie against the negligent builder if a defect in his work leads to damage in another part built by a different builder. In this respect Lord Bridge envisaged a distinction between different parts of the structure: ‘A critical distinction must be drawn here between some part of a complex structure which is said to be a “danger” only because it does not perform its proper function in sustaining the other parts and some distinct item incorporated in the structure which positively malfunctions so as to inflict positive damage on the structure in which it is incorporated.’

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Defective Construction Work By way of example of a positive malfunction Lord Bridge envisaged a central heating boiler exploding or an electrical installation causing a fire. In each case it was envisaged that the negligent sub-contractor (though not, it would seem, the builder) would have to compensate the injured party for the damage to other parts of the structure. However, once the defect is known, it no longer represents a source of danger. This latter point indicates that, once the defect is discovered, the owner can and should put it right and sue for his losses (subject to the economic loss exception), but if the owner continues to use the defective item he will not be able to recover any additional loss that would have been avoided if appropriate action had been taken upon discovery of the defect (this approach was later adopted in the Nitrigin case).

6.2.2 An exception? Since Murphy the complex structure theory has been considered in a number of further cases. In Jacobs v. Morton & Partners (1994) it appeared to have some life left in it, but now as an ‘exception’ to the general economic loss restriction. In Jacobs a home owner recovered compensation from structural engineers for loss suffered as a result of defectively designed underpinning of existing foundations, which led to damage to the rest of the house. Although the original foundations were defective, the house was capable of repair by underpinning. After the defective underpinning was carried out – some eight years after construction of the house – the house was doomed. In Jacobs it was decided that the complex structure theory was a part of English law, albeit strictly limited: ‘It is a modest exception to the general principle laid down in Murphy that defects in a building should generally be characterised as economic loss suffered by the building owner.’ On the facts of Jacobs the judge concluded that the underpinning raft had been designed by a builder who had not been responsible for any other part of the building, that the raft had only merged with the rest of the building ‘to some degree . . . but not entirely’ so was a distinct item, and that the defective raft had inflicted positive harm upon the rest of the house because it was no longer repairable. The editors of the Building Law Reports have cautioned that Jacobs should be approached with care. Their caution is probably justified, because if the rest of the house was ‘other property’ then the decision is really just a case of property damage that falls within the basic Donoghue principle without impinging on the economic loss restriction. Later, in Tesco Stores v. Norman Hitchcox Partnership (1997), a further unsuccessful attempt to deploy the complex structure exception occurred in a case against architects after a supermarket was destroyed by fire – but it failed on the facts rather than by way of an outright rejection of

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the complex structure exception. In Tesco the fire had been started deliberately but spread rapidly. The accusation against the architects was that their design of the fit-out works for the building failed to properly prevent the spread of fire, and that they had failed to properly supervise the fit-out works on site during construction. The court decided, however, that the architects were not liable in tort to meet the cost of reinstating the fit-out works as the fire suppression arrangements had not inflicted positive damage on the structure; rather they had simply failed to prevent the spread of fire. There then followed Tunnel Refineries v. Bryan Donkin Ltd (1998), where the existence of the complex structure exception was rejected. Tunnel Refineries concerned a chattel (i.e. a compressor) rather than real property (i.e. a building). In this case the judge refused to follow Jacobs on the basis that he was bound by Warner, and because Warner had not been cited in Jacobs. In addition, the judge did not consider himself bound by what had been said by Lord Bridge in Murphy about complex structures because those remarks were not binding as they were obiter dicta. On the facts the judge found that a removable fan within a compressor (which had shattered in use and destroyed the compressor) did not have a separate identity from the compressor so: ‘In short, when the Fan shattered and wrecked the Compressor, the Compressor was not “other property” for the purpose of the exclusionary rule. The Fan was simply the particular defective part of a defective Compressor’.

Another claim based on the complex structure exception arose in Bellefield Computer Services v. E Turner & Sons Ltd (2000), where fire in a storage area of a building caused damage to other areas of the building that were divided into offices, a laboratory and a processing and bottling plant. A compartment wall that divided the storage area from the other areas was inadequately constructed and allowed the spread of fire to those other areas. A subsequent purchaser sued the builder for compensation for the cost of repairing the other areas, arguing that they constituted other property. Following Murphy the Court of Appeal ruled that damage to the building itself was irrecoverable, and that the separate areas used for separate purposes could not be treated as ‘other property’. Finally, there is the decision in Payne v. John Setchell Ltd (2002), which concerned cottages with shared foundations. In this case the court not only considered the complex structure exception to be untenable, but also regarded it as artificial and unrealistic to treat the foundations under one of the cottages as separate from those under the other: ‘. . . not only is the “complex structure” exception no longer tenable but it is also clear that in approaching the question of “another part of the property” it is necessary to avoid any artificiality and to be realistic.’

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Defective Construction Work The result appears to be that the complex structure theory has largely had the life squeezed out of it, at least as an exception.

6.2.3 A test? In the light of the authorities mentioned in the preceding subsections it is doubtful whether there can fairly safely be said to be such a thing as a complex structure exception. It is less safe, however, to dismiss the complex structure issue entirely. What started life as a theory and then transformed into an exception may yet retain some life, if only as a useful – but not exclusive – test for determining whether damaged items are in fact ‘other property’.

6.3 Economic harm The duty to avoid harm to the economic interests of others – which originates from the decision of the House of Lords in Hedley Byrne & Co Limited v. Heller & Partners (1964) – can be summarised as follows: the law imposes a duty to avoid careless acts and omissions in the course of giving advice or providing services that may cause foreseeable economic harm. It can be seen immediately that this duty can be distinguished from the Donoghue duty by the fact that it protects the injured party against economic, rather than physical, harm. If the duty is breached, the wrongdoer is liable to compensate the injured party for the resultant economic loss. This is because economic loss is precisely what the advice or service was intended to protect the recipient against. The Hedley Byrne decision concerned a careless statement (i.e. a credit reference about a customer) given by a bank to a non-customer, who suffered financial loss as a result. The House of Lords decided that a person who assumes a responsibility towards another person owes a duty of care to that other person. The duty is to exercise reasonable care. In this case the bank had assumed a responsibility to provide information that was accurate, and therefore owed a duty to exercise care to see to it that the information provided was accurate. Later, in Henderson v. Merrett Syndicates Limited (1995), it was decided ‘that the [Hedley Byrne] principle extends beyond the provision of information and advice to include the performance of other services.’ In Henderson those ‘other services’ were insurance brokerage. Henderson also confirmed that the wrongdoer is obliged to compensate the injured party ‘in respect of economic loss which flows from the negligent performance of those services’. This duty to avoid carelessly causing economic harm has been expanded over the years since Hedley Byrne to

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include other services, such as those provided by accountants, bankers, brokers, designers, solicitors, surveyors and valuers. The duty almost certainly applies to anyone providing professional or specialist advice or services.

6.3.1 A concurrent duty The key feature of Hedley Byrne was the absence of a contract between the bank and the injured party. If there had been a contract then it would most likely have included a term that the bank should exercise reasonable care and skill. The law of tort therefore filled the gap by creating a duty to exercise reasonable care despite the absence of a contract. But this begged the question: can the tort based duty coexist with an equivalent contractual duty? In Henderson, it was found that: ‘the law of tort is the general law out of which the parties can, if they wish, contract.’ However, the mere existence of a contract between the parties does not mean that they have contracted out of the general law, or that it otherwise ceases to apply. This was the conclusion in Henderson, where the House of Lords decided that the tort based duty can coexist with an equivalent contractual duty. However, although the Hedley Byrne duty can coexist with an equivalent contractual duty, it is subject to the restriction, formulated in Henderson, that: ‘the contract can modify and shape the tortious duties’. This restriction was refined, in South Australian Asset Management Corporation v. York Montague Limited (1997), so that the contractual duty sets the limits upon the tortious duties: ‘. . . in a case in which the parties are in a contractual relationship and the complaint is that one of them has failed to do with reasonable care and skill that which he contracted to do, the scope of any duty of care in tort which the alleged contract breaker owes to the other is prescribed by the terms of the contract between them.’

So, the duty of care in tort to avoid causing economic harm through carelessness can coexist with contractual duties, except that where there is a contract the tortious duty is limited by reference to the contractual duty.

6.3.2 Third parties The tortious duty to avoid causing economic loss through carelessness may exist where there is a direct relationship between the injured party and the wrongdoer. This direct relationship may be contractual; or it may be ‘equivalent to contract’, i.e. enough of the features of a contract are present, such as occurred in Hedley Byrne, where the reference was

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Defective Construction Work supplied at the request of the non-customer, to show that there is reliance upon the wrongdoer. But the duty of care may arise between persons who have not dealt directly with one another, and where a relationship equivalent to contract is absent. For example, in Henderson managing agents at Lloyd’s were held to owe a duty of care to Names for whom they wrote insurance contracts directly, and to Names for whom they wrote insurance contracts indirectly (i.e. through members’ agents). These indirect Names were separated from the managing agents by a series of mutually exclusive contractual relationships, which had the effect that the managing agents did not owe any contractual duties to the indirect Names. Despite this separation, and the absence of any direct dealings between the managing agents and the indirect Names, the court concluded that a duty was owed to the indirect Names. In this scenario the indirect Names were third parties to the transaction under which the managing agents wrote the insurance contracts. This imposition of a duty towards third parties is the result of the tests the courts have developed to determine whether a duty of care exists.

6.3.3 The tests It was stated in the Customs & Excise case that, in order to determine whether a Hedley Byrne duty of care is owed, ‘something more is needed’ than just reasonable foreseeability of harm. In trying to determine what is needed the courts have, over the years since Hedley Byrne, developed three competing tests for establishing the existence of a duty to avoid economic harm. These tests are based upon: (a) an assumption of responsibility; or (b) proximity, foreseeability and fairness; or (c) incrementalism. 6.3.3.1 Assumption of responsibility In Hedley Byrne the House of Lords decided that a person making a statement to another owes a duty to exercise reasonable care and skill to ensure that the statement is accurate if the circumstances show an ‘assumption of responsibility’ by the maker of the statement, and if the recipient of the statement relies upon it. Subsequent cases therefore involved a search for this – sometimes elusive – assumption of responsibility. The result was a sometimes strained attempt to find an assumption of responsibility, or the risk that meritorious claims might go uncompensated owing to the inability to discover an assumption of responsibility. As the limitations of this test were steadily exposed, the assumption of responsibility test appeared to fall by the wayside, particularly with the advent of the three-stage test (see subsection 6.3.3.2 below). However, the assumption of responsibility test was merely

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down, but not out. It underwent a revival with the decision in Henderson, but its renewed pre-eminence was short lived. It is now best described as a test of first resort, but the absence of an assumption of responsibility does not mean the absence of a duty in tort not to cause economic harm. 6.3.3.2 Proximity, foreseeability and fairness As the assumption of responsibility test came to be perceived as one that was not satisfactory in all circumstances, it became necessary to find a new, all-embracing test. The result was the development of the threestage test of proximity, foreseeability and fairness approved by the House of Lords in Caparo Industries Plc v. Dickman (1990). Put simply the three-stage test means that:

• there must be a relationship of proximity between the wrongdoer and

• •

the injured party, i.e. the injured party must be someone whom the wrongdoer ought to have had in his contemplation as likely to suffer harm as a result of careless acts or omissions; the wrongdoer must be reasonably able to foresee that harm will result from his carelessness; and it must be ‘reasonable, fair and just’ in all the circumstances to impose a duty of care.

As will be seen in subsection 6.3.3.4 below, this test, while not the only test, is now the dominant test. 6.3.3.3 Incrementalism This test posits a gradual expansion of the duty to avoid economic harm by carelessness on an analogous basis. It is based upon an observation in a New Zealand decision, Sutherland Shire Council v. Heyman (1985), which was subsequently approved in Caparo in these terms: ‘It is preferable, in my view, that the law should develop novel categories of negligence incrementally and by analogy with established categories, rather than by a massive extension of a prima facie duty of care restrained only by indefinable “considerations which ought to negative, or to reduce or limit the scope of the duty or the class of person to whom it is owed”.’

This test is not regarded as one that can be satisfactorily applied in all circumstances, and while the adoption of an incremental and analogous approach may yet be suitable in some situations, it is a test that is itself now subject to the overriding considerations of the three-stage test.

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Defective Construction Work 6.3.3.4 Which test? Currently, based on the decision of the House of Lords in the Customs & Excise case, the dominant test is the three-stage test of proximity, foreseeability and fairness. This is not to say that the other tests have been cast aside. Far from it. The assumption of responsibility test is alive and well on the basis, as explained in Riyad Bank v. United Bank of Kuwait (2006), that: ‘once the Hedley Byrne requirements are fulfilled in a given case there is no room for a further limitation in terms of the “fair just and reasonable” test made famous by Caparo’. This sentiment was shared in the Customs & Excise decision, where the assumption of responsibility test was not jettisoned, but rather was treated as inapplicable to the particular facts. In particular, it was said that: ‘There is a tendency, which has been remarked upon by many judges, for phrases like “proximate”, “fair, just and reasonable” and “assumption of responsibility” to be used as slogans rather than practical guides to whether a duty should exist or not. These phrases are often illuminating but discrimination is needed to identify the factual situations in which they provide useful guidance.’

Similarly, it was also said that: ‘. . . the incremental test is of little value as a test in itself, and is only helpful when used in combination with a test or principle which identifies the legally significant features of a situation. The closer the facts of the case in issue to those of a case in which a duty of care has been held to exist, the readier a court will be, on the approach of [Sutherland] adopted in Caparo v. Dickman, to find that there has been an assumption of responsibility or that the proximity and policy conditions of the threefold test are satisfied. The converse is also true.’

So, while the ‘assumption of responsibility’ and ‘incremental’ tests have not been abandoned, they are components of, or at least subject to, the overriding considerations of the three-stage test. The position therefore is that the courts have the necessary tools to impose a duty to avoid economic harm in those cases that do not fit neatly into the assumption of responsibility or incremental categories, but where the facts combined with fairness and policy renders it just to impose a duty.

6.4 Builders and professional consultants Despite the clear indication in Henderson that a duty in tort to avoid causing economic harm through carelessness may be imposed upon persons who provide services, there has nevertheless been a continuing

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debate about the extent to which the duty applies to the kinds of services provided by builders and professional consultants in the construction industry.

6.4.1 Builders In 1997 the Hedley Byrne duty was applied to a design and build contractor in Storey v. Charles Church Developments Ltd (1997). In that case defectively designed foundations led to damage to the superstructure of a building, and the builder (as designer) was obliged to meet the cost of repairing both the foundations and the superstructure. It can be seen that the provision of the design was a ‘service’ for the purposes of the Hedley Byrne test, and was undertaken carelessly, resulting in economic harm (i.e. the cost of repairing both foundations and superstructure). Subsequently, in Payne, which also concerned defective foundations – but this time designed by an independent engineer (rather than a designer/builder) – the court expressed the view that: ‘A designer is not liable in negligence to the client or subsequent purchaser for the cost of putting right a flaw in a design that the designer has produced that has not caused physical injury or damage just as a contractor is not liable.’

This particular aspect of the judgment in Payne is difficult to reconcile with Storey, and was not followed in Tesco v. Costain or in Mirant AsiaPacific Construction (Hong Kong) Ltd v. Ove Arup & Partners International Ltd (2005). In Tesco v. Costain the court, after a thorough review of the authorities, declined to accept that a contractor is not liable in tort to his client for economic harm. The judge, in Tesco, therefore declined to follow Payne and decided instead that: ‘. . . it does not seem to me that Murphy v. Brentwood District Council and the other authorities . . . do establish the proposition that a builder never owes a duty of care which extends to not causing economic loss, only that he does not do so in the absence of “a special relationship”.’

Having cleared the ground in this way, the judge went on to express the view that the earlier decision in Murphy was not an impediment to imposing a tortious duty upon a builder to avoid causing economic harm to his customer: ‘It seems to me clear that all of the attention in Murphy v. Brentwood District Council, so far as the builder was concerned, was on his relationship with what Lord Oliver called . . . “a remote owner”, that is to say . . . “a derivative owner

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Defective Construction Work with whom he has no contractual or other relationship”. While the terms of the speeches in Murphy v. Brentwood District Council may themselves have been somewhat elliptical in relation to the position of a builder in respect of owing a duty of care in tort not to cause economic loss to someone with whom he was in a contractual relationship, there are indications in the passages from the speeches which I have quoted that the position was, or might be, different from that as between a builder and a party with whom he was not in a contractual relationship. Any ambiguity or obscurity on this point has now, in my judgment, been clarified by the decision in Henderson v. Merrett Syndicates Ltd.’

The removal of these potential obstacles to liability in tort for economic loss as between builder and customer opened the way to the conclusion that: ‘If the position now is, as I consider that it is, that anyone who undertakes by contract to perform a service for another upon terms, express or implied, that the service will be performed with reasonable skill and care, owes a duty of care to like effect to the other contracting party or parties which extends to not causing economic loss, there seems to be no logical justification for making an exception in the case of a builder or the designer of a building.’

Having reached the conclusion that the existence of a contractual care and skill obligation in relation to services gave rise to a sufficient special relationship to create an equivalent and concurrent duty in tort, the judge in Tesco v. Costain went on to apply this conclusion directly to a design and build contractor in relation to his design. In this respect it was found that a designer/builder: ‘. . . assumed a duty of care to [the employer] to carry out the work which it itself, rather than any sub-contractor, in fact did pursuant to that agreement with the care and skill to be expected of a reasonably competent building contractor. That work potentially included both physical work of construction and the making of decisions as to design . . . [and] . . . that duty did extend to not causing economic loss . . .’

In the circumstances whenever builders are obliged by contract to exercise reasonable care and skill in relation to any design they prepare, they will also be subject to a concurrent tortious duty to exercise reasonable care to avoid causing economic harm to their customers through carelessness. This concurrent duty is not limited solely to design; it will also extend to any other services provided by builders. That this is so is demonstrated by the decision of the Court of Appeal in Barclays Bank Plc v. Fairclough Building Limited (1995), where it was decided that a specialist sub-contractor owed a concurrent duty in tort to his employer to exercise care and skill. This case concerned a specialist engaged to clean an asbestos roof. The Court of Appeal found that:

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‘A skilled contractor undertaking maintenance work to a building assumes a responsibility which invites reliance no less than the financial or other professional adviser does in undertaking his work. The nature of the responsibility is the same though it will differ in extent.’

The Barclays decision has been the subject of criticism on the basis that it ought to require more than the existence of a contract to provide a service or to do work to give rise to a duty of care. But this particular criticism of the Barclays decision does not appear sustainable in the light of the Tesco decision. It may be that where the law is moving (or perhaps where it has already moved) is towards the creation of a concurrent duty not to cause economic harm to the other party in all instances where there is a contract between the parties for the provision of a service, on the basis that this is invariably consistent with an assumption of responsibility, and with the requirements of proximity, foreseeability and fairness.

6.4.2 Professional consultants In Mirant structural engineers were found liable in tort to their client for economic loss for carelessness in the design of foundations and the approval of formations. In this case the judge rejected the proposition that the Payne decision meant that the designer could not owe a duty of care to avoid economic loss: ‘I conclude that in relation to [their client], Arup assumed a responsibility for economic loss following the reasoning derived from Lord Goff’s judgment [in Henderson]. In so far as I need to do so I respectfully disagree with the judgment of Judge Lloyd QC in Payne v. Setchell where he places a designer in the same position as a contractor. It seems to me that where the designer performs services of a professional or quasi-professional nature it is in the same position as bankers, solicitors, surveyors, valuers and accountants.’

These cases show that just as builders (and their sub-contractors) owe a non-contractual duty of care to their respective employers not to cause economic harm through carelessness so do independently engaged designers.

6.4.3 Liability to third parties Despite the proposition in subsection 6.3.2 above that the tortious duty of care may extend to third parties, the courts have been keen to stress that it may not generally be used to bypass the contractual chain. In other words, purchasers and owners cannot, as a general rule, use the

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Defective Construction Work tortious duty to obtain compensation from sub-contractors and suppliers with whom they do not have a contractual relationship. Indeed, in Henderson, while the tortious duty did enable the injured party to bypass the contractual chain, the court was nevertheless at pains to explain the restrictive nature of the duty – which it did by reference to the contractual framework that habitually occurs in the construction industry: ‘. . . if the sub-contracted work or materials do not in the result conform to the required standard, it will not ordinarily be open to the building owner to sue the sub-contractor or supplier direct under the Hedley Byrne principle, claiming damages from him on the basis that he has been negligent in relation to the performance of his functions. For there is generally no assumption of responsibility by the sub-contractor or supplier direct to the building owner, the parties having so structured their relationship that it is inconsistent with any such assumption of responsibility.’

This reassuring statement is pregnant with its own exception, which was used to bypass the contractual chain in Henderson itself. It was also the basis of an earlier decision, Junior Books Ltd v. The Veitchi Co Ltd (1983), where the House of Lords had found that a nominated specialist sub-contractor who knew that the employer was relying on his special skill owed a duty to the employer not to cause economic harm through carelessness. In this case a defectively laid floor that the nominated specialist had supplied caused no physical harm to persons or other property, but the sub-contractor was nevertheless found liable for the cost of replacing the floor and other purely economic losses. This approach was regarded at the time as a significant expansion of the tortious duty, but though much criticised it has not been overruled. It is regarded as something of a high water mark, and as a case that is perhaps best confined to its own special facts. However, in Simaan General Contracting Co v. Pilkington Glass Ltd (1988) the opinion was expressed in the Court of Appeal that: ‘Where a specialist sub-contractor is vetted, selected and nominated by a building owner it may be possible to conclude (as in the Junior Books case . . .) that the nominated sub-contractor has assumed a direct responsibility to the building owner.’

Later, in George Fischer Holdings Ltd v. Multi Design Consultants Ltd (1998) it was concluded that this potential to jump the contractual chain was indeed narrowly confined. In this case the court concluded that a subcontractor did not owe a duty to the employer of the main contractor to avoid causing pure economic loss by carelessness in the supervision and design of the works except as provided by the Junior Books exception. More recently, in Riyad it was stated in the Court of Appeal that:

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‘There cannot be a general proposition that, just because a [contractual] chain exists, no responsibility for advice is ever assumed to a non-contractual party.’

Once again, however, it was the existence of an assumption of responsibility on the part of the wrongdoer that gave rise to liability for his carelessness.

6.4.4 Conclusion As Junior Books has not been overruled, and despite the professed antipathy to bypassing the contractual chain, all that can be said is that it is clear that in appropriate circumstances it may be possible to obtain compensation for purely economic harm from a wrongdoer who carelessly provides advice or services directly to the injured party, or if the services are supplied indirectly where a special relationship exists between the wrongdoer and the injured party. Quite how special that relationship needs to be is not at all clear, and that is at the heart of much of the criticism of the Junior Books decision. The truth may be, however, that the senior judiciary when applying either the assumption of responsibility test or the proximity, foreseeability and fairness test take a much more relaxed view of what constitutes a special relationship than do many practitioners and academic writers.

Chapter 7

The Defective Premises Act 1972

Until 1972 the seller of land that included a building was not required to warrant the suitability of the building for any particular purpose, even if the seller had built it. In this respect the seller was protected by the long-established common law doctrine of caveat emptor (‘let the buyer beware’), which obliged buyers to satisfy themselves as to the suitability of their purchases. The result was that sellers (including developer/builders) rarely, if ever, volunteered a warranty of suitability, so that buyers – and subsequent owners – took the risk that the building had been adequately constructed. Indeed, until 1972 buyers – in the absence of a warranty – could recover compensation only if they could prove fraud, negligent misstatement, or non-fraudulent misrepresentation on the part of the seller; and they had no right of action against the builders and designers of the relevant structure, who were often one or more steps removed from the seller. In addition, the position of the buyer’s successors in title was hopeless. They rarely had dealings with the seller, let alone the project team, so that they were usually wholly without remedy if defects manifested themselves after purchase. This state of affairs came to be seen as unsatisfactory, with the result that Parliament enacted the Defective Premises Act 1972, which imposes on the ‘providers’ of residential premises a statutory duty to protect ‘owners’ from a narrow category of defects for a limited period of time irrespective of contract.

7.1 Application The broad thrust of the Act is to impose a duty upon the providers of building work for residential premises. This duty is set out in section 1(1), which obliges: ‘. . . a person taking on work for or in connection with the provision of a dwelling . . . to see that the work which he takes on is done in a workmanlike or, as the case may be, professional manner, with proper materials and so that as regards that work the dwelling will be fit for habitation when completed.’

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This duty is owed to the owner for the time being of the dwelling, i.e. the person who ordered it, and every person who acquires an interest in it. However, the cause of action under the Act becomes statute-barred after 6 years from completion of the dwelling, so the protection is relatively short lived. The term ‘dwelling’ is not defined in the Act, but a later statute offers some guidance. The later statute is the Housing Act 1985, where section 525 (since repealed) defined the term ‘dwelling’ as including ‘any yard, garden, outhouses and appurtenances’. If this definition is adopted for the purposes of the 1972 Act, it offers the opportunity to define the term ‘dwelling’ widely so as to include any buildings or land sold as an adjunct to the residence, such as a separate garage. In Uratemp Ventures Ltd v. Collins (2001) the House of Lords defined the term ‘dwelling’, as used in the Housing Act 1988, as meaning the place where a person lives or resides ‘and makes one’s home’. This definition was followed in Catlin Estates Ltd v. Carter Jonas (2005), where a shooting lodge used for family and business entertaining was nevertheless found to be a dwelling for the purposes of the Act, as it was capable of being used as a dwelling house. The decision in Alexander v. Mercouris (1979) confirms that the work taken on may relate to the whole or part of a dwelling, while Jacobs decided that the Act does not apply to repair work to an existing dwelling. In this respect it was concluded that: ‘Section 1 is directed to the provision of new dwellings and not to the preservation of existing dwellings.’ In short, new dwellings are within the Act whereas repairs to existing dwellings are not. The phrase ‘taking on work’ was construed in Alexander so as to impose the statutory duty upon as wide a range of persons as possible, including persons taking on work for or without reward (and it matters not whether the reward is due under contract or otherwise), and includes a landowner doing the work for himself. If, however, the owner merely gives instructions for work to be carried out to a particular design, that is not enough to constitute taking on the work unless, as confirmed in Mirza v. Bhandal (1999), the instruction is given by someone engaged in a business that includes the provision of a dwelling – even on a one-off basis. This later liability arises because section 1(4) of the Act stipulates that those persons who provide dwellings in the course of a business or in the exercise of a statutory power shall be treated as persons who have taken on work for the purposes of the Act. The duty under the Act is discharged if the person taking on the work does so on terms that it must be carried out in accordance with the instructions of another person (i.e. his employer), provided the work is done properly in accordance with those instructions. However, if the person taking on the work is obliged to warn his employer but fails to do so, then he will remain liable under the statutory duty. A person is

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Defective Construction Work not to be treated as having given instructions merely by agreeing that work may done in a specified manner. Equally, a person cannot escape liability by alleging that he did not give a particular instruction. In this respect Mirza confirms that it is necessary to ascertain whether the alleged wrongdoer gave instructions for the overall design, not just particular aspects of it.

7.2 Fitness for habitation The term ‘fit for habitation’ as used in section 1 derives from a commonlaw-implied term that applied to building contracts (but not contracts for the sale of land) that was around long before the Act. It is a term that was described, in Hancock v. B W Brazier (Anerley) Ltd (1966), as requiring no more than that the work should be done properly and with proper materials. Under the common law term there were a number of decisions that limited its scope, so that a dwelling was not to be regarded as unfit for habitation simply because defects caused injury to persons using it. Later, in relation to the Act, the Court of Appeal decided, in Andrews v. Schooling (1991), that fitness for habitation was the standard against which the quality of work and materials should be judged, but that the duty extends to create a liability for failure to carry out necessary work (non-feasance), as well as for inadequately carried out work (misfeasance). This approach was followed in Smith v. Drumm (1996), which concerned failure to connect a gas supply and disconnection of a dangerously installed electricity supply. In the meantime it had been decided in Thompson v. Clive Alexander & Partners (1992) that the duty does not, however, extend to all defects. In this latter case the court declined to accept that trivial defects rendered premises unfit for habitation. The duty was applied to lighting, power, drainage, sanitation and water supply in Nottingham Community Housing Association v. Powerminster Ltd (2000), where the court decided that these features were vital to regarding a building as fit for habitation, while in Mirza inadequate foundations that would inevitably lead to collapse of the house rendered it unfit for habitation. Threats to the habitability of dwellings that arise from external influences may not amount to a breach of the duty under the Act. In this respect, in Batty v. Metropolitan Realisations (1978), a house that was unstable and in danger of fairly imminent collapse because adjacent land was unstable was found not to be fit for habitation, but this decision was subsequently called into question in D&F Estates. It was confirmed in Bayoumi v. Protim Services Ltd (1996) that it is irrelevant that there are other causes of the unfitness provided that

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breach of the duty under the Act has caused or materially contributed to the loss suffered.

7.3 Exclusion The statutory duty of care under the Defective Premises Act may be excluded if a scheme, approved by the Secretary of State, applies that confers rights in respect of defects on persons acquiring an interest in a dwelling. An example of an approved scheme is the National HouseBuilding Council scheme, which confers on the buyer and his successors in title a warranty that is more extensive in scope and duration than the statutory duty under the Act.

Chapter 8

Third Party Rights

The common law limited the class of persons who could sue to enforce contractual bargains. This limitation is known as the doctrine of privity of contract. As a general rule this doctrine (subject to one exception) prevents non-parties from enforcing contractual bargains, even if the contract was made for their benefit and they have suffered loss. Privity of contract prevents strangers from interfering in the private affairs of others, but nevertheless sometimes causes problems for persons who, although non-parties to a particular contract, are nevertheless intended to benefit from it. The classic example of this problem is where A and B enter into a contract under which A pays, or agrees to pay, B to perform a service for C. If B fails to perform the service adequately, or at all, C has no right to sue B either for repayment of the price or for compensation. Only A can sue B for the consequences of non-performance, and vice versa. However, sometimes even A may not have an effective remedy if he has not suffered a substantial loss as a result of the breach, even though C may have suffered a substantial loss. The result is that sometimes a non-party with a direct interest in the performance of a contract (or at least some of its terms) may be unable to recover compensation for the loss he has suffered. The doctrine of privity of contract is particularly troublesome in relation to building projects where non-parties often have an interest in the proper performance of building contracts and professional appointments. These interested parties are often, though not exclusively, funders and prospective or actual occupiers of the proposed structure. Until quite recently the interests of these third parties were unenforceable at their suit, even if expressly recognised in building contracts or professional appointments. However, an exception to the doctrine of privity of contract has been recognised in recent times, and was extended to building contracts in 1994 (see section 8.1). In addition it has long been possible to avoid the doctrine of privity of contract in a number of situations: first, under the law of agency; second, by way of assignment; third, by way of a collateral contract; and fourth, by way of an action in tort for negligence. Finally, the Contracts (Rights of Third Parties) Act 1999 has enabled third parties to enforce contractual rights in which they have an interest in certain limited circumstances. 56

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8.1 The exception The House of Lords recognised a limited exception to the doctrine of privity of contract in relation to contracts for the carriage of goods in The Albezero (1977). This exception allowed the consignor of goods to recover substantial damages for loss or damage to the goods where the ownership and risk in the goods had passed to the consignee, who had therefore suffered the loss. In these circumstances the consignor was liable to account to the consignee for the compensation recovered. This exception was extended to building contracts in Saint Martin’s Property Corporation Ltd v. Sir Robert McAlpine & Sons Ltd (1993). In this latter decision the House of Lords, by a majority, decided that, where a building contract is entered into in circumstances where the parties envisage that the property may be transferred to a third party, the transferor may recover from the builder the losses suffered by the transferee, but is liable to account to the transferee for the losses recovered. Subsequently, in Alfred McAlpine Construction Ltd v. Panatown Ltd (2000), the exception was applied by the House of Lords to the commercial affairs of a group of companies. In this case one group company entered into a building contract but did not own the land on which the building was to be constructed, which was owned by an entirely separate company within the group. When the first company sued for compensation resulting from defects in the work, the builder defended the claim on the basis that the first company had not suffered any loss (which had been suffered by the second company).The House of Lords rejected the ‘no loss’ defence, and in so doing invoked the exception identified in The Albezero and expanded upon in Saint Martin’s, but also decided that this exception does not apply where the transferee has a direct remedy against the builder (such as through a collateral contract). In these latter circumstances the first party cannot recover anything other than nominal damages. The Albezero/Saint Martin’s exception does not strictly erode the doctrine of privity of contract, because it does not permit third parties to sue, but it is an exception to the rule that a claimant may recover damages only for his own loss. It therefore achieves the same result by a different route unless a direct remedy exists. This exception seems to permit the recovery of losses by a first party that he has not actually suffered, provided the loss is suffered either by a transferee envisaged by the parties as likely to suffer loss in the event the building contract is breached, or by another member of a group of persons that the first party ‘represented’ at the time the transaction was entered into. The application of this exception is likely to prove highly fact sensitive. Although the exception does not apply where the injured third party has a direct remedy against the builder, it was held in Catlin that the

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Defective Construction Work right to claim under the Defective Premises Act 1972 does not extinguish the right to claim under the exception.

8.2 Agency If, in the above example, A enters into a contract as agent for C, then C is not a third party at all, but a principal, i.e. a party to the contract. As such C may, as principal, sue B for non-performance. Likewise B may sue C for non-payment of the price. In fact, in this situation it is the agent, A, who is the third party. The law of agency does not therefore dilute the doctrine of privity of contract. To create a binding contract for his principal an agent must have authority to bind his principal at the time the contract was made, and must disclose his agency to the other party. Authority may be actual, ostensible or presumed. Even so, a principal may in some circumstances ratify the unauthorised actions of his agent; and in some instances an ‘undisclosed principal’ may enforce a contract made on his behalf. However, in the absence of disclosure, or of ratification, or of the undisclosed principal exception, then A would be a party to the contract on his own account and the only person able to benefit from the contract and liable under it. Where a person, A, holds himself out to be an agent for B – and purports to bind B to a contract with C – the agent is said to warrant his authority to bind B. If the agent in fact lacks authority, a contract does not come into existence between B and C. However, the agent is liable to C for breach of his warranty of authority. So, if A falsely purports to be agent for C and agrees that C will pay a certain price if B delivers materials to C, then B may sue A (for compensation) not upon the contract (because there isn’t one) but for breach of warranty of authority. Agency can be very important in relation to defects, because the principal can enforce all of the terms of the contract in his own right in the event that defective work manifests itself.

8.3 Assignment At one time the assignment of contractual rights was not permitted. This prohibition was gradually eroded until section 136 of the Law of Property Act 1925 created the modern foundation for the assignment of contractual rights. This statutory right to assign most, though not all, contractual rights is subject to the provisos that the assignment must be absolute and in writing, and that written notice of the assignment must be given to the debtor, i.e. the person by whom the debt or other obligation under the contract is owed.

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This erosion of the prohibition against assignment is not strictly a dilution of the doctrine of privity of contract because the assignee, although he sues in his own name, stands in the place of the assignor. The assignee is therefore the ‘successor in title’ to the assignor. So if A agrees to pay B £10 for building work, B may assign the right to receive the £10 to C, who may then sue in his own name to recover the £10 if the statutory formalities are complied with. This arrangement underpins debt factoring and other financing arrangements where banks and finance houses provide funding to businesses and take an assignment of debts as security for payment. Under this arrangement B remains obliged to perform the contract, i.e. to carry out the building work, and will remain liable to compensate A if the work is defective. The obligation to pay damages for defective work is a right under a contract that may be assigned unless the contract contains an express prohibition against assignment of such rights (see Linden Garden Trust Ltd v. Lenesta Sludge Disposals Ltd (1993)). Certain bare rights of action may not be assigned, however. These bare rights include rights to litigate that are not incidental to the contract or property that has been assigned, and rights under contracts involving personal skill or confidence. These latter prohibitions mean that it cannot be ruled out that there may be circumstances when the benefit of a building contract, more particularly a professional appointment, cannot be assigned. All assignments are subject to equities. This means that the debtor may defend any claim for payment made by the assignee by deploying any defence available against the original party. So, if C sues A for the £10 that B assigned to him, A may defend the action by asserting that all or part of the debt is not due because of defects. This defence is an equity to which the debt is subject. The assignee is not therefore put in a better position than the assignor. If an assignment is not absolute, or if the statutory formalities are not complied with, or if the contract prohibits assignment of the rights arising under it, the assignee may nevertheless be able to enforce the assigned rights, but will have to do so in the name of the assignor and with his cooperation (see Bawejem Ltd v. MC Fabrications Ltd (1998)).

8.4 Novation The assignment of the benefit of a contract does not effect an assignment of the burden. So, while B (as per the example in section 8.2 above) can assign the debt or other benefits (subject to equities and subject to the bare rights of action restriction) to C, B cannot assign the obligation to perform the work to C (or anybody else) without the consent of A. The assignment of the burden of a contract can be achieved only by way of a novation agreement. Under a novation agreement A, B and C are all

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Defective Construction Work parties to the novation, and all agree that A will release B from his obligations (in whole or in part) in return for A accepting C’s undertaking to perform B’s obligations (in whole or in part). In this situation C is not a third party because C substitutes for B with the agreement of A (and B). So, once again, this arrangement does not dilute the doctrine of privity of contract. Novation agreements are now commonly used in connection with building projects, especially design and build projects. Professional consultants are often engaged by the purchaser on the basis that their appointments will in due course, usually upon appointment of the builder, be assigned to the builder under the terms of a pro-forma novation agreement incorporated into their appointment. Similarly, the builder will be engaged on the basis that he too will enter into the same pro-forma novation agreement. By this means the purchaser divests himself of responsibility for some or all of his consultants once the builder is appointed, when the builder assumes responsibility for them (usually on an ab initio basis, i.e. on the basis that the builder takes responsibility for all of the work carried out by the consultants prior to the novation). The Scottish decision in Blyth & Blyth v. Carillion Construction Ltd (2001) indicates that there are limits to the type of pre-novation losses that the builder may claim from negligent professional consultants. It is important, therefore, that appropriate undertakings as to the suitability of pre-novation work be included in the novation agreement, or in a separate collateral contract, or by way of the statutory third party rights regime (see section 8.5). Novation agreements are sometimes used if the builder is acquired by another entity, and sometimes if the builder gets into financial difficulty. In either case the purchaser may see it as in his own best interests to accept the undertaking of another builder to complete the work, in substitution for that of the original builder. Where the substituted builder undertakes the novation on an ab initio basis, the purchaser sues only the replacement builder for compensation, even in respect of defects that pre-date the novation agreement.

8.5 Statutory third party rights That the doctrine of privity of contract has impeded the ability of third parties to acquire enforceable rights under contracts has not been universally seen as a good thing. Apart from the widespread use, in the construction industry, of collateral contracts (see section 8.6 below), there has also been parliamentary intervention from time to time to cure some of the perceived ills created by the doctrine. One example of parliamentary intervention is the Third Parties (Rights against Insurers) Act

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1930, under which injury victims could exercise against insurers the rights of an insured wrongdoer in the event of the wrongdoer becoming insolvent. Another parliamentary intervention came in the form of the Defective Premises Act 1972 (see Chapter 7). More recently Parliament has intervened much more widely, in the shape of the Contracts (Rights of Third Parties) Act 1999, to put in place a regime of directly enforceable contractual rights in favour of third parties. This new statutory regime – which applies unless expressly excluded – significantly dilutes the doctrine of privity of contract by:

• allowing third parties to enforce certain contractual terms in their

•

•

• •

own right against the promisor. For this to occur the contract must expressly provide for third party enforcement, or a term must purport to confer a benefit upon the particular third party seeking to enforce it. In the latter instance a third party may not enforce a term if it appears that the parties did not intend the term to be enforceable by third parties. In all cases the third party must be expressly identified by name or as a member of a class or as answering a particular description. The first reported case concerning the operation of the Act, Avraamides v. Colwill (2006), declined to accept that the court could use a process of construction or implication to identify a class of persons not ‘expressly’ identified in the contract. preventing the parties altering or extinguishing the rights of a third party under the terms of a contract without his consent where that third party has communicated his assent to the term to the promisor, or where the promisor is aware that the third party has relied upon the term, or where the promisor can reasonably be expected to have foreseen that the third party would rely on the terms and the third party has done so. effectively treating third parties as a party to the contract for the purposes of remedies available, but without putting third parties in a better position than the promisee (i.e. third party rights are subject to and must accord with the other terms of the contract). making available to the promisor in response to a third party claim all defences, set-offs and counterclaims that would be available if the action were brought by the promisee. preserving the promisee’s right to enforce all of the contractual terms, but also ensuring that, if he does so, any award in respect of a third party’s loss will ‘appropriately’ reduce the amount that the third party may recover in a separate action against the promisor.

This new regime has particular ramifications for the construction industry, where many third parties have an interest in the proper performance of building contracts and professional appointments. In this respect the

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Defective Construction Work funders of building projects do not – and do not want to – become a party to the building contract or the professional appointments, but nevertheless they have an interest in the work being carried out properly, as the land and building will usually be taken as security for the funding advanced to the developer. To protect the value of their security, funders will want to be able to enforce the terms of the building contract or professional appointments relating to quality in the event that the developer cannot or will not do so. Up until the introduction of the 1999 Act this could be achieved only through the use of collateral agreements (see section 8.6 below). After a slow start the 1999 Act is now coming into significant use, either as a substitute for, or in addition to, collateral contracts. This means that building contracts and professional appointments will now often identify particular persons or classes of person (usually someone with an actual or prospective interest in the land or completed works) as having particular rights against the builder and/or the consultants. For example, the JCT SBC conditions now provide that certain rights as set out in Schedule 5 of the conditions shall vest in those purchasers, tenants and funders identified in a written notice to the builder. These rights include a warranty in favour of purchasers and tenants that the work, at completion, has been carried out in accordance with the building contract, and that the builder will meet the reasonable cost of repair, renewal and/or reinstatement incurred or for which the purchaser/ tenant becomes liable and any other losses incurred up to the maximum amount stipulated in the building contract. For funders there is a warranty that the builder has complied and will continue to comply with the building contract. For purchasers/tenants and funders there are further conditions concerning compliance with specified guidelines for the selection of materials, the licensing of design documents, the maintenance of professional indemnity insurance, assignment of the third party rights, and limitation of claims. Further, for funders there are stepin rights and restrictions on the builder’s right to terminate the building contract. Pretty much all the rights usually associated with a collateral warranty are included in the third party rights schedule to the JCT conditions. It is unlikely that the third party rights conferred by the Act will entirely supersede the need for collateral contracts, but it may lead to some reduction in the overall number of collateral contracts in use. However, from the point of view of the project team there is no escaping the reality that, except for modest-value domestic projects, they will find themselves warranting the quality of their work to their direct employer and to others with an indirect interest in the proper performance of their work. Increasingly these warranties will be provided through the vehicle of the Act.

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8.6 Collateral contracts A collateral contract arises in one of two ways, but serves broadly the same purpose however it is made. That purpose is to enable the enforcement of promises that are made in support of another contract. In the first instance the law has long recognised the collateral contract as a device for enforcing a promise given prior to another contract and but for which the other contract would not have been made. Perhaps the best-known example of this form of collateral contract is to be found in Shanklin Pier Ltd v. Detel Products Ltd (1951), where the owners of Shanklin Pier engaged X to repair it and reserved the right to specify the materials to be used. Detel induced the owners to specify their paint by giving assurances about its suitability. X then purchased the specified paint directly from Detel and used it, but it proved unsuitable. The owners sued Detel, who argued that they had not entered into a contract with the owners, but only with X. The court decided that in addition to the contract for the sale of paint to X there was also another contract between the owners and Detel that was collateral to it, under which Detel guaranteed the suitability of its paint in consideration of the owners specifying it for use. This contract came into existence when the owners specified Detel’s paint. This type of collateral contract no doubt arises with regularity in relation to construction projects, where suppliers of products and services often give assurances to prospective purchasers and their advisers about the suitability of their products/services in the expectation that their product/services will then be specified for use by the builder (see for example, the George Fisher decision). The precise terms of this sort of collateral (and often oral) contract will depend on the nature of the assurance and the circumstances in which it was given. In the second instance, lawyers have long used the device of formal written collateral contracts (sometimes referred to as ‘collateral warranties’ or just ‘warranties’) to effect the enforcement of promises made in support of another contract. This type of collateral contract has been commonplace in the construction industry for decades past. For a long time these collateral contracts were produced on an ad hoc basis, usually to suit the demands of funders and developers. Latterly, there has been a move towards the publication of model collateral agreements for use in connection with building work. The purpose of these collateral agreements is to provide funders, prospective purchasers/ tenants and others with a directly enforceable warranty by the builder, some sub-contractors and professional consultants that the work has been carried out with reasonable care and skill and/or otherwise conforms to the building, or other, contract to which the warranty is collateral. This means that persons acquiring an interest in property will

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Defective Construction Work become the beneficiaries of a collateral contract with members of the project team under which they can look directly to one or all of them for compensation if defects that constitute breaches of the collateral warranty are discovered post acquisition. These collateral contracts are usually assignable, and therefore support the value of the asset upon resale. Currently the JCT publishes collateral warranty agreements for main contractors and sub-contractors to enter into with funders and purchasers/tenants (respectively forms CWa/F, CWa/P&T, SCWa/F and SCWa/P&T) and a warranty for sub-contractors to enter into with the employer (form SCWa/E). The JCT conditions provide that the builder must provide the relevant warranty upon 14 days’ notice of being required to do so, or must procure that the relevant sub-contractors do so. The effect is that the builder and his sub-contractors will be aware before entering into the building or relevant sub-contracts that warranties must be provided, to whom they must be provided, and their terms. The rights conferred by the JCT collateral warranties are broadly the same as the rights set out in the Third Party Rights schedule to the JCT conditions (see section 8.5 above). Any breach of the terms of a collateral warranty will entitle the beneficiary to claim compensation for loss suffered, subject to any exclusions or restrictions set out in the warranty.

8.7 Tort Sometimes the law of tort allows third parties to assert rights if they suffer harm as a result of failure by builders or consultants to exercise reasonable care in the course of carrying out their tasks. This is because under the tort of negligence (see Chapter 6) a duty will be imposed to avoid causing physical harm to persons and property, where harm to those persons or their property is a foreseeable consequence of failure to exercise reasonable care. It is irrelevant, in these circumstances, that the injured persons are not party to the contract under which the careless work was carried out. Also, builders, their sub-contractors and professional consultants are obliged to exercise reasonable care to avoid causing economic harm to third parties when they assume a responsibility towards them, or when they are in a relationship of proximity and harm is foreseeable and it is fair, just and reasonable to impose the duty. While the presence of a contract between wrongdoer and injured party increases the likelihood that a duty to avoid economic harm will be imposed, the absence of a contract is not fatal to the existence of this duty. The tortious duty to avoid causing harm to others is not itself a dilution of the privity of contract doctrine. On the contrary, the law of tort is a separate stand-alone body of law that

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coexists with the law of contract, and often operates concurrently with contractual rights. The result is that persons suffering harm as a result of defective building work may be able to claim compensation from the wrongdoer, either for physical harm to themselves or their property, or sometimes for the cost of remedying the defects, despite the absence of a contract.

Chapter 9

Statutory Requirements

Statutes may impose minimum requirements in relation to building and engineering projects. These statutory requirements apply irrespective of the terms of agreement between the parties, and even in the absence of a contract. The main sources of statutory requirements are the Building Act 1984, the Building Regulations 2000 and the Construction Products Regulations 1991 (as amended). There are, however, many other legislative measures that impact on building projects, such as the Workplace (Health, Safety and Welfare) Regulations 1991, which affect buildings when in use and which may be of relevance to the design, in particular, of building work.

9.1 The Building Act 1984 The main source of statutory standards for building work is the Building Act 1984. This Act empowers the Secretary of State to make regulations concerning the design and construction of buildings and the provision of services, fittings and equipment in connection with buildings. The term ‘buildings’ is widely defined in the 1984 Act, and includes parts of buildings, permanent and temporary buildings, and any other structure or erection. The power to make regulations under the 1984 Act is for the purpose of securing the health, safety, welfare and convenience of people in or about buildings, and to further conservation of fuel and power, the prevention of waste and the undue consumption, misuse and contamination of water. In pursuit of these purposes the regulations may give effect to the requirements of other legislation. In this respect the current building regulations give effect to aspects of the Disability Discrimination Acts 1995 and 2005 and the Construction Products Regulations 1991. The Secretary of State is also empowered under the 1984 Act to approve and issue documents for the purpose of providing practical guidance with respect to the requirements of building regulations. Under the 1984 Act it is a criminal offence not to comply with any regulations made in accordance with its terms. Failure to comply with an approved document does not, however, of itself give rise to civil or criminal liability. Nevertheless, failure to comply may be relied on as 66

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tending to establish liability, while compliance may be relied on as tending to negative liability. Although the 1984 Act contains provision for civil liability for noncompliance with building regulations, that particular provision has yet to be brought into force. There is therefore no independent cause of action for compensation arising from non-compliance with the regulations. Nevertheless, in an action for compensation based on breach of contract or breach of a duty of care in tort, non-compliance with the regulations may be relied upon to establish breach of the term/duty in question. The 1984 Act delegates the enforcement of the building regulations to local authorities, who are given responsibility, among other things, for passing plans, prosecuting offenders, and requiring the demolition or alteration of non-complying work. In this latter respect magistrates’ courts are empowered to make appropriate orders to ensure compliance with enforcement requirements, and civil courts may grant injunctions for the same purpose.

9.2 Building regulations The principal regulations under the 1984 Act are the Building Regulations 2000. These regulations apply only to buildings (but not other structures or erections). Under the regulations building work must be carried out so that it complies with the requirements set out in Schedule 1 to the regulations. These requirements are supported by guidance contained in approved documents issued by the Secretary of State. The Schedule 1 requirements are concerned with the structure, fire safety, site preparation, resistance to moisture, toxic substances, resistance to the passage of sound, ventilation, hygiene, drainage, waste disposal, heat-producing appliances, stairs, ramps, guards, protection from falling, and collision and impact, conservation of fuel and power, access and facilities for disabled people, and finally glazing safety (i.e. in relation to impact, opening and cleaning). Regulation 8 places a limit on the scope of the Schedule 1 requirements in that: ‘Parts A to K and N of Schedule 1 shall not require anything to be done except for the purpose of securing reasonable standards of health and safety for persons in or about buildings (and any others who may be affected by buildings, or matters connected with buildings).’

However, parts L (conservation of heat and power), M (access and facilities for disabled people) and N (glazing) are not confined to aspects of health and safety. Regulation 7 imposes a general requirement about work and materials so that:

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Defective Construction Work ‘7. Building work shall be carried out – (a) with adequate and proper materials which – (i) are appropriate for the circumstances in which they are used, (ii) are adequately mixed or prepared, and (iii) are applied, used or fixed so as adequately to perform the functions for which they are designed; and (b) in a workmanlike manner.’

This is a mandatory requirement, which applies irrespective of the terms of contract. Designers and builders must have regard to and comply with this requirement.

9.3 Construction products The Construction Products Regulations 1991 as amended (which implement the Construction Products Directive 89/106/EEC) impose obligations in relation to construction products produced for incorporation in a permanent manner in construction works. Regulation 7 of the Building Regulations 2000 requires compliance with the Construction Products Regulations. The regulations require that construction products must have such characteristics that the works into which they are incorporated can, if properly designed and built, satisfy the prescribed essential requirements. These essential requirements are concerned with:

• • • • • •

mechanical resistance and stability; safety in case of fire; hygiene, health and the environment; safety in use; noise; and energy, economy and heat retention.

The broad thrust of these regulations is that only construction products that conform to the essential requirements should be used in building work. Under the regulations there exists a scheme for authenticating compliant products by use of a CE mark. Designers should specify and builders should use only products that comply with the essential requirements, and should look for the CE mark when selecting and using products.

9.4 Workplace safety regulations The Workplace (Health, Safety and Welfare) Regulations 1982 serve as an example of the many and various regulatory requirements in relation to the operation and use of buildings and structures that designers, in

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particular, must take account of when designing building work. These particular regulations were made under the Health and Safety at Work etc. Act 1974 and implement the Workplace Directive 89/654/EEC. The Workplace regulations place a duty upon employers of workers to ensure that certain requirements are met in relation to workplaces. These requirements include such things as lighting, ventilation, temperature, windows, doors, washing facilities, and room sizes. Employers who fail to comply with the regulations commit a criminal offence. Builders and designers of buildings and other structures must have regard to any applicable regulations when designing relevant premises in order to protect the interests of their client. If not, then their design will be defective. For example, in Townsend (Builders) Ltd v. Cinema News and Property Management Ltd (1958) a designer was found to have been negligent as a result of designing facilities that did not comply with a local by-law. In some circumstances designers may be obliged to advise on the applicability of regulations, or at least to advise that independent specialist advice should be sought. This was the conclusion in BL Holdings Ltd v. Robert J Wood & Partners (1978) at first instance. This decision was overturned by the Court of Appeal (in 1979), when the principle was accepted but its application to the particular facts was not. Designers and builders must therefore be familiar with regulations that affect the use of buildings or structures that they design and build, to the extent that they are expressly or impliedly obliged to achieve a functional objective that attracts the particular regulations. A builder working to a design prepared by an independent designer will not be liable for functional inadequacies of this nature provided the purchaser has not knowingly relied upon the builder in relation to the design. Failure to take account of relevant regulations will amount to a lack of care and skill on the part of the designer. Such a failure may also amount to breach of a fitness for purpose obligation where such an obligation arises. In either case the breach will entitle the purchaser to compensation if alterations are subsequently required to bring a building into compliance with regulations applicable at the time of design. In other words, inadequacies in design or workmanship that result from failure to have proper regard to applicable functional requirements amount to defects.

9.5 CDM regulations The Construction (Design and Management) Regulations 2007 are concerned with the health and safety aspects of building and engineering work (as defined in the regulations). These regulations require the appointment of a CDM coordinator for all notifiable projects to advise and assist clients on the measures the latter must take to comply with the regulations, to ensure that these and other suitable arrangements are

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Defective Construction Work made and implemented, and to liaise with the principal contractor about the contents of the health and safety file, preparation of the construction phase plan, and any design development that may affect planning and management of the construction work. A project is notifiable to the Health and Safety Executive if the construction phase is likely to involve more than 30 days or 500 person-days. The regulations create duties of cooperation and coordination between relevant members of the project team. They also create certain specific duties that are imposed upon designers and principal contractors. In particular, designers must avoid foreseeable risks to the health and safety of any person carrying out, liable to be affected by or maintaining construction work, or using a structure designed as a workplace. This widely drawn duty indicates that the duty of designers under the regulations extends beyond the construction phase, all the more so as the duty of designers is further enhanced by the requirement that the design must take account of the Workplace (Health, Safety and Welfare) Regulations 1991 so far as they relate to materials used in the structure. The duty of cooperation extends to everyone so far as the reporting of anything dangerous is concerned. In this respect the regulations provide that: ‘Every person concerned in a project who is working under the control of another person shall report to that person anything which he is aware is likely to endanger the health or safety of himself or others.’ There is a requirement that persons appointed as CDM coordinator, designer, principal contractor and contractor should be competent, and that only persons who are competent should be appointed to and undertake these roles. Although the main focus of the regulations is upon health and safety during the construction phase, any failure to discharge a duty imposed by the regulations may be a relevant factor to take into account not only when determining liability for injury to persons suffered as a result of failure to discharge the duties imposed by the regulations but also in relation to defects that would have been avoided if these duties had been discharged.

9.6 The relationship with contractual obligations Model conditions usually expressly provide that builders must comply with relevant statutory requirements. In this respect the JCT SBC conditions oblige builders to carry out and complete the works in accordance with those statutory requirements that affect the works to be carried out. This encompasses all statutory requirements that relate to the building process, but does not mean that builders are necessarily obliged to comply with statutory requirements that affect the use of the building

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once constructed. Whether builders are required to comply with these latter requirements depends on whether they were charged with designing the works (or some part of the works), or whether they have undertaken that the building or structure will be fit for purpose or achieve some functional objective once completed. The JCT SBC conditions require builders and architects, once either ‘becomes aware’ of a divergence between the statutory requirements and the contract documents, to notify the other of the divergence. If the divergence relates to the contractor’s design portion he must propose amendments for removing it. The architect must issue instructions within 7 days, which are deemed to be a variation instruction if the works are varied as a result (except in relation to contractor’s design portion divergences, which the builder must pay for unless a change in the statutory requirements occurred after the base date identified in the contract). Provision is made for the builder to execute work in an emergency without waiting for the architect to give instructions, and for the emergency work to be treated as part of the variation instruction in appropriate circumstances. It is also provided in the JCT SBC conditions that the builder has no liability for breach of contract if he does not become aware of a divergence (other than in relation to the contractor’s design portion) and consequently carries out work that does not conform to the statutory requirements. This is not to say that builders will not be liable under the relevant statute to the extent it imposes a criminal penalty. Also, if a builder was not – but with the exercise of reasonable care and skill would have become – aware of the divergence, then this will amount to a breach of the care and skill obligation, and render the builder liable for the consequences. This de facto presumed knowledge means that there is no incentive for builders to turn a blind eye and hope that the architect does not spot a particular divergence. The ICE conditions not only make express provision for compliance with statutory requirements but also add that compliance with applicable ‘rules and regulations of public bodies and companies’ must be achieved. Builders are liable under the ICE conditions to indemnify their employers in respect of any breach of the statutory and other requirements unless it is the ‘unavoidable result of complying with the Contract or instructions of the Engineer’. Again, the result is unlikely to be regarded as unavoidable if the builder – through the exercise of reasonable care and skill – should have discovered the divergence. Under the NEC3 conditions the builder must notify the project manager as soon as he becomes aware that the works information requires him to do anything that is illegal or impossible, which will include doing anything incompatible with a mandatory statutory requirement. The project manager is then obliged to issue an instruction – which gives rise to a compensation event – if he agrees that there is a

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Defective Construction Work divergence. As with the other conditions, a failure to become aware of an illegal act that should have been discovered with the exercise of reasonable care and skill will not relieve the builder of liability for failure to comply with a statutory requirement. Builders will be obliged to comply with mandatory statutory requirements, such as building regulations, even if the building contract does not expressly stipulate such an obligation. Further, if a building contract does not qualify the obligation to comply with the statutory requirements, then divergences contained within the specification and drawings supplied by builders are likely to be at their risk. The obligation to comply with statutory requirements gives rise to the possibility therefore that work (or parts of it) may be defective because the specification does not conform to the statutory requirements, and that the builder is in breach of contract as a result for following it, even though he did not draw it up. Building regulations will also have an indirect effect on defects claims, because the requirements of the regulations are bound to be taken into account when assessing whether materials are of satisfactory quality or, where appropriate, fit for purpose, and when assessing whether workmanship is adequate. Everyone – builders included – is deemed to know the law. Builders will therefore be deemed to be aware of the requirements of building regulations and any other applicable statutory requirements.

Chapter 10

The Builder’s Obligations: Design, Workmanship and Materials

Purchasers of building work are interested only in having it handed over on time, on price and defect free. Builders are engaged to see that these interests are met. In order to do so there are three key ingredients that builders must satisfy. These ingredients are:

• good workmanship, • adequate materials, and • a sound design (to the extent that responsibility for design rests with the builder).

The standards that builders must achieve in relation to design, workmanship and materials will often be set out expressly in the contract itself, commonly by reference to incorporated specifications, plans and drawings – or sometimes by reference to other documents that they mention. This does not necessarily mean, however, that every document referred to in the incorporated specification or drawings will become a contractual document (see Co-operative Insurance Society Ltd v. Henry Boot Scotland Ltd (2002)). If, however, the contract and incorporated documents do not adequately address all aspects of the work, then it may be necessary to resort to implied terms (see Chapter 3) or statutory requirements (see Chapter 9). It is therefore important to bear in mind at all times that it is the contracts between a purchaser and his project team that will form the starting point for any enquiry about the adequacy of building work and services, but that the express requirements may be subject to implied duties (see Chapter 3, section 3.4) and statutory requirements (see Chapter 9). It is also important to bear in mind that the obligations imposed on builders in relation to workmanship, materials and design have an impact on the overall obligations of builders in relation to the buildability, durability and maintainability of the structures they undertake to erect. Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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10.1 Buildability, durability and maintenance The buildability, durability and maintenance of a proposed structure are matters of paramount importance to purchasers. The obligations of builders in these respects depend on the terms of contract. Whether a proposed structure is buildable engages the obligation to complete the works. In this respect builders are said to give a warranty that the design they have agreed to construct is practicable (that is to say, buildable) and that it can be completed for the agreed price (see Hudson’s Building and Engineering Contracts, 11th edition, 4.004(b)). Having agreed to carry out and complete work, builders must therefore ensure that it conforms both to the design and to all relevant statutory requirements, and must carry out such additional work as is necessary to achieve completion. If they do not, the work will be defective in that it will be incomplete. If the design has been prepared for the purchaser by an independent designer and is discovered to be inadequate, then the builder may be obliged in some circumstances, and without additional remuneration, to undertake any additional work necessary to achieve completion, unless the contract provides otherwise. Further, unless the building contract provides otherwise, designer/ builders impliedly warrant the fitness for purpose of the completed work (or, in the case of a dwelling, its fitness for habitation – see Chapter 7). Sometimes builders may be relieved of liability if an independently prepared design contains discrepancies, or if it diverges from statutory requirements. For example, in relation to discrepancies the JCT conditions require architects to issue instructions that are treated as variations, whereas the design and build conditions broadly leave it to the builder to resolve divergences and discrepancies, with purchasers obliged to pay for the corrective solution only if they want something different from the solution proposed by their builder. It is suggested by Hudson (at 4.003(1)(c)) that builders do not owe a duty, where the design is supplied by the purchaser and has been faithfully adhered to, in relation to its performance, safety, durability and suitability. Nevertheless it cannot be ruled out that builders may be under a duty in some circumstances to warn purchasers of inadequacies in the independently prepared design that would be apparent prior to completion to a reasonably competent builder exercising reasonable care and skill. In some circumstances this may even require builders to alter the design and the works at their own expense to overcome flaws that inhibit some functional requirement of the structure (see section 10.2.4 below). If defects affecting the performance, safety, durability and suitability of the design manifest themselves after completion, they may give rise to breach of express or implied terms relating to the suitability or fitness

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of individual materials. If so, the builder will be liable to compensate the purchaser.

10.2 Workmanship The services that builders provide are not limited to the physical work of excavating, building and installing things. They may also include managing and supervising workmen and suppliers, and selecting and inspecting materials, and may extend to reviewing, commenting upon and even altering the design where necessary. All of these things are encapsulated under the broad heading of workmanship, in respect of which there are two overlapping duties, namely an obligation to exercise reasonable care and skill, and an obligation to achieve the particular standards of workmanship as may be stipulated in the contract.

10.2.1 Care and skill At common law builders engaged to carry out work, whether with or without a concurrent obligation to supply materials, impliedly warrant that the work will be carried out in a good and workmanlike manner (see Young & Marten v. McManus Childs (1968)). Although potentially capable of exclusion, the circumstances in which the common law workmanship warranty might be excluded were likely to be rare (see Rumbelows Ltd v. A.M.K. (a firm) and Firesnow Sprinkler Installations Ltd (1980) and Chapter 3, section 3.5). The common law term has been largely superseded, where services are provided in the course of business, by section 13 of the Supply of Goods and Services Act 1982. Unless excluded, section 13 implies a term that services will be carried out with reasonable care and skill. The wording of this statutory term may be slightly different from the common law term, but the obligation it creates is in substance the same. In addition, builders may owe an independent and concurrent duty of care in tort to exercise reasonable care to avoid causing foreseeable harm to persons and property, and in some circumstances to avoid causing economic harm (see Chapter 6) and, where they do, these duties may impact on the scope of the statutory implied term. Wherever workmanship is required, the obligation to exercise reasonable care and skill will set the minimum standard required of builders in the absence of some expressly or impliedly stipulated standard. To the extent therefore that builders carry out work that fails to conform to the standard reasonably to be expected of an ordinarily competent workman, then the work in question will be defective.

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10.2.2 Specified standards Building contracts sometimes stipulate the particular standard of workmanship required in relation to particular aspects of the physical work, including its finish or aesthetic appearance. This may involve a very precise description of a particular standard, or it might be by reference to a generic requirement such as ‘a fair finish’ or ‘the best of its kind’, with the latter potentially imposing a very high standard. Model conditions tend to fix the standards of workmanship by reference to incorporated documents, such as a specification. The JCT SBC conditions, for example, mandate that workmanship shall be of the standards described in the contract bills or the employer’s requirements/contractor’s proposals, as the case may be. Similar provisions are found in the ICE, MF/1 and NEC3 conditions. The incorporated documents may then identify the standards required, either specifically or generically. Sometimes the building contract may specify, as is the case with the JCT SBC conditions, that the quality and standards of workmanship must be to the reasonable satisfaction of the architect. Where this occurs it is as well for the builder and architect to agree a standard by reference to a sample, but in any event the architect may not insist on an unreasonably high standard. If the standard of work required is neither specified nor expressly left to the discretion of the architect, then the standards will have to be addressed by reference to some other criterion. This may involve applying the standard that can be discerned from the overall requirements of the contract. In this respect, the JCT SBC conditions expressly state that standards ‘appropriate’ to the contractor’s design portion or the works (as the case may be) will apply – but it is likely that this is the standard that would be insisted upon by the courts in the absence of such express stipulation. If the stipulated standards are not achieved, it will not be a defence for the builder to say that he exercised reasonable care and skill. If a particular standard is specified, then it must be achieved.

10.2.3 Inspection of materials The care and skill implied term obliges builders to subject materials delivered to site to a reasonable inspection. The absence of a reasonable inspection and consequent rejection of patently defective materials constitutes a lack of care and skill. In the Young & Marten case it was said that: ‘There is no doubt that . . . [the builder] . . . is bound to make a proper inspection of the material before using it, and he will be liable if the loss is caused

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by the use of material which reasonable inspection would have shown to be defective.’

Although this was said in the context of the common law term, the same approach will be applied to the statutory requirement. The effect is that builders who fail to carry out a reasonable inspection of materials delivered to site will be liable to compensate the purchaser in respect of the consequences of patent defects that a reasonable inspection would have revealed. When patent defects are revealed, the materials in question should be rejected. One consequence of this obligation to inspect materials is that builders may be held liable for patent defects that render materials unfit for purpose (if these defects are not discovered when they should be), even though the contract does not impose a fitness for purpose obligation on the builder.

10.2.4 Duty to warn Builders are engaged for their expertise, but for which no one would bother to employ them. This expertise may sometimes lead to conflict if instructions, drawings or specifications are in the opinion of the builder inadequate or unsafe. If a builder is of the opinion that instructions, drawings or specifications are unsatisfactory, should he slavishly follow them without any concern for the consequences – or should he say something? Whether employing a single bricklayer or corporate entity, most purchasers probably expect their builder to say something, i.e. to offer advice in appropriate circumstances and sound a warning when something untoward is proposed. This expectation that builders will advise or warn is, to an extent, satisfied by the implied warranty that the design is practicable (see section 10.1 above). If it is not practicable, then competent builders will decline to tender. But the obligation to complete may not be a sufficient protection if the design, though practicable, in the sense that it is buildable, will inevitably (and to the actual or presumed knowledge of the builder) be defective in some respect upon completion. In these circumstances it is little comfort to a purchaser to be told after completion that the design, while capable of being built, was plainly inadequate. If purchasers expect to have obvious shortcomings pointed out to them at the earliest opportunity, it begs the question: is the builder obliged to warn of design defects, especially if the purchaser has engaged independent advisers? The answer to this question depends on the existence of a duty to warn and the scope of the duty to exercise reasonable care and skill.

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Defective Construction Work 10.2.4.1 An implied duty There have been a number of cases in which the courts have had to consider whether builders are obliged to warn of defects in designs that they have not themselves produced. In three of them a duty to warn was found to exist. In the first of these three cases, Brunswick Construction Ltee v. Nowlan (1974), a builder was engaged to construct a house designed by architects. Although the contract contemplated the appointment of an engineer to supervise the work, no one was appointed to perform this function. After completion, repairs were required, because the design did not provide sufficient ventilation of the roof space and timbers. The Supreme Court of Canada concluded that an experienced builder should have detected the inadequacies in the design. It also found that the absence of an independent person to supervise the work (especially as the contract contained a term that: ‘The contractor shall give efficient supervision to the work using his best skill and attention.’), indicated that the purchaser relied entirely on the skill and judgement of the builder who was consequently under a duty to warn of the inherent danger of executing the work in accordance with the architect’s plans. This finding led the court to conclude that the builder was obliged – without extra payment – to carry out any work necessary to achieve the intended function of the design (which in this case appears to have been the construction of a building fit for human habitation). This obligation overrode the obligation to comply with the plans and specification. The majority decision in the Supreme Court treated the contractor’s failings as a breach of contract, which suggests that the duty to warn arose from an implied term. In the second of these three cases, Equitable Debenture Assets Corporation Ltd v. Moss (1984), the English courts relied on the Brunswick decision as the basis for implying a term that builders should warn the employer of design defects ‘as soon as they came to believe that they existed’, even though the employer had retained an independent designer. In the third case, Victoria University of Manchester v. Wilson (1984), a term was also implied that the builders would warn the architect of design defects that they believed to exist. However, in two further decisions the courts declined to imply a term that builders should warn of design errors. In both of these cases it was necessary to establish the existence of a (non-contractual) duty of care under the law of tort (see Chapter 6) as a springboard for contribution proceedings. However, in each of these cases the courts declined to impose a duty of care, because they could not find any reliance on the builder and could not find any basis for implying a (contractual) term that the builder should warn of defects in the architect’s design. The first of these latter two decisions was The University Court of the University of Glasgow v. William Whitfield and John Laing (Construction) Limited (1988). In this case the building contract contained ‘a description of the works

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making it clear that the [builder] had no design responsibility under the contract’. In these circumstances the court followed the approach set out in the decision of the Privy Council in Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank Ltd (1986) ‘that where there is a detailed contract of the nature found here, there is no room for the implication of a duty to warn about possible defects in design.’ In Tai Hing it was stated that: ‘Their Lordships do not, however accept that the parties’ mutual obligations in tort can be any greater than those to be found expressly or by necessary implication in their contract.’

Applying these principles led to the conclusion that there was nothing in the relationship between the University and its builder that independently gave rise to a duty in tort, and the absence of an implied term meant that there could not be a concurrent duty of care in tort. The second of these two contrary cases is Oxford University Press v. John Stedman Design Group (1990), where the court again declined to impose a duty to warn of defects, having found that the employer did not rely on his builder in relation to the quality of the design, and declined to imply a term as the detailed contract left no room for the implication of such a term. The upshot of these latter two cases was that, in the circumstances, the builders were not under a duty to warn of defects in the design, and therefore not obliged to contribute towards the cost of remedying the defects in question. The court was careful, however, in the University Court decision not to rule out the possibility that a duty to warn of design defects might be implied in appropriate circumstances. The latter two cases did not overrule the first three. The broad conclusion to draw from all of these cases is that, whenever there exists a detailed contract placing responsibility for the design on to an independent designer, the likelihood of the courts importing a duty to warn is probably restricted to those cases where some special factor renders the implication of the term necessary, or shows an assumption of responsibility for the design by the builder and reliance upon the builder’s skill in relation to the design. The result is that the builder is not required in all circumstances to intervene in the design and is not inevitably liable if an independently prepared and supervised design proves to be inadequate after the work is completed. It is important to note, however, that all of the cases mentioned in this subsection involved non-dangerous defects in the permanent work discovered after completion. 10.2.4.2 An aspect of care and skill Matters have not stood still since the duty to warn cases referred to in the preceding subsection. Three further cases have arisen, but each of them concerned dangerous defects in temporary work. All of these cases

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Defective Construction Work approached the problem by examining the scope of the care and skill obligation imposed on builders. The first of these cases was Edward Lindenberg v. Joe Canning (1992), where the court found that a builder’s failure to warn his employer (or his employer’s surveyor) of the grave doubts that he had, or should have had, about the independently prepared design amounted to a breach of his care and skill obligation. In Lindenberg the builder had been employed to carry out works in accordance with a plan prepared by the employer’s surveyor, which showed various walls including a chimney breast wall as non-load-bearing – and required their removal. The contract was subject to an implied term that Canning would exercise the care to be expected of an ordinary competent builder. Demolition was commenced without providing any temporary propping, even though there was some evidence, and Canning had concerns, that the walls were in fact load bearing – which they turned out to be, and their removal without propping caused damage to the building. The court, in Lindenberg, concluded that a competent builder would have had grave doubt about the plan, that this doubt should have been raised with the surveyor, and that a prudent builder ought to have provided temporary propping, even if given assurances that the walls were not load bearing. Further, it was found that in the absence of such an assurance a prudent builder would undoubtedly have supplied temporary propping. By failing to adopt this approach the builder ‘behaved with much less care than was to be expected of the ordinary competent builder’, and was liable to pay compensation for the damage that resulted. In their commentary on Lindenberg the editors of the Building Law Reports (62 BLR 150) suggest that the basis of the implied term to warn of defects ‘is primarily business efficacy: a competent builder should not execute a design which he thinks will not work satisfactorily without first seeking instructions.’ They also concluded that: ‘where the employer relies on the contractor, there will be a duty to make such changes in the design as are necessary to fulfil that purpose.’ The care and skill obligation was again used as the basis for holding a builder liable in the second of these cases, which was the Plant Construction case, where it was decided that merely expressing reservations about a design to the purchaser’s professional designer, including proffering an alternative design, may not be sufficient to protect builders from liability. In this case a builder who was employed to install engine mountings at a research centre sub-contracted part of the work, and engaged a consulting structural engineer to advise. Both the main contract and the sub-contract required compliance with the instructions of the purchaser’s engineer, who instructed the sub-contractor to support roof trussing with Acro props. This instruction was recognised by the builder, the sub-contractor and the consulting engineer as inadequate. The sub-contractor suggested an alternative method, which was vetoed

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by the consulting engineer. No one raised their concerns with the employer’s engineer. After the props were installed the roof collapsed. The Court of Appeal, in Plant Construction, found that: ‘. . . the factual extent of the performance which . . . [the care and skill] . . . term requires will depend on all relevant circumstances . . . But . . . may . . . include the size, nature and details of the works; the experience and perceived expertise of the contractor; relevant elements of the relationship between the contractor and the employer and their respective relationships with others, for example, architects, engineers, surveyors, contracts managers, clerks of works, sub-contractors, local authority building inspectors and so forth; and crucially details of the particular parts of the works and other facts which give rise to the question whether the contractor fulfilled the obligation which the implied term imports.’

In other words it depends on the facts and circumstances, and the circumstances of this case – especially the fact that the proposed works were obviously, and to the sub-contractor’s knowledge, dangerous – rendered it essential to performance of his obligations with care and skill that the sub-contractor should warn of the perceived danger. Furthermore, the imposition of a flawed design and the involvement of third parties in the design process did nothing, in Plant Construction, to negate the duty owed by the sub-contractor. In this latter respect the court took account of the sub-contractor’s duty of care in tort to avoid personal injury to others, which led to the conclusion: ‘That duty extended to giving proper warnings about the risk. It was not itself a contractual duty owed to [the builder], but it is a relevant circumstance in determining the extent of performance which [the sub-contractor’s] implied duty of skill and care required.’

The Court of Appeal remitted the Plant Construction case back to the lower court to determine causation. In the course of its judgment on causation the lower court concluded that safety ‘is central to any consideration of what [the builder] could and should have done,’ and that the sub-contractor should have pursued its safety reservation with higher levels of management and relevant safety authorities, and if necessary should have refused to perform unsafe work that put the safety of workmen at risk. The Court of Appeal in Plant Construction regarded its decision and analysis as being in accordance with Lindenberg, save that it left open for future consideration what the position might be if the builder/subcontractor lacked actual or presumed knowledge of the defect, or where the defect is non-dangerous. It also made clear that it regarded the Oxford University case as consistent with its approach, and noted that the University of Glasgow decision had been careful not to suggest that

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Defective Construction Work there were no circumstances in which a duty to warn might be implied. In the last of these decisions, Aurum Investments Limited v. Avonforce Limited (2000), the court followed the Plant Construction approach to the care and skill obligation but declined to find an underpinning sub-contractor liable when a flank wall, which formed part of an excavation to allow underpinning works, collapsed owing to lack of temporary support. The sub-contractor was required to construct underpinning bases, but had not carried out the prior excavation work, which had been done by the builder. The builder alleged that the sub-contractor should have warned him of the need to provide temporary support to the excavation. The court found, on the facts, that the sub-contractor was not asked to advise about excavation techniques, was not informed how the builder intended to carry out the excavation, and was entitled to assume that the builder would not carry out the excavation in a negligent manner. The court also regarded it as significant that the builder had retained, and was being advised by, an independent professional consultant (i.e. an engineer). These latter three cases show that builders may not slavishly follow instructions, drawings and specifications when constructing work if the result is to adopt practices that are dangerous, and threaten the stability of the structure under construction or the health and safety of workers. In the circumstances builders must cast a careful eye over what they are being asked to do and, if necessary, display a stridency in ensuring that it is done safely. If they do not, then they are likely to be fixed with liability for the consequences.

10.3 Materials Building work may prove defective because the goods and materials prove inadequate. Builders will be liable for inadequate goods and materials only if they do not conform to description or sample, or if they are not of satisfactory quality or reasonably fit for purpose. If a building contract does not expressly require that goods and materials should comply with these requirements, then a term to this effect will be implied by virtue of the Supply of Goods and Services Act 1982, unless the relevant term is appropriately excluded (see Chapter 3).

10.3.1 Description The common law has always regarded it as vital that goods and materials should answer the description given to them in the contract (see the Randall decision). The Supply of Goods and Services Act 1982 adopts a

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similar approach. Most model conditions similarly demand conformity with description. In this respect the JCT SBC conditions require goods and materials of the ‘kinds and standards’ described in the contract, but only so far as the goods and materials in question are procurable. Substitution of goods or materials is allowable only with consent, but does not relieve the builder of his other obligations – in other words the substituted goods or materials must meet the description sanctioned in the consent and be of suitable quality and, where appropriate, reasonably fit for purpose. The requirement that goods and materials be of the ‘kind’ described permits the supply of a generic product unless a specific product is described. The supply of used items may also be acceptable unless brand new items are specified. If goods and materials are both described and subject to approval of a sample, then the materials must conform to both description and sample. In this respect the quality of the bulk must conform with the sample, the purchaser must have a reasonable opportunity of comparing the bulk with the sample, and the goods must be free from any quality defect that would not be apparent on reasonable examination of the sample.

10.3.2 Satisfactory quality: history Goods and materials that comply with the contractual descriptions may nevertheless be defective if they are not of ‘satisfactory quality’. This requirement arises as an implied term that has a specific definition under section 4 and section 18(3) of the Supply of Goods and Services Act 1982 (which mirror section 14 of the Sale of Goods Act 1979). The satisfactory quality term represents a significant change from the common law approach, which was that goods should be of ‘merchantable quality’. It was this latter term that initially found its way into the codification of the common law in the Sale of Goods Act 1893, and which was kept upon re-enactment of the code in the Sale of Goods Act 1979 and then adopted when the 1982 Act codified the law for work and materials contracts (i.e. those involving the transfer (as opposed to sale) of goods). In 1987 the Law Commission criticised the merchantability standard as outmoded and inappropriate, because it concentrated too exclusively on fitness for purpose – in the sense that if the goods supplied were fit for any (rather than all) of the purposes for which the kind of goods in question are commonly sold, then they were to be regarded as merchantable, even if substandard in terms of appearance or finish or if subject to minor defects (see Law Commission Report on Sale and Supply of Goods). The Law Commissioners therefore recommended that fitness for purpose as the determining factor in decisions about quality should

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Defective Construction Work be de-emphasised and changed (from fitness for ‘any’ to fitness for ‘all’ purposes), and that appearance, finish, freedom from minor defects, safety and durability should be elevated to a status equal, in appropriate cases, to the fitness for purpose requirement. To overcome these criticisms and give effect to recommendations of the Law Commissioners the merchantability term was discarded and replaced. This was achieved by the enactment of the Sale and Supply of Goods Act 1994, which amended section 4 of the 1982 Act by introducing a ‘satisfactory quality’ term in substitution for the former ‘merchantable quality’ requirement (see section 4(2) & (2A) and section 18(3) of the 1982 Act). Under the substituted term it became necessary, in order for goods and materials to be treated as being of satisfactory quality, that they must ‘meet the standard that a reasonable person would regard as satisfactory, taking account of any description of the goods, the price (if relevant) and all the other relevant circumstances.’ The standard created by the substituted term takes account not only of the description applied to goods but also ‘their state and condition’ and ‘in appropriate cases’ a non-exclusive list of aspects of quality as identified by the Law Commissioners, being (a) fitness for all the purposes for which goods of the kind in question are commonly supplied, (b) appearance and finish, (c) freedom from minor defects, (d) safety, and (e) durability.

10.3.3 Satisfactory quality: scope The satisfactory quality term has been considered in two decisions, both of which arose under the identical provisions in the Sale of Goods Act 1979 and therefore apply by analogy to the 1982 Act. In Britvic Soft Drinks Ltd and Bass Brewers Ltd v. Messer UK Ltd and Terra Nitrogen UK Ltd (2002) the court applied the satisfactory quality term to bulk liquid carbon dioxide for the carbonation of drinks. In this case, as a result of a manufacturing error, the liquid contained a measurable but insignificant quantity of carcinogenic benzene. As such, the liquid neither represented a risk to health nor offended any statutory requirements. Nonetheless, the court declined to treat the liquid as being of satisfactory quality because no consumer would willingly buy a drink knowing that it was contaminated with a carcinogen. In these circumstances the court did not ‘consider that the CO2 can be regarded as of satisfactory quality if it had this effect on the end product into which it was introduced.’ At first glance this decision appears to indicate that the effect on the end product and its end user of the quality characteristic were both factors to be taken into account in determining whether a reasonable person would regard goods as being of satisfactory quality.

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Subsequently, however, in Jewson Ltd v. Boyhan (2002) the Britvic decision was distinguished on its facts. The Jewson decision concerned the supply of electrical boilers for a block of flats that were intrinsically satisfactory but which did not achieve a satisfactory home energy rating under the Building Regulations (Amendment) Regulations 1994. At first instance, and following Britvic, the court had concluded that the failure to achieve a satisfactory rating rendered the boilers unsatisfactory because end users would be put off purchasing the flats into which the boilers were to be installed. However, on appeal this approach was rejected as inapplicable on the facts. The Court of Appeal took the view that when determining whether a reasonable person would regard goods as being of satisfactory quality: ‘The question in most cases will be whether the goods are intrinsically satisfactory and fit for all purposes for which goods of the kind in question are supplied. In my opinion these boilers satisfied that criterion. They were satisfactory as boilers.’

In Jewson the Court of Appeal also decided that even the aspects of quality such as fitness for all purposes and safety were directed at the intrinsic quality of the goods supplied: ‘Section 14(2) is directed principally to the sale of substandard goods. This means that the court’s principal concern is to look at their intrinsic quality, using the tests indicated in subsection (2A)(2B) and (2C). Of these, it can be seen that the tests postulated in paragraphs (a) and (d) of subsection (2B), and perhaps others too, may well require regard to be had to extrinsic factors. These will typically have to do with the predictable use of the goods. But the issue is still their quality: neither these provisions nor the residual category of “all the other relevant circumstances” at the end of subsection (2A), make it legitimate, as a general rule, to introduce factors peculiar to the purposes of the particular buyer. It is section 14(3) which is concerned with these’.

This decision indicates therefore that the satisfactory quality standard gives rise to an objective assessment of the suitability of goods and materials without any consideration of the requirements of the particular purchaser.

10.3.4 Satisfactory quality: relevance of selection Builders will be liable if goods and materials supplied under a building contract are not of satisfactory quality unless the implied term is expressly excluded. This will be so even if the defect is latent, and even if the defective item was not selected by the builder. In this respect there is no reason to assume that the introduction of the satisfactory quality

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Defective Construction Work condition is intended to dilute the effect of the Young and Marten decision of the House of Lords. This decision affirmed that the common law merchantability warranty applied even if the builder did not select the materials, and even if the defect was hidden. The facts of Young’s case are simple enough: the contract specified ‘Somerset 13 [Tiles], supplied by Browne of Bridgwater’. The tiles suffered from a latent defect, which manifested itself some time after completion. The purchaser sought damages from the builder on the basis that the tiles supplied were not of merchantable quality. The builder was keen to resist the claim because he was unable to pass on any liability to his supplier, as the relevant limitation period under the supply contract had expired. The House of Lords found the builder liable on the basis that a warranty that the tiles were of merchantable quality should be implied, even though the tiles had not been specified by the builder and the defect could not be detected upon a reasonable inspection. The rationale for implying the merchantability warranty was that the purchaser would otherwise be left without a remedy, whereas the builder could normally pass the liability down the supply chain to the ultimate producer of the defective product. Even where this is not possible, because the supply contract exempts or limits the liability for defects of the supplier (to the builder), this did not generally operate, under the common law, as a ground for absolving the builder from liability, as it may indicate no more than that the builder has chosen to take the risk of latent defects. In this respect it was said in Young that: ‘If the contractor chooses to buy on . . . terms [which permit the supplier to disclaim liability for defects] he takes the risk of having to bear the loss himself if the goods prove to be defective.’ In relation to the common law merchantability term it was postulated, obiter dicta, in Young’s case, that the outcome might have been different if the purchaser had specified a proprietary product known to be procurable by the builder only on terms that excluded liability for defects, or if the supplier’s exclusion of liability resulted in a cheaper price for the purchaser. The difference it would have made can be discerned, at least under the common law, from the decision in Morris v. C.W. Martin & Sons Ltd (1966). This was a bailment of goods dispute where the question was posed and answered, in the Court of Appeal, in these terms: ‘Can the defendants rely, as against the plaintiff, on the exempting conditions although there was no contract directly between them and her? There is much to be said on each side. On the one hand, it is hard on the plaintiff if her claim is defeated by exempting conditions of which she knew nothing and to which she was not a party. On the other hand, it is hard on the defendants if they are held liable to a greater responsibility than they agreed to undertake. . . . The answer to this problem lies, I think, in this: the owner is bound by the conditions if he has expressly or impliedly consented to the bailee making a subbailment containing those conditions, but not otherwise.’

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The Morris approach was later followed in the Rumbelows decision. This was a building dispute where it was discovered, after work commenced, that a water pipe that crossed the building site needed to be lowered. The landowner requested that his builder engage the person who had originally installed the pipe to carry out the task of lowering it. The builder did so, but on terms that excluded the liability of the subcontractor. The work was carried out badly, and resulted in loss. When sued by the landowner, the builder sought to limit his own liability to the landowner by reference to the sub-contractor’s exclusion. On the facts of this case the court concluded that: ‘If the [landowner] had not only known of but also consented to the [subcontractors]’ conditions, then having regard to Morris v. Martin & Sons I think the implied term as between the [landowner] and [builder] would indeed have been modified so as to limit the [builder’s] liability to conform with the limits on the [sub-contractors]’ liability.’

It is important to appreciate, however, that the court, in Morris and in Rumbelow, was considering the circumstances in which it would modify the common law implied term as to merchantability (see Chapter 2, section 2.4), whereas under the 1982 Act the statutory implied terms may be excluded only in much narrower circumstances, i.e. if there is express agreement, a course of dealing or trade usage. Unless one of these factors applies, the satisfactory quality term will be implied – although it will not extend to matters rendering goods unsatisfactory that are specifically drawn to the purchaser’s attention before the contract is made; or that would be revealed on reasonable examination, if the goods are examined before contract; or, where the supply is by reference to a sample, anything that reasonable examination of the sample ought to reveal. The prospect of avoiding the satisfactory quality term would appear therefore to be greatly reduced as a result of the codification of the law. The reality seems to be that if builders accept a supplier’s exclusion of liability then they must, as a general rule, live with the consequences. Builders should therefore take the opportunity when tendering to ascertain the terms upon which suppliers will sell and, if appropriate, qualify their tenders to reflect the supplier’s terms, either by adjusting the price to reflect the risk, or by insisting upon an exclusion of the satisfactory quality warranty in whole or at least in relation to particular goods. If builders do not adopt the latter approach it is not unreasonable to infer that they have adopted the former or are prepared to take the risk. The overriding conclusion, however, is that the absence of selection by the builder is irrelevant when deciding whether the statutory satisfactory quality warranty applies.

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10.3.5 Fitness for purpose In contracts for work and materials there will be implied, in addition to the satisfactory quality condition, a further condition that goods supplied will be reasonably fit for any purpose expressly or implicitly made known to the builder by the purchaser. This term will not be implied where the circumstances show that the purchaser did not rely, or that it was unreasonable for him to rely, on the skill and judgement of the builder. It is a term that may, however, be annexed to a contract by virtue of a trade usage. The fitness for purpose condition is currently found in section 4 of the Supply of Goods and Services Act 1982, which broadly enacted the common law rules about fitness for purpose. Reliance on the skill and judgement of the builder is central to liability. In the Rotherham case the court considered the scope of the common law fitness condition, and concluded that: ‘The implication of a warranty of fitness will be displaced where . . . the circumstances show that the employer does not rely or that it is unreasonable for him to rely on the contractor’s skill and judgement.’

This case applies by analogy to the fitness term created by the 1982 Act. It is illustrative of the limitations that apply to the implication of the fitness for purpose condition, and in particular that merely leaving some characteristic of the materials unstated will not necessarily amount to reliance on the builder’s skill and judgement. The Rotherham case involved two separate contracts, each with a different builder, both of which incorporated the JCT standard form, 1963 edition. Under the contracts the builders were obliged to use materials of the quality specified. The builders supplied hardcore conforming with the description in the bill of quantities, which described the hardcore required for use in cellars in the following terms: ‘[Granular] hardcore shall be graded or uncrushed gravel, stone, rock fill, crushed concrete or slag or natural sand or a combination of any of these. It shall not contain organic material, material susceptible to spontaneous combustion, material in a frozen condition, clays or more than 0.2% of sulphate ions as determined by BS 1377.’

Both builders used steel slag. At the time the contract was entered into, neither Rotherham nor the builders were aware that steel slag had to be rendered inert by weathering before use in confined conditions (such as cellars), otherwise it would expand with disastrous consequences. The result was that the hardcore supplied was not inert; it expanded, and caused reinforced

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concrete slabs to crack. Rotherham sought compensation on the basis that the hardcore was not reasonably fit for its intended purpose. It was not disputed that the hardcore supplied conformed to the contractual description, and that it had been inspected and approved by the architect, including for use in cellars. The contracts even empowered the architect to instruct the testing of materials at his discretion, though no testing was ordered. By the time the contract was entered into the Building Research Establishment and slag production companies knew that steel slag was not safe for use as fill in confined conditions. The trial judge concluded that the specification of fill materials was partial, and left many important matters to be decided by the builders, such as whether the fill material should be inert; he also concluded that neither the contractual terms nor the surrounding circumstances demonstrated any intention not to imply the fitness warranty, nor did they show that the employer did not place any reliance upon the builders. It was also found that the architect’s approval confirmed no more than the apparent compliance with the specification, without relieving the builder from liability for latent defects. The builders were therefore found liable for the unsuitable material, but appealed. In the Court of Appeal it was concluded that it was not simply a question of whether the particular purpose for which the fill was required was made known (as it was by the contractual documents) ‘but whether the circumstances show that [the employer] did not rely on the [builders’] skill and judgement.’ In relation to the reliance issue it was found that the limited freedom of choice that the contractual description left to the builder did not indicate that reliance was placed upon his skill and judgement: ‘To the extent that there were no stipulations and the supplier was free to choose, the freedom was accorded not in order to enable the supplier to exercise some supposed skill and judgement but because the architect believed that no further stipulations were necessary.’

It was also said that: ‘nothing relevant to suitability was intentionally left unspecified.’ In addition factors such as relative knowledge and experience, selection by the employer and the ability to pass liability down the supply chain were all factors to take into account: ‘. . . it would in my judgment be unreasonable to imply the term in this case taking account of the relative knowledge and experience of the employers and the contractors . . . ; the fact that the employers were clearly selecting the materials to be used so as to include steel slag which they knew would be likely to be used because they believed it to be fit for the purpose. Further there was in this case no prospect of the contractors being able to pass liability for damage due to steel slag having an unexpected property to their suppliers and through them to the ultimate producer of the material.’

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Defective Construction Work It was also found that the court could take into account a wider pool of knowledge and experience than just that possessed by the employer and the builders: ‘In deciding who was relying upon whose skills and judgement, the comparative experience, expertise and knowledge of the contracting parties, the architects and engineers, the suppliers of the material and the producers of the material are all relevant.’

Although the Rotherham decision may be at the extreme end of the range, it appears to indicate that, generally, if the selection of materials is left wholly to the builder, the fitness for purpose condition will apply. However, if the contract elaborately specifies the type of materials to be used, and if the employer is advised by an independent and skilled third party adviser, and if the builder has no better skill and knowledge than the third party, it may be inappropriate to conclude that there was actual reliance or, even if there was, that reliance on the builder was reasonable. However, if the contract provides a less elaborate specification, or if the employer does not have a third party adviser, or if the builder has, or ought reasonably to have, specialist knowledge putting him in a better position to know about the performance of materials, then it is much less likely that a tribunal would refuse to imply the fitness for purpose condition. Clearly, if particular characteristics of materials to be supplied are expressly left to the builder, then this will result in the implication of the fitness for purpose term.

10.4 Design The Rotherham decision concerned builders who had undertaken to supply work and materials in order to build what was shown and described in drawings and specifications produced by an independent designer, and – more importantly – where the purchaser did not rely upon the skill and judgement of the builders in relation to the selection of the materials that ultimately proved disastrous. In these circumstances the builders were found not to have impliedly warranted the fitness for purpose of the ultimately defective materials, and so had no liability. The outcome might well have been different if the builders had undertaken to design as well as build the works. This is because, under the common law, designer/builders are regarded as having impliedly warranted the fitness for purpose of the completed works. This was the outcome in Independent Broadcasting Authority v. EMI Electronics Ltd and BICC Construction Ltd (1980), where the House of Lords was not prepared to accept that ‘the design obligation of the supplier of an article

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is to be equated with the obligation of a professional man in the practice of his profession.’ In this case a builder had been engaged to undertake the ‘design, supply and delivery’ of a 1250 foot high mast for transmitting television signals. The builder engaged others to advise on the design of the mast. Not long after completion the mast collapsed. When sued for compensation the builder, in the IBA case, argued that, in relation to design, he was only subject to a care and skill obligation equivalent to that imposed upon independent professional designers. In this respect it was the builder’s case that he had discharged this obligation, such that the collapse had occurred without culpable fault. Apart from rejecting the argument that designer/builders should be treated the same as independent professional designers, the House also found that there is: ‘no reason why one who in the course of his business contracts to design, supply, and erect a television aerial mast is not under an obligation to ensure that it is reasonably fit for the purpose for which he knows it is intended to be used.’

As a result of the IBA case designer/builders are subject to a much more onerous duty than an independent professional designer unless the contract provides otherwise. Some building contracts do provide otherwise. For example, under the JCT DB conditions and the contractor’s design portion provisions of the JCT SBC conditions builders will have ‘the like liability to the Employer’ as would an independently employed architect or other professional designer supplying a design for works to be carried out and completed by a builder who is not the supplier of the design. This is an attempt to equate the builder’s liability for design to the liability that would apply to a professional designer in the relevant circumstances: in the vast majority of cases this will be a care and skill liability, but if for any reason an independent designer would, in the particular circumstances, be subject to the more onerous fitness for purpose liability in relation to the design, then so would a designer/builder. This lessening, under the JCT SBC and DB conditions, of what would otherwise be an onerous obligation for designer/builders is subject, however, to an important qualification. Under both of these conditions the builder is required to complete the design of the works or the contractor’s design portion, as the case may be. In addition, the builder is required to comply with instructions up to practical completion. If an instruction is given that merely requires the builder to complete the design (rather than change the employer’s requirements) because it has been found to be unfit for its purpose (as identified in the employer’s requirements), then the builder must comply with the instruction, but it will not amount to a variation instruction. Further, an instruction

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Defective Construction Work condemning work and materials that are not in accordance with the contract (which includes the employer’s requirements) because they are unfit for purpose does not amount to a variation. Some support for this proposition may be found in Brickfield Properties Ltd v. Newton (1971), which confirms that architects (and by analogy engineers) are under a continuing duty to ensure that their design will work in practice and, if it will not, to correct it. This duty applies equally to designer/builders who must then implement the necessary changes. There is therefore a risk for designer/builders engaged under these JCT conditions that until practical completion is achieved they may be required to achieve a fitness for purpose outcome even though after completion their liability for design defects is subject to the less onerous care and skill obligation. The position does not appear to be greatly different under the ICE conditions. Under the 7th edition the builder is not responsible for the design of the permanent works or any temporary works design supplied by the engineer. If the builder does design any part of the permanent works he is required to exercise ‘reasonable skill, care and diligence’. However, he must also construct and complete the works so far as legally and physically possible ‘to the satisfaction of the Engineer’, and must comply with the instructions given by the engineer up to substantial completion of the works. This means that if the engineer is not satisfied with the design of those parts of the permanent works designed by the builder, then he may insist on changes at no cost to the purchaser. Under the MF/1 conditions the builder is ‘responsible for the detailed design of the Plant and of the Works in accordance with the requirements of the specification’ and must comply with the engineer’s instructions. However, the builder gives no warranty that the design ‘will satisfy the Purchaser’s requirements’. Instead, the builder accepts responsibility for a period of 3 years after taking over of the works for rectifying defects that arise due to his gross misconduct. In addition to the rebuttable common law fitness for purpose term concerning the overall design, the statutory term that goods and materials used in the works will be reasonably fit for purpose will apply where appropriate. This term will be rebutted by those contracts that limit the builder’s design liability to that of care and skill, as the selection of materials is an aspect of design. Where a project involves the erection of a dwelling house the designer/ builder will, in accordance with the Defective Premises Act 1972, be obliged to use proper materials and workmanship so that the dwelling will be fit for habitation when completed (see Chapter 7). However, under the JCT conditions this duty is limited, as indicated above, to what is in effect a duty to exercise reasonable care and skill.

Chapter 11

The Builder’s Obligations: Defects Before Completion

Builders can put right defects discovered before completion. Any delay to completion caused by defects can be compensated – and this is usually done by way of liquidated damages. It does not follow, however, that purchasers of building work need not be concerned about precompletion defects. Indeed, unlike purchasers of goods – whose concern about quality is engaged only on delivery – the purchasers of building work have an immediate interest in the quality of work as it progresses. This is because the work is carried out upon, and becomes a fixture of, the purchasers’ land, and is usually paid for as it progresses. This immediacy of interest in the quality of work means that purchasers of building work are not comfortable standing idly by while a defect-riddled edifice is thrown up – and they may not be persuaded by protests that it will be all right at completion. Apart from delaying completion, defects tend to undermine confidence in the builder’s competence (especially if they are quantitatively or substantively significant), they raise concerns as to whether the defects will be rectified at all if they are not rectified promptly, and may mean that the builder has been overpaid. The latter two concerns are heightened by the fact that builders sometimes becomes insolvent, resulting in abandonment of the work. If so, the purchaser will have to employ a replacement builder to complete the work, including rectifying defective work – which may increase the cost of the project. Further, the security provided by the retention fund (if there is one) is diminished, or may even be extinguished, if defects are left unremedied. For these reasons defective work discovered before completion is a serious and worrying matter for purchasers.

11.1 Temporary disconformities Whether purchasers can do anything about defects discovered before completion depends on whether one of the following two requirements are satisfied: either (a) the defective work must constitute a breach of contract, or (b) the contract must expressly empower the purchaser to Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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Defective Construction Work take appropriate measures. If the contract does not address the second requirement, then the position is entirely dependent on whether the common law treats pre-completion defects as breaches of contract. Unfortunately, there is some debate about the precise status of precompletion defects in building work. This is because of the development of the temporary disconformity theory, which posits that defective work discovered before completion is not a breach of contract at all, but rather a ‘temporary disconformity’. The rationale for this proposition is that builders cannot be in breach of their quality obligations until completion because, until then, they can put right any defects that arise.

11.1.1 The theory The temporary disconformity theory is derived from non-binding observations (obiter dicta) made in the judgments given in two decisions. First, in Jarvis v. City of Westminster (1970), the judge at first instance observed that a builder who makes an error in the course of performance is entitled to remedy it if he can, and if fully remedied it does not constitute a breach of contract. Second, in P & M Kaye Limited v. Hosier & Dickinson Ltd (1972), it was observed in a dissenting speech that: ‘Upon a legalistic analysis it might be argued that the temporary disconformity of any part of the works with the requirements of the contract even though remedied before the end of the agreed construction period constituted a breach of contract for which nominal damages would be recoverable. I do not think that makes business sense. Provided that the contractor puts it right timeously I do not think that the parties intended that any temporary disconformity should of itself amount to a breach of contract by the contractor.’

This observation was made in the context of defects discovered but put right before completion, but where the purchaser sought to characterise them as pre-completion breaches of contract in an effort to bypass the consequences of the final certificate (see Chapter 13). Although said in a dissenting judgment – and even though strictly non-binding – the latter observation, in particular, has frequently been deployed since to support claims that bad work occurring before completion does not amount to a breach of contract. As the Kaye observation was made by a Law Lord, it is one that inferior courts have found themselves unable to lightly ignore.

11.1.2 The theory confined Despite its distinguished parentage, the temporary disconformity theory has not prospered since the Kaye decision, but nor has it been rejected

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outright. It survived scrutiny by both the High Court and the Court of Appeal in Lintest Builders Ltd v. Roberts (1978) and (1979) respectively. In this case an assessment had to be made of the value of work done after termination of a building contract. The builder argued that defects (which had not been corrected by the time of termination) had to be ignored, as the work could not be treated as defective until completion, which would no longer occur – so all work should in effect be treated as properly done. If this argument had been accepted, the purchaser stood to be prejudiced by the temporary disconformity theory, by being required to pay for badly done work. The potential prejudice was avoided by the court applying specific provisions of the contract in question, under which the purchaser acquired the right, at the time the defective work was done, to require that it be remedied, and therefore was entitled to have any defective work omitted from the valuation. Although both courts, in the Lintest decisions, avoided the need to confront the temporary disconformity theory directly, they both nevertheless expressed reservations about it. In this respect the judge at first instance observed that: ‘the technicalities may be that there is a technical breach each time the defective work is done.’ The Court of Appeal declined to accept that prior to completion the builder was free to do defective work ‘as often and as long and as frequently as he liked provided that by the time the contract comes to an end and the defects period comes to an end he has remedied those defects.’ It also questioned whether the dissenting observation in the Kaye decision was: ‘on any view intended . . . to be of universal application’. These remarks are perhaps unsurprising given that, but for the availability of specific contractual remedies, the temporary disconformity theory could, if applied to the facts of the Lintest case, have required the purchaser to pay for bad work. It is perhaps equally unsurprising that on subsequent occasions the courts have taken strides to distance themselves from the temporary disconformity theory – first, in Nene Housing Society Ltd v. National Westminster Bank (1980), where the Kaye observation was cited but again sidestepped by applying the specific provisions of the Bond under which Nene’s claim was made – which required the bondsman to pay in the event of ‘default’ rather than ‘breach.’ In this case the court was satisfied that non-conforming work (which had not been put right by the time the building contract was terminated) amounted to default, whether or not it also amounted to a breach. However, the court also distinguished the facts from those of Kaye and Jarvis, and as a result regarded neither observation from these cases as helpful. It also treated the terms of the building contract as creating two separate obligations: namely, a duty to carry out the work properly, as well as a duty to complete it. A further disengagement from the temporary disconformity theory appeared in Surrey Heath Borough Council v. Lovell Construction Ltd (1988),

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Defective Construction Work where Kaye was, once again, distinguished on its facts which were so extreme that they caused the judge to observe that ‘the expression “temporary disconformity” does not immediately appear apt to describe a destruction of a building by fire when nearing completion.’ In Surrey Heath the builder had rectified the damage caused by the fire, and completed the work (albeit later than planned), but the Council sued the builder to recover various incidental losses, which included interest on capital, damage to other property, loss of revenue, and additional staff costs. The builder contended that he was under a duty, by way of an implied term, only to select competent sub-contractors and complete the work in accordance with the design and on time. It was argued that, having done so, the builder owed no further duty to the purchaser in relation to those defects that pre-dated completion. The court rejected this approach, and decided instead that the builder was – as a corollary of one of the express obligations imposed by the contract – duty bound, by a much wider implied term, to carry out the contract work (including both design and construction functions) in a good a workmanlike manner, and with the proper care to be expected of a skilled contractor. This much wider implied term created a continuing duty that was not discharged merely by selecting competent sub-contractors, or by eventually completing the work. Further, on the facts, it was a duty that had been breached prior to completion. So, in keeping with the Nene decision, the court in Surrey Heath also recognised the existence of a dual duty to carry out work properly – as well as to complete it properly. Unfortunately, neither the Nene nor the Surrey Heath decision satisfactorily addresses the position when builders insist that they have the right to remedy defects and will get around to the necessary remedial work (rather than have done so) in due course, but before completion. In these circumstances can purchasers do anything other than stand by and watch, pending completion? The decision in William Tomkinson & Sons Ltd v. The Parochial Church Council of St Michael (1990) suggests that purchasers are not obliged to stand powerlessly by. In this case the court permitted the recovery of damages in respect of unremedied defects that had been discovered prior to practical completion, but which had not been remedied. In this case the court, after reviewing the authorities including Kaye, found that: ‘. . . it may be concluded, as a matter of construction of the contract, that it was not intended that damages should be recoverable in respect of temporary deficiencies in the works prior to their being corrected. However, it does not follow that where workmanship falls short of the standard required by the contract and the employer remedies it prior to practical completion, there is no breach of contract, or the employer is not entitled to recover as damages his outlay in remedying the defective works . . .’

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This approach not only indicates that the purchaser may do something about pre-completion defects, but also implies that temporary deficiencies are constituted as a breach only if the purchaser rectifies them prior to practical completion. If, however, the builder remedies them before practical completion: ‘the contract may be construed as impliedly excluding any right to nominal damages in respect of them.’ This approach was followed in Guinness Plc v. CMD Property Developments Ltd (1995), except that the court concluded, in addition, that the obligation to pay damages arose irrespective of instructions from the architect to the builder to remedy those defects that had arisen.

11.1.3 Reconciling the cases The decisions in Lintest, Nene, Surrey Heath, William Tomkinson and Guinness are not easily reconciled with Jarvis and Kaye. The former group of decisions indicate that pre-completion disconformities have consequences, whereas Jarvis and Kaye suggest that they do not, at least within the narrow factual confines of those two cases. One possible approach to the reconciliation of these cases is to note that the dissenting observation in Kaye addressed the ‘intention’ of the parties. It may not have been possible, in Kaye, to deduce a common intention that temporary disconformities should be treated as breaches of contract, but this does not prevent such an intention being deduced in other cases – including cases where the facts are otherwise identical to those of Jarvis or Kaye. In this sense the Nene, Surrey Heath, William Tomkinson and Guinness decisions can all be reconciled with Jarvis and Kaye on the basis that the implied term adopted in each of those cases can be seen as deriving from the presumed intention of the parties. It is much less easy, however, to see them as terms implied as a matter of necessity for, in truth, the contract in each case would have worked without the implied term (see Chapter 3). In addition, there are two other factors in the dissenting speech in Kaye to bear in mind. First, Kaye envisaged the ‘timeous’ rectification of defects. Second, it envisaged that the defects should be ‘temporary’. These two factors are really opposite sides of the same coin, and each is fact dependent. If, on the facts, it is found that a particular defect was not remedied promptly or is not, or was not, temporary, then it may be treated as a breach of contract. In this respect in Surrey Heath the court found it difficult to treat the total loss of the structure as temporary, while in the other cases the defects were neither timeously repaired nor temporary. In this sense it may be said that none of the latter cases is inconsistent with Jarvis or Kaye. This approach does not seem to be inconsistent with the decision in Oval (717) Ltd v. Aegon Insurance Co (UK) Ltd (1997), where it was decided that purchasers do ‘not expect

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Defective Construction Work initial perfection in on-site performance by all operatives engaged in the works at all times,’ and that ‘such temporary disconformities would not constitute either non-performance or non-observance of the terms of the construction contract.’ In this respect the Oval decision was approved subsequently in McGlinn. These latter two decisions do seem to indicate that purchasers should, if nothing else, proceed with some sensitivity as to what constitutes a defect, because something that is merely less than perfection may not amount to a defect. Finally, it is also worth bearing in mind that the proposition that nominal damages are as a general rule recoverable where (among other things) there is a ‘technical’ breach of contract but no loss may not be entirely correct. It may be that nominal damages are recoverable only when there is an unremedied breach and no loss, but if the breach is remedied and there is no loss then there is no right to nominal damages. Some slender support for this proposition can be found in the decision of the Court of Appeal in Pagnan & Fratelli v. Corlisa Industrial Agropacuarica (1970). If this is the correct position then – without the need to imply a term excluding nominal damages – it protects builders when defects are rectified before completion (and is thus consistent with Jarvis), but leaves a remedy in the hands of purchasers on those occasions when defects are not remedied promptly before completion, or where despite prompt rectification a real loss is nevertheless suffered (as occurred in Surrey Heath).

11.2 Opening up the work The temporary disconformity theory, to the extent that it continues to concern purchasers at all, does so only where the building contract does not make express provision for the purchaser to give instructions or to take unilateral action if the builder leaves defects as the work progresses. In these circumstances any action by the purchaser may have unintended consequences. For example, if the purchaser enters the site to effect repairs (or employs others to do so), this may be characterised by the builder as a repudiation of the contract. If so, the builder may abandon the work altogether, making legal proceedings inevitable as to who should compensate whom. Far better that the building contract should empower the purchaser to give instructions and/or to employ others to effect repairs, so that his actions cannot be treated as effecting a rescission of the contract. Provisions of this nature mean that the work will continue to progress, even though disputes may remain as to whether the work in question was in fact defective, or as to whether self-help was justified in all the circumstances. Model conditions do generally provide expressly for the purchaser to take action in the event of defective work pre-completion. This is usually achieved through all or a combination of three methods:

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• by permitting the exclusion of defective work for the purposes of

•

•

interim payment. This is achieved by requiring that interim payments should reflect only the value of work done – and defective work has no value – something that has an immediate, and no doubt salutary, effect on builders; by adopting the ‘dual obligation’ approach and requiring that builders carry out as well as complete the work. This is the approach adopted in the JCT conditions, which tend to stipulate that builders must ‘carry out and complete the Works’. The ICE conditions by contrast use the words ‘construct and complete’, but it is unlikely that this formula produces a different result. Even the elaborate terminology of the MF/1 conditions, which requires that the builder: ‘shall . . . with due care and diligence, design, manufacture, deliver to Site, erect and test the Plant, execute the Works and carry out the Tests on Completion’, undoubtedly encompasses the dual obligation within the phrase ‘execute the Works’. The effect of these express dual obligation provisions is that purchasers may then exercise self-help and claim damages if defects appear pre-completion; by empowering purchasers to insist that the work should be opened up for inspection. For example, the JCT SBC conditions empower the architect to instruct the builder to open up for inspection any work covered up, and to arrange for testing of materials and goods, whether or not already incorporated into the works. These instructions are at the purchaser’s expense unless the contract provides otherwise, or if the inspection/test reveals non-conforming work. Where work does not conform, the architect has power to: (a) give instructions for the removal of non-conforming work, materials or goods; and/or (b) (subject to an appropriate reduction from the price) permit the nonconforming work to remain; and/or (c) give instructions for consequential variations at no additional cost to the purchaser; and/or (d) give instructions for such further opening up for inspection or testing as is reasonable to establish the likelihood or extent of any further similar non-compliance.

The latter of these powers is to be exercised having regard to the JCT Code of Practice and at no additional cost to the purchaser, although they may result in an extension of time if further non-conforming work is not revealed. Model conditions generally provide that purchasers may employ others to undertake the necessary work if their builders will not do so, and charge the cost to them. Further, they often provide that purchasers may also invoke the determination procedure, although sometimes they are prohibited from determining the contract unreasonably or vexatiously. The JCT DB conditions contain provisions that are broadly similar to the JCT SBC conditions, while the ICE, NEC3 and MF/1 conditions all contain provisions concerning the inspection and correction of

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Defective Construction Work defects found prior to completion, and allow for termination of the contract if instructions are not obeyed.

11.3 Defects and interim payment Under the common law, builders are, subject to the doctrine of substantial performance, entitled to be paid only when work is complete unless the contract expressly provides otherwise. In practice most building contracts, with the exception perhaps of those of very short duration, expressly include some mechanism for payment on account to the builder. Indeed, for most builders the cash flow generated by payments on account is generally crucial to their solvency. As Lord Denning famously said in Gilbert-Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd (1973): ‘There must be a “cash flow” in the building trade. It is the very lifeblood of the enterprise.’ This cash flow is so important that Parliament intervened in 1996 to provide a mandatory statutory framework for interim payment and deductions (see Chapter 3, section 3.4.3). The object of the contractual and statutory regimes is broadly the same, however: it is to see that builders are paid on account for work done as a project progresses, but only if the work is done properly. If there are defects, then work cannot be said to have been done properly, and so purchasers ought not to be obliged to pay for it.

11.3.1 The contractual position Model conditions tend to provide that builders are entitled to payment – including interim payment – only in respect of work properly executed. In this respect the terms dealing with payment amount to a direction to the person charged with valuing the work. For example, under the JCT SBC conditions the architect is obliged to certify for payment only ‘the total value of work properly executed’ and ‘the total value of the materials and goods delivered’. Similarly, under the ICE conditions the engineer is obliged to certify the amount that is ‘due’ in respect of the ‘value’ of the permanent works executed. The NEC3 conditions provide for interim payment in respect of ‘the Price of Work Done to Date’. They also define the term ‘defect’ as including ‘a part of the works which is not in accordance with the Works Information’. This convoluted approach has the same effect as the JCT and ICE conditions. The MF/1 conditions similarly provide that interim payment certificates must include the total sum due in respect of work done in the course of manufacture and/or work duly executed on site, but expressly add that certificates must not include work or plant that ‘does not comply with

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the Contract’. The effect of these directions to the certifier under the MF/1 conditions is that work must be done properly before it can be included in a valuation for the purposes of interim payment. Those model conditions that do not provide for independent assessment and certification of interim payments nevertheless contain a similar direction to include only the value of work properly done in interim valuations, and oblige purchasers to pay this amount (see, for example, the JCT SBCSub/C conditions).

11.3.2 Interim valuations, certificates and payments Interim valuations, certificates and payments do not amount to an acknowledgement that work is defect free unless the contract provides otherwise – which they rarely do. Furthermore, and subject to the effect of the Housing Grants, Construction and Regeneration Act 1996, interim certificates do not, unless the contract provides otherwise, give rise to a ‘temporary finality’ or ‘pay now, sue later’ requirement. This is because interim valuations, certificates and payments are usually provisional. This means that the valuer may, unless the contract provides otherwise, adjust interim valuations/certificates by omitting the value of work previously included and paid for if it is subsequently discovered to be defective. The valuer may address such adjustments at the next valuation/certification, but in any event the purchaser may do so earlier (including after a valuation has been notified or certified, but before payment of the sum due) if defects are discovered after a valuation or certificate is issued to the builder. This common law right is constrained, however, by the statutory regime that arises under the Housing Grants, Construction and Regeneration Act 1996, which, in some circumstances, requires that payment must be made despite the discovery of defects after the value of work has been certified or notified to the builder (see section 11.3.3 below). The provisional nature of interim valuations and certificates is reflected in the practice of assessing the gross value of all work done up to the valuation date, rather than the value of work done between valuation dates. This means that, if work that has been valued and included in a certificate is subsequently discovered to be defective, the gross value can be adjusted in the next interim valuation or certificate by excluding the defective work from the gross valuation. This will inevitably have an impact on the net payment due. It may be less than the builder was expecting, it may be nothing, or – if a negative certificate results – he may be obliged to pay money back. Things get problematic if defects are discovered after a certificate is issued but before payment is made, particularly so if it is disputed that the work in question is defective. If this occurs, builders sometimes insist that payment of the certified sum

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Defective Construction Work is made, while purchasers usually refuse to pay any more than the true value after taking account of subsequently discovered defects – which usually means paying less than the net sum due under the valuation or certificate in question. This is especially likely if defects are significant (either individually or collectively) and will result in the builder being substantially overpaid if the full amount certified is paid. This desire to avoid payment is all the stronger where purchasers lack confidence in their builder’s ability to repay if the defects are not corrected by the next valuation date. The practice of making deductions from interim payments to reflect the true value of the work has led builders to challenge the right to make such deductions. One such challenge met with success. This occurred in Dawnays Ltd v. F.G. Minter and Trollope & Colls Ltd (1971), where it was said, in the Court of Appeal, that an interim certificate is the equivalent of cash or a negotiable instrument, and therefore must be paid less only permitted deductions (which, under the particular contract in Dawnays, included only retention, discount and previous payments). Later, however, in Gilbert-Ash the House of Lords took a different view. In this case it was said that: ‘. . . in construing a contract one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption.’

The effect of this was that the purchaser was allowed to exercise the right ordinarily available at law to set off against certified sums the amount of his cross-claim for breach of contract. While there remained some debate as to whether the Gilbert-Ash decision applied only to the particular contract under scrutiny, it is a decision that has been treated since as one of universal application. The result has been that, in the absence of clear words, the courts have refused to exclude the defences to payment otherwise available at law. For example, in NEI Thompson Ltd v. Wimpey Construction UK Ltd (1987) a contractual set-off clause was held not to exclude the common law right of set-off. One outcome of Gilbert-Ash was that some publishers of model conditions, notably the JCT, amended some of their sub-contract conditions to limit the right of builders to set off against sums due to their subcontractors. The JCT limited the right of set-off to those instances where notice in writing of the intention to set off was given within a stipulated period before the contractual payment date, and provided for an adjudicator to determine the validity of the deductions so notified. Subsequently, however, the usefulness (to sub-contractors) of this mechanism was reduced when the courts made it clear that the defence of abatement was subject to the Gilbert-Ash principle, and remained available unless clear words excluded it, and that words excluding or restricting the right

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to set off cross-claims were not sufficient to exclude the defence of abatement (see Acsim (Southern) Ltd v. Danish Contracting and Development Co Ltd (1989) and A. Cameron Ltd v. John Mowlem Plc (1990)). The effect of these decisions was that builders retained the right to dispute the value of work done by their sub-contractors, and also retained the right to pay less than the amount certified if they did so, but denuded the contractual adjudicator of power to determine the validity of the abatement. This rendered the pre-1996 JCT adjudication mechanism largely worthless. The position was much the same in the main contract relationship between purchaser and builder. In this respect the Court of Appeal, in C.M. Pillings & Co Ltd v. Kent Investments Ltd (1985), could find nothing in the wording or provisions of the 1967 edition of the JCT Prime Cost contract either requiring immediate payment of certified sums where a bona fide dispute as to the correctness of the certificate existed, or making payment of a certified sum a condition precedent to the right to arbitrate the dispute. Likewise it was found that other main contracts with similar wording did not exclude the right to set off against certified sums (see for example R.M. Douglas Construction Ltd v. Bass Leisure Ltd (1990) and Enco Civil Engineering Ltd v. Zeus International Developments Ltd (1991)). The effect of these decisions was that the payer retained the right to adjust the valuation at any time in the absence of clear express contractual provision to the contrary, and so could always protect himself from the impact of defects by consequently adjusting the amount of an interim payment right up to the point of payment.

11.3.3 The effect of the HGCRA The Housing Grants, Construction and Regeneration Act 1996 (HGCRA) (see Chapter 3, section 3.4.3) has, without altering their provisional status, nevertheless made interim valuations and certificates binding as to the sum payable in some circumstances. The HGCRA provides a mandatory regime for interim payment to builders carrying out construction operations under a construction contract, except where the work duration is, or is estimated to be, less than 45 days; or where the work relates to a dwelling that the other party (defined as a residential occupier) occupies, or intends to occupy, as his residence. The mandatory regime requires that relevant contracts must provide an adequate mechanism for determining what payments become due under the contract, and when, and must provide for a final date for payment of any sum that becomes due. The contracting parties are left free to agree the period between the due date and the final date for payment. They are also free to agree the period after the due date for the giving of a notice by the payer of the amount that is to be paid and how it has been calculated (a ‘payer’s notice’), but the period must not

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Defective Construction Work be more than 5 days. If nothing or a reduced amount is to be paid – because of the builder’s failure to carry out his obligations under the contract, or because of an abatement or set-off under another contract – the paying party must still give notice of the amount that would have been payable but for these events. A sum that has become due may not be withheld after the final date for payment unless the payer shall have given an ‘effective notice’ specifying the amount (or amounts) to be withheld and the ground (or grounds) attributable to the deduction. An effective notice must be given no later than the prescribed period before the final date for payment, but the parties are again free to agree the period to be prescribed. If a relevant contract does not expressly conform to these mandatory requirements, the HGCRA stipulates that appropriate terms will be implied; and the relevant appropriate terms are to be found in secondary legislation made pursuant to the Act, being the Scheme for Construction Contracts (England and Wales) Regulations 1998. The Scheme, where it (or any part of it) applies, stipulates that the amount due shall be the value of work done and of materials supplied during the relevant valuation period; renders this amount due 7 days after the expiry of each valuation period or upon the making of a claim for payment; requires that a payer’s notice must be given no later than 5 days after the due date; provides that the final date for payment is 17 days after the payment shall have become due; and provides that an effective notice must be given not later than 7 days before the final date for payment. Under the Scheme, failure to give a payer’s notice carries no sanction (see the Scottish decision in S.L. Timber Systems Ltd v. Carillion Construction Ltd (2001) and the decision of the House of Lords in Melville Dundas Ltd (in receivership) v. George Wimpey UK Ltd (2007)), so that the builder must still prove the value of work done, at which point defects can be taken into account as extinguishing or diminishing the value of work and materials supplied. If nothing is due then there is no requirement to give an effective notice. However, a contractual term may be drawn much more widely than the Act or the Scheme requires, and may have the effect that the amount applied for by the builder is the amount due in the absence of a payer’s notice (see Watkin Jones & Son Ltd v. Lidl UK GmbH (2001)). If this occurs, then failure by the payer to give notice setting out his valuation and how it is calculated deprives the payer of his first opportunity to adjust the amount claimed to reflect the true amount due. The payer does, however, have a second bite at the cherry in these circumstances, because he may give an effective notice of intention to deduct, and this notice may address defects as well as other claims. If the contract provides for interim payment by reference to a certificate, then the only opportunity that the payer has, if he disputes the value of the work as shown in the certificate, is to give an effective notice

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of intention to withhold payment. In the absence of such a notice the certified sum must be paid even if the payer disputes the valuation because of defects discovered after the issue of the certificate that reduce the value of work done (see Rupert Morgan Building Services (LLC) Ltd v. Jervis (2004)). Although there are therefore circumstances when the payer may become bound to pay the amount valued and/or certified, it remains the case that the valuation/certificate nevertheless remains provisional – something the judges were at pains to stress in the Rupert Morgan decision. This means that the gross value can still be adjusted in the next valuation/certificate so that the next net payment will then reflect the true value of the work. This does not present a problem if the builder remains solvent, but if he abandons the project it may result in the purchaser having paid more than the true value of the work and materials supplied.

Chapter 12

The Builder’s Obligations: Defects at Completion

As indicated in the previous chapter, builders are obliged both to carry out and to complete the building work they have agreed to undertake. The importance of completion is that – subject to the terms of contract – it signifies discharge of the builder’s performance obligation, and therefore frees him from any further liability to pay compensation for delay. It is also the point at which the builder’s possession of the site ends and the purchaser’s possession resumes (with the purchaser also assuming the risk of damage to the works thereafter). At completion, purchasers should have received what they bargained for. Completion is therefore a highly significant event. However, unlike contracts for the sale of goods, where a particular and easily identifiable event – such as delivery – may be sufficient to identify full performance, there is no directly equivalent concept for building contracts, where there may be scope for argument about the scope of work and whether it has been achieved.

12.1 Scope of work to be completed It is an oversimplification to state that builders must do all the work that has to be done in order to finish the work. Plainly, builders must do all the work described in the specification – but sometimes they may be required to do more than what is expressly described in the specification, because sometimes work that is not expressly described may nevertheless form part of the work that must be done to achieve completion. This undescribed work usually takes the form of either indispensably, or contingently, necessary work.

12.1.1 Indispensably necessary work Builders are obliged to do everything necessary to see that the work they have undertaken is finished or done. This includes work that may not be expressly specified, if it is necessary to achieve completion. Hudson explains the position in the following terms: 106

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‘It is a cardinal principle of construction, therefore, that, in the absence of an expressed contrary intention, an obligation to do described work for a price imports an obligation to do any essential and inevitable ancillary work or processes, whether described or not, which are needed to produce the described work.’

This is what happened in Williams v. Fitzmaurice (1858), where a builder agreed to complete a house so that it was dry and fit for occupation. The specification stipulated floor joists but not the flooring itself, so the builder refused to provide floorboards in the absence of a variation instruction. The court concluded that the contract could not reasonably be construed as excluding all work not specifically mentioned. In this case the house could be complete only once it was fit for occupation, and without floorboards it was not fit for occupation. In the circumstances the builder was found liable to provide floorboards as part of the original contract price. In Williams the court adopted a purposive approach to the meaning of ‘complete’, which meant that floorboards were indispensably necessary to completion. The authorities are littered with other examples of projects where builders were required to carry out significant items of work without extra remuneration in order to achieve completion, even though the work in question was not described in the specification. But it is always a question of construction of the contract as a whole whether any particular item is included and therefore necessary to achieve completion. It does not follow in all cases, however, that all of the work necessary to complete the project is included in the price. This is especially so where the contract contains a sophisticated pricing mechanism – usually involving bills of quantities and/or a method of measurement. The result in these circumstances may be that items that might otherwise be thought to be included in the price may not be. In this respect, for example, it was decided in Re Walton-on-the-Naze Urban District Council and Moran (1905) that a contract that described an outlet pipe as extending to the low water mark did not require the builder to construct it beyond the low water mark without extra remuneration, even though one of the contract drawings showed it doing so, and the quantities were consistent with the pipe extending beyond the low water mark. In addition, in A.E. Farr Ltd v. Ministry of Transport (1965) extra remuneration was payable to the builder for the excavation of working space for a concrete structure – even though the digging of working space was indispensably necessary to construct the structure – because this was what the bills of quantities, when properly construed, required. These cases indicate that the terms of contract may place limits on the amount of work included within the agreed price. However, it is important to remember that, even though some items of inevitable work may

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Defective Construction Work entitle builders to extra remuneration, it does not follow that they may refuse to carry out the items in question. Such items may still fall within the description of what the builder must do to complete the work, or they may amount to an actual, or deemed, variation that the builder is obliged to carry out. If so, the work will be defective if the item in question is not supplied.

12.1.2 Contingently necessary work Sometimes wholly unexpected work may be necessitated by unexpected conditions or events. For example, ground conditions may not be as anticipated, and may require stabilisation before the design can be executed, or the works may be destroyed by fire before completion, necessitating rebuilding to achieve completion. Further, unexpected conditions or events may necessitate changes to the intended method of working. All of these situations demand extra work – sometimes referred to as contingently necessary work – which someone must perform and pay for. The common law usually allocates these risks to builders. Indeed, as Hudson puts it: ‘. . . a contractor who . . . expressly or impliedly undertakes to complete the work or project according to the contract drawings and design, thereby impliedly warrants his ability to do so, and if he cannot, will be liable in damages.’

This principle applies even if the drawings or design are prepared by the purchaser or his independent designer (if one is employed), because the purchaser does not warrant that the design is practicable – and there is usually no contractual relationship between builders and independent designers. The liability to bear the cost of contingently necessary work may not extend to unforeseen variations that are different in substance or location from the original work. Further, model conditions sometimes expressly allocate particular contingent risks, in whole or in part, to the purchaser. For example, under the JCT SBC conditions the works and (where applicable) the existing structures must be insured such that while the builder may be obliged to rebuild in the event of damage or destruction by an insured risk before completion, he also gets paid for the reinstatement work as a deemed variation. Similarly, under clause 12 of the ICE conditions the builder is relieved of the cost of unforeseen physical conditions or artificial obstructions, which must be paid for by the purchaser.

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12.2 Completion Whatever the scope of work may be, purchasers will look to their builder to see that all of the work is complete or finished. If it is not, purchasers may adjust the price to reflect the true value of the work done, or may seek compensation for financial losses caused by defects, which may include both the monetary value associated with the defects themselves and the financial consequences of any delay to completion. It is therefore important to establish what constitutes completion, and when it occurs.

12.2.1 The common law concept The common law adopted a stringent approach to the performance requirement of lump sum contracts. In this respect the common law stipulated that entire performance was required before payment became due (hence lump sum contracts are sometimes referred to as ‘entire’ contracts). The stringency of the common law rule is exemplified by the decision in Cutter v. Powell (1795), where the estate of a ship’s mate who had agreed to undertake a voyage for an agreed sum was unable to recover the lump sum as the mate had died before completing the voyage. This rather harsh rule was summed up in Sumpter v. Hedges (1898), in these terms: ‘The law is that where there is a contract to do work for a lump sum, until the work is completed the price of it cannot be recovered.’ When applied to building work this rule means that, if the contract requires entire performance before payment is due, then the contract cannot be regarded as entirely performed if there are patent defects. So, a builder who agrees to build a structure for £10,000 with payment (or part payment) on completion risks standing out of the whole amount (or the balance) until the work is entirely complete. This harsh approach had the potential to allow purchasers who had substantially received the benefit of the building work they had contracted to receive to avoid payment altogether because of the existence of minor defects. The common law rule was therefore modified by the doctrine of ‘substantial performance’ to prevent purchasers taking advantage of minor defects.

12.2.2 Substantial completion The potential harshness of the entire performance rule as exemplified in Sumpter was ameliorated by the development of the doctrine of ‘substantial performance’ (sometimes called ‘substantial completion’), which

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Defective Construction Work was approved by the Court of Appeal in H. Dakin & Co Ltd v. Lee (1916). Under this doctrine, builders working under a lump sum contract who have ‘finished’ or ‘done’ the work are entitled to be paid the lump sum even though the work ‘is in some respects not in accordance with the contract.’ Later, in Hoenig v. Isaacs (1952), it was indicated that it was first necessary to decide whether, as a matter of construction of the contract, entire performance was a condition precedent to payment. If not, then the doctrine of substantial completion applied where defects were of a ‘minor character’. The result, if defects exist, is that, provided the work can be regarded as finished, then the lump sum is payable, less an appropriate adjustment for the value of the defects. In this respect in Bolton v. Mahadeva (1972) it was indicated that defects could be more than trivial (or, to use the Latin, de minimis), but: ‘In considering whether there was substantial performance I am of opinion that it is relevant to take into account both the nature of the defects and the proportion between the costs of rectifying them and the contract price. It would be wrong to say that the contractor is only entitled to payment if the defects are so trifling as to be covered by the de minimis rule.’

In this case the court declined to accept that defects that were valued at between one third and one quarter of the contract price, and which were deleteriously affecting use of the premises affected, could be regarded as minor. Indeed, in these circumstances the court decided that the work could not be regarded as substantially complete. So, under the common law builders could claim payment if their work was substantially complete provided any defects, while more than trivial, were of a minor character. In this respect, whether a defect is indeed minor is a question of fact and one of degree, and the onus of proving that the work has been substantially performed rests with the builder: see Close Invoice Finance Limited v. Belmont Blanching & Dyeing Co Ltd (2003).

12.2.3 Practical completion The common law concept of substantial completion has not been universally adopted in model conditions as the basis for determining when work is complete or finished. The JCT conditions, for example, provide that work is to be regarded as complete once ‘practical completion’ has been achieved. Further, all of the JCT conditions contain a mechanism for signifying that practical completion has been achieved. This may be by the purchaser giving notice (as occurs under the JCT DB conditions); or, where an independent certifier is appointed, by that person issuing a certificate

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of practical completion (as occurs under the JCT SBC conditions); or by the builder giving notice (albeit with the option for service of a counternotice – as occurs under the JCT SBCSub/C conditions). Until publication of the JCT Major Contracts Form in 2003 (see section 12.6 below) the JCT conditions (and indeed most model conditions – though not always the ad hoc forms prescribed by some purchasers) shied away from defining ‘practical completion’, preferring instead to leave it to the judgement of the certifier. Nevertheless, the authorities provide some guidance as to the meaning of this term. The starting point is the decision of the House of Lords in Westminster Corporation v. J Jarvis & Sons Ltd (1970), which indicates that: ‘One would normally say that a task was practically completed when it was almost but not entirely finished; but “Practical Completion” suggests that that is not the intended meaning and that what is meant is the completion of all the construction work that has to be done.’

In the same judgment it was also indicated that latent defects do not prevent practical completion but: ‘If they had been then apparent, no such certificate [of practical completion] would have issued.’ At this stage practical completion looks a little like ‘entire performance’ (see subsection 12.2.1 above). However, since Jarvis it has been recognised that some degree of defective work is not necessarily inconsistent with practical completion. In this respect, the effect of the word ‘practically’ was explained in H. D. Nevill (Sunblest) Ltd v. William Press & Son Ltd (1981) in these terms: ‘I think that the word “practically” in Clause 15(1) [of the RIBA 1963 edition], gave the architect a discretion to certify that [the builder] had fulfilled its obligation under Clause 21(1), where very minor de minimis work had not been carried out, but that if there were any patent defects in what [the builder] had done the architect could not have given a certificate of practical completion.’

This indicates that the existence of defects that are more than trivial prevents the achievement of practical completion, and that the contractual requirement to achieve practical completion is a more exacting standard than the common law requirement of substantial completion (see subsection 12.2.2 above). In the now overruled decision of the Hong Kong Court of Appeal in Big Island Contracting (Hong Kong) Ltd v. Skink Ltd (1990), it was decided that practical completion could not be distinguished from the common law doctrine of substantial performance. The implication of this is that defects that are more than trivial but are nevertheless minor do not prevent practical completion. It is noteworthy, however, that Skink

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Defective Construction Work involved defects valued at up to HK$60,000, including a failure to modify a sprinkler system, which led the court to conclude that the work was neither ‘finished’ nor ‘done’, so that the work in question could not be regarded as practically complete. Clearly, the defects and the incomplete item were of such a scale that they were neither trivial nor of a minor character, but were significant enough to render the work incomplete. Later, in the George Fischer decision, the court concluded that ‘practically complete’ did not mean an absence of defects: ‘I conclude that whatever the precise meaning of “practically complete” in clause 20.1 (and the expression is not defined) it is not inconsistent with some degree of outstanding or defective work.’ But despite this observation the court concluded that a certifier had been negligent in certifying practical completion when he had identified defects that, when listed, filled two pages. As indicated above, the Big Island decision has not withstood scrutiny. In Mariner International Hotels Ltd v. Atlas Ltd (2007) the Hong Kong Court of Final Appeal criticised Big Island for failing to recognise the distinction between the common law doctrine of substantial completion and the meaning of the words ‘practical completion’, and overruled it. In so doing the court indicated instead that the term ‘practical completion’ gives rise to an exacting standard, and means ‘a state of affairs in which the [work] has been completed free from any patent defects other than ones to be ignored as trifling’. Essentially, the Hong Kong court has adopted the approach set out in the Nevill decision. The result is that it now appears that the existence of patent defects that are more than trivial prevents work from being regarded as practically complete. It should be borne in mind that because the interpretation of the term ‘practical completion’ demands an exacting standard, even the very modest relaxation for trivial items may not provide much of a relaxation, especially where the decision as to whether the work is practically complete is left to a third party certifier. This is because, as the Nevill decision confirms, builders do not have an entitlement to a certificate of practical completion where patent but trivial defects exist; rather the certifier has a discretion to certify practical completion in these circumstances. The certifier may, subject to his duty to act fairly, prefer not to exercise this discretion in favour of the builder. In these circumstances the builder is no better off than if the original undiluted common law entire performance requirement applies. The fact that a contract uses both the terms ‘practical completion’ and ‘completion’ may not signify that different standards are to be applied. This occurred in the 1980 edition of the JCT conditions, but it was decided in Emson Eastern Ltd (In Receivership) v. E.M.E. Developments Ltd (1991) that, at least for the purposes of the JCT 1980 edition, there is no difference between ‘completion’ and ‘practical completion’. This may not always be the case, however.

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Not all model conditions use the term ‘practical completion’. Where they do, that term will most likely be given the same meaning as that adopted in the Nevill decision. The ICE conditions use the term ‘substantial completion’ instead of ‘practical completion’, and the NEC3 and MF/1 conditions simply use the term ‘completion’. It is not as yet clear whether the term ‘substantial completion’ or the word ‘completion’ when used in model form building contracts will be given the same meaning as practical completion, or whether they will be treated as having the same meaning as is given to ‘substantial completion’ under the common law doctrine (see subsection 12.2.2 above). However, it is open to the courts to conclude that by adopting a term that is already defined under the common law (and one that is different from the established term ‘practical completion’) the draftsman intended to give the terms ‘substantial completion’ and ‘completion’ a different meaning from ‘practical completion (see British Sugar Plc v. NEI Power Projects Ltd (1997)). The JCT SBC conditions make provision for the purchaser, with the consent of the builder, to take possession of parts of the works before practical completion is certified. Where this occurs, practical completion of the relevant part is deemed to have occurred on the date the purchaser took possession, and the defects period is deemed to have commenced at the same time. There is a similar provision in the ICE conditions dealing with premature use of the works by the purchaser.

12.3 Snagging There is a widespread belief in the construction industry that work may be treated as practically complete when there are ‘snagging’ items remaining to be done. The Penguin Dictionary of Building (4th edition) defines the word ‘snagging’ as ‘doing the last minor jobs and adjustments before the handover of a completed building’. But a minor job means work that is not yet satisfactorily complete – in other words, a defect. It is noteworthy that the dictionary envisages that these minor jobs will be attended to before completion, as they should be. Indeed, it is good practice for builders to allow sufficient time in their programmes for snagging to be carried out in advance of the agreed (or extended) completion date. Similarly, architects should inspect work and identify snags in good time before the intended completion date – but having done so should be slow to certify practical completion until all snags identified are rectified, unless they are (whether individually or collectively) trivial. There is nothing particularly unusual about architects either issuing what purports to be a qualified certificate of practical completion – the qualification usually being a requirement that outstanding items (usually

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Defective Construction Work identified in a ‘snagging’ list) must be attended to promptly – or issuing an unqualified certificate but nevertheless identifying at the same time snags to be attended to during the defects liability period. These are, however, dangerous practices in the absence of client consent. The authorities indicate that if defects are patent, and are anything more than trivial, work cannot be regarded as practically complete. It is always a question of fact and degree whether a particular defect is – or a collection of defects are – trivial, but the longer the list the less likely it is that the ‘snags’ can be regarded as trivial. Further, even where the certifier purports to issue a qualified certificate, it may be treated as unqualified. This is precisely what occurred in George Fischer, where a certificate of practical completion was issued subject to a two-page list of defects. In this case the contract stipulated that: ‘When in the opinion of the Supervising Officer, the Works are practically completed, he shall issue a Final Certificate of Practical Completion.’ The supervising officer later argued that his certificate was not the Final Certificate of Practical Completion. The court however found that it was: ‘any submission that this was not a contractual certificate would lie ill in the mouth of a professional adviser who had chosen to use the words “certify” and “Practical Completion” and to describe it as issued “under the terms of the . . . contract”.’

The consequence was that the certificate was premature, and the certifier negligent. This is an example of the courts preferring substance over form. It is also a reminder that the only safe course is to refuse to certify practical completion unless the purchaser agrees otherwise, where there are defects that are more than trivial. If the purchaser consents, it is sensible practice for the certifier to require that the snagging work be completed promptly.

12.4 The effect of practical completion Although the achievement of practical completion demands an exacting degree of completeness, it is not all gloom for builders. The effect of this exacting requirement is in one sense ameliorated by the fact that most model forms of building contract provide for payment on account to builders (and this is compulsory if the contract constitutes a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996, and the work is to last more than 45 days: see Chapter 3, section 3.4.3, and Chapter 11, section 11.3.3). Often, therefore, only a proportion of the price is unpaid by the time that practical completion is due or is said to have been achieved. Nevertheless, the final

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interim payment may be a significant sum. In addition, builders remain exposed to liability for damages (usually in the form of liquidated damages) until practical completion is achieved, and for some categories of defect the limitation period may not commence until practical completion is achieved. The achievement of practical completion, in addition to relieving builders from any further liability for damages for delay, also releases them from the obligation to insure the works and, under the JCT conditions for example, triggers both the release of a proportion of the retention (usually one half) and the commencement of the defects liability period. The achievement of practical completion as soon as possible is therefore highly important to builders, despite payment on account. It is therefore essential for builders to avoid and, where necessary, remedy promptly those defects that are discovered prior to the certification or practical completion.

12.5 The ICE, NEC3 and MF/1 conditions Under the NEC3 conditions completion occurs when the work is done in accordance with the ‘Works Information’ and when all notified defects ‘which would have prevented the Employer from using the works and Others from doing their work’ are corrected. The NEC3 wording suggests that defects that are more than merely trivial do not prevent the certification of completion. The ICE conditions similarly envisage that certification of substantial completion of parts of the work may occur despite the existence of ‘outstanding work’. Under the MF/1 conditions the engineer may issue a ‘Taking Over’ certificate where sections of the works have passed the tests on completion and are complete ‘except in minor respects that do not affect their use for the purpose for which they are intended’. There is no equivalent provision where the works are not to be taken over in sections.

12.6 The JCT Major Project Construction Contract The JCT Major Project Construction Contract (which was first published in 2003) was the first of the JCT model conditions to define practical completion. The Revision 1 2007 edition uses the following definition: ‘Practical Completion takes place when the Project is complete for all practical purposes and, in particular:

•

the relevant Statutory Requirements have been complied with and any necessary consents or approvals obtained;

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• • •

neither the existence nor the execution of any minor outstanding works would affect its use; any stipulations identified by the Requirements as being essential for Practical Completion to take place have been satisfied; and the health and safety file and all “as built” information and operating and maintenance information required by this Contract to be delivered at Practical Completion has been so delivered to the Employer.

Where the Contract Particulars identify that there is more than one Section then, unless stated otherwise, references to Practical Completion are to be read as references to the Practical Completion of the relevant Section.’

Under this definition the project must be ‘complete for all practical purposes’ and satisfy each of the four subsidiary stipulations. The requirements that the project be ‘complete for all practical purposes’ and that the existence or execution of minor outstanding works should not ‘affect’ the use of the project appear to leave the certifier with a greater degree of discretion than applies where the requirement is to achieve practical completion as defined in the case law for other contracts. However, strict compliance with the ‘Statutory Requirements’, the essential stipulations of the ‘Requirements’ and the provision of the as-built and O&M information appear to be mandatory, so that the discretion conferred on the certifier is restricted to this extent. Also, while it is not clear whether the essential stipulations of the ‘Requirements’ must be expressly and specifically identified as such, or whether they may be identified as a matter of construction of the contract, it is probable that the latter will apply, so that certifiers must be careful not to ignore indispensably and contingently necessary work.

12.7 The provision of information prior to practical completion The JCT Major Projects Contract is not the only form of model conditions in which the achievement of completion requires more than just the physical completion of the specified building work. For example, the JCT SBC conditions require, as a precondition of the certification of practical completion, that builders must have ‘complied sufficiently’ with their obligations to supply:

• ‘as built’ drawings and other details of those works that fall within

•

the Contractor’s Design Portion as are specified in the contract (and concerning the maintenance and operation of the Contractor’s Design Portion) or as ‘the Employer may reasonably require’, and such information as the CDM coordinator reasonably requires for the preparation of the health and safety file required by the CDM Regulations.

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It is only when these additional obligations have been complied with that practical completion is achieved and may be certified. Under the JCT DB conditions the supply of information for the health and safety file (where the builder is the CDM coordinator) is also a precondition of practical completion, as is the supply of as-built and operation and maintenance information. The ICE conditions similarly require the provision, by the builder, of operation and maintenance manuals and as-completed drawings before the issue of the certificate of substantial completion. They also require, as do the MF/1 conditions, that any stipulated tests are passed (satisfactorily passed in the case of the ICE conditions) before the engineer may issue a certificate of substantial completion, or of completion as the case may be.

Chapter 13

The Builder’s Obligations: Defects Post Completion

Once building work is complete, concepts such as defects liability period, making good of defects, retention and final certificate come to mind – and they are sometimes the subject of misconception. The extent to which these concepts come into play at all, and their precise scope and effect, depends entirely upon the contractual terms of the contract. If the contract is silent about these concepts then they have no role at all. Nevertheless, even in the absence of express provision for postcompletion events, builders retain a liability to pay compensation for unremedied patent defects and for latent defects discovered after completion – and will usually return to site after completion to remedy defects, even in the absence of any obligation to do so, precisely in order to avoid or limit their potential liability to pay compensation.

13.1 The common law At common law the performance obligation ends at completion. Builders who have achieved completion may leave site without facing accusations of abandonment, are then free from any further liability to pay compensation for delay to completion, are free to cancel their insurance arrangements for the works, are no longer at risk of damage to the works (except damage caused by their own prior breach of contract), and are entitled to payment in full, less only any necessary adjustment to the price – often referred to as abatement – to reflect patent defects. Subject to this right to abate the price for defects the purchaser has no right to retain any part of the price after completion unless the contract expressly stipulates otherwise. This is so even if the contract expressly identifies a defects period, unless it is accompanied by an express right to hold a sum as security either for a given period or pending rectification of defects. Once building work is complete, builders may no longer insist on being given the opportunity to remedy those defects that arise after completion, nor even those minor defects that arose before, but which did not prevent, completion (unless it was a condition of granting 118

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completion that the builder would return and complete outstanding defects – as is often the case). Instead, at common law, builders are liable after completion to pay compensation to the purchaser for all patent defects and all latent defects that are subsequently discovered. However, there may be circumstances, as occurred in City Axis Ltd v. Daniel P Jackson (1998) – which followed Payzu v. Saunders (1919) – where the purchaser may not be entitled to recover the extra cost of rectifying defects if he unreasonably denies the builder the opportunity to remedy them, i.e. fails to mitigate his loss. Whether the denial is unreasonable is ultimately a question of fact

13.2 Defects liability period Most model conditions make provision for a defects period. Under the JCT conditions this is now referred to as the ‘rectification period’. The duration of the defects period is usually fixed (but is sometimes capable of adjustment), each party has identifiable rights in relation to defects, and the defects liability period is usually accompanied by a right to retain a portion of the price as security pending discharge of the defects obligations.

13.2.1 Duration Often the defects period will start once completion is achieved (see, however, Chapter 12, section 12.7 above), and will last for a stipulated period of time – often, but not exclusively, 6 or 12 months. For example, the JCT and ICE conditions opt for a fixed duration, whereas the NEC3 and MF/1 conditions opt for a degree of flexibility. In this latter respect the NEC3 conditions stipulate that for defects identified after completion the defects period begins ‘when the Defect is notified’. Similarly, under the MF/1 conditions, while a defects period of fixed duration is identified, the period effectively starts again for any repair or replacement work carried out during the defects period, but on the basis that the extended period applies only to the items that have been repaired or replaced, and will not exceed 2 years unless the contract makes special provision to the contrary. Furthermore, under the MF/1 conditions, if the work cannot be used because of defects, the defects liability period for the work is extended pro rata.

13.2.2 Snagging As indicated in Chapter 12 (section 12.3), it is not appropriate to certify practical completion if there are patent defects that are more than trivial.

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Defective Construction Work Nevertheless, there may be circumstances when purchasers may wish to secure handover despite the presence of defects that are more than trivial. When certifying completion despite the existence of defects it is always advisable that the certifier should (as well as obtaining client consent) secure an express undertaking from the builder to remedy patent defects within a stipulated period as a condition of certifying completion, rather than leave the position open ended. It will inevitably be the case in these circumstances that purchasers will desire that the defects be attended to promptly. In this respect both the ICE and MF/1 conditions contain an express undertaking on the part of the builder to complete any outstanding work that remains at the date of substantial completion (or, in the case of MF/1, ‘completion’) either (in the case of MF/1) ‘within the time stated in the Taking-Over Certificate’, or (under the ICE conditions) within an agreed period or, if no period is agreed, ‘as soon as practical during the Defects Correction Period’. If the value of defects is equivalent to, or exceeds, the retention sum, then – apart from this rendering it questionable whether the work can properly be regarded as practically complete at all – the certifier should ensure that it is made a condition of granting practical completion that a sufficient adjustment (in addition to retention) be made to the final interim payment to secure that the excluded work is rectified promptly and that the builder is not overpaid.

13.2.3 ‘Defects arising’ As building work should be complete without any patent defects (other than those of a trivial character), builders ought to be concerned, during the defects liability period, only with defects appearing after practical completion. However, if practical completion is certified subject to a ‘snagging’ list, the builder may be obliged to remain at, or to promptly return to, the site to rectify outstanding work (see Chapter 12, section 12.3). Under the JCT SBC conditions builders are obliged, during the defects period, to make good at their own expense ‘any defects, shrinkages or other faults’ that appear and which are due to ‘materials, goods or workmanship not in accordance with this Contract or any failure of the Contractor to comply with his obligation in respect of the Contractor’s Design Portion.’ The words ‘which shall appear’ tend to suggest that this provision is concerned only with those defects that appear after practical completion. However, the power to require the rectification of, or to seek compensation for, defects is not limited to defects that manifest themselves only during the defects liability period. In this respect the William Tomkinson decision found that the words

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‘appear within’, as used in clause 2.5 of the JCT Standard Form Agreement for Minor Works 1980 edition, were fairly capable of meaning ‘shall be apparent within’, as well as ‘shall become apparent within’. On this basis defects that appeared prior to practical completion were also subject to the defects liability obligation, so that they could be the subject of instructions during the defects period requiring that they be remedied. Furthermore, in William Tomkinson the court concluded that: ‘Where [defects] are not remedied by the contractor within the construction period, there is nothing in the wording of clause 2.5 to suggest that it is intended to exclude the employer’s ordinary right to damages for breach of contract, including the right to recover the cost of remedying defective workmanship.’

The result is that the purchaser retains a remedy in respect of precompletion patent defects. If they are not remedied during the defects period then the purchaser may claim compensation, which may include the cost of repair and consequential loss (see Johnston v. W.H. Brown Construction (Dundee) Ltd (2000)).

13.2.4 Compensation instead of repair The mere fact that a building contract stipulates a defects period does not mean that purchasers must allow their builders an opportunity to remedy defects that arise during the defects period. However, whenever purchasers choose to retain another builder to remedy defects discovered in the defects period, the compensation payable by their builder may be reduced owing to the failure to mitigate. This is what occurred in Pearce and High Ltd v. Baxter (1999), which concerned clause 2.5 of the JCT standard form for minor work, and where the Court of Appeal had to consider the consequence of the builder not having been given the opportunity to rectify defects discovered during the defects period. The Court of Appeal decided that:

• it is not a condition precedent to the right to damages for patent • •

defects that the purchaser should notify the builder of the defects before the expiry of the defects period, and clause 2.5 did not clearly and expressly exclude the right to damages for defective work, and if the builder is prevented from exercising his contractual right to remedy defects, the purchaser’s right to damages is limited to the amount that it would have cost the builder to carry out the necessary works.

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13.2.5 Instructions When defects arise during the defects period it is necessary that instructions be given to the builder to attend to them. Under the JCT SBC conditions this role falls to the architect, who may ‘whenever he considers it necessary to do so’ instruct the builder to remedy defects due to breaches of the contract, or he may simply wait until the end of the

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defects period, when he is required to deliver to the builder a schedule of defects. This schedule must be delivered not later than 14 days after the expiry of the defects period. Whether the instructions are given during or at the end of the defects period, the builder must rectify the defects within a reasonable time and at his own cost. If he does not do so, the builder will be in breach of contract, and the purchaser may employ others to effect the necessary repairs and recover the full cost from the builder. The position is identical under the JCT DB conditions except that the instructions are given by the purchaser. It is noteworthy that under the JCT SBC and JCT DB conditions the architect may not issue instructions for the correction of defects after the delivery of a schedule of defects or more than 14 days after expiry of the defects period. This curtailment of the architect’s power to give instructions does not, however, leave the purchaser without a remedy merely because particular defects were not apparent, or were missed, at the time of the architect’s final inspection. This curtailment of the architect’s power to give instructions merely renders the architect functus officio (i.e. he has discharged his powers) and prevents him giving further instructions to the builder. This means that the builder is no longer obliged (or indeed entitled) to correct further defects, but is instead obliged to pay compensation to the purchaser for subsequently discovered defects (including any missed by the architect and therefore omitted from his schedule of defects). Under the ICE conditions the engineer may give instructions for repairs during the defects period or within 14 days after its expiry in which case the builder must effect the repairs ‘as soon as practicable’. Under the MF/1 conditions there is a broadly similar arrangement under which the engineer gives instructions and the builder is required ‘with all possible speed’ to put the defects right, and if he does not do so the purchaser may do the repairs at the builder’s ‘risk and expense’ provided he does so in a reasonable manner and gives notice to the builder of his intention to do so. The NEC3 conditions, on the other hand, merely oblige the builder to correct defects before the end of the defects period. Some model conditions make provision for defects to be left unrepaired, and for the purchaser to be given an adjustment to the price instead. For example, under the JCT SBC conditions the architect may, with the consent of the purchaser, instruct that defects shall not be made good but that an appropriate deduction shall be made from the contract sum instead. The manner of calculating the appropriate deduction is not specified, but it is likely to be a sum that reflects the reasonable cost to the builder of rectifying the defect in question. Any greater sum would not be reasonable, and therefore is unlikely to be regarded as appropriate. There is a similar provision in the NEC3 conditions.

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13.2.6 Making good Some model conditions make provision for the issue of a certificate of making good of defects to signify that the builder has discharged his obligations under the contract in relation to defects arising during the defects liability period. For example, under the JCT SBC conditions and the ICE conditions the certifier is respectively required to issue a certificate of making good or defects correction certificate once satisfied that the builder has made good all those defects required to be made good during the defects period. The relevant certificate is inevitably issued after the expiry of the defects period, but not earlier than the date of completion of the defects in question. The issue of the making good (or defects correction) certificate triggers release of the final portion of retention (or any retention bond) under each of the JCT and ICE conditions, and in the case of the JCT SBC conditions it also triggers the requirement to issue the final certificate (unless the final account remains to be dealt with). Neither the certificate of making good nor the certificate of defects correction is conclusive that the work under the contract is in accordance with the contract, so purchasers retain the right to claim compensation for defects discovered after the issue of the certificate. This is so even though, under the JCT SBC conditions, it is provided that: ‘completion of that making good shall for the purposes of this Contract be deemed to have taken place on the date stated in that certificate.’ These words show that the certificate is intended only to identify the date of completion rather than signify conclusively that the work is free from defects. The relevant certificate should only be issued once the certifier is satisfied that the work in question is fully in accordance with the contractual requirements and free from patent defects (see section 13.3 below and the Hoenig decision). It is not clear, when issuing the making good certificate, whether the certifier has discretion – as he has when certifying practical completion – to disregard trivial defects (although Hoenig suggests that he does not). It would, however, be inadvisable for an independent certifier to do so without the purchaser’s consent.

13.3 Retention money The function of retention, where the contract makes provision for the deduction of retention, is to provide security for the rectification of those defects for which the builder is responsible. If the builder will not rectify defects that arise, then the purchaser has a fund that he may have recourse to in order to reimburse himself for the cost of remedying those defects. In the Hoenig decision it was observed that builders are ‘not entitled to the retention money until the work is entirely finished,

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without defects or omissions.’ Although this observation was made in the context of a contract that did not provide for retention it probably, nevertheless, represents the approach adopted by most model conditions (see also section 13.2.6). Where model conditions make provision for a retention fund, purchasers are allowed to withhold a specified proportion from each interim (or stage) payment. The precise proportion to be deducted for the retention fund varies from project to project, but the default position in, for example, the JCT conditions is 3%. The fund therefore gradually accrues during the life of the contract until completion. It is important to bear in mind that retention may be deducted from interim payments only if the contract expressly so provides, and although both the JCT and ICE conditions envisage that there will be a retention fund, not all model conditions do so. Even when the contract provides for a retention fund its deduction is discretionary, so that builders are entitled to the gross value of the work executed unless the purchaser exercises, or gives notice of his intention to exercise, his right to deduct retention (see Ballast Wiltshier Plc v. Thomas Barnes & Sons Ltd (1998)). If this is done then, as the work progresses, the purchaser pays only the net value of work properly done at each valuation date (or stage payment milestone). The JCT and ICE conditions make provision for one half of the total retention fund to be released upon the certification of practical (or, as the case may be, ‘substantial’) completion, and for the remainder to be released upon the issue of a ‘certificate of making good’, which is issued at the end of the rectification period (under the JCT conditions) or the ‘defects correction period’ (under the ICE conditions). The retention fund may be a significant sum, but whatever its total value it is money that the builder has earned. The builder will be keen to know that his money is safe, and not at risk in the event of the purchaser’s insolvency. This interest is addressed by the JCT SBC conditions by requiring the creation of a trust fund for retention, except where the purchaser is a local authority. In this respect it is stipulated that the purchaser’s interest in the retention is ‘fiduciary as trustee for the Contractor’. This creation of a trust in favour of the builder means that the retention fund is the builder’s money, even though it is subject to the purchaser’s right to withhold or to make deductions from it once it becomes due to the builder. By itself this trust arrangement offers builders no real protection unless the trust fund is separated from the purchaser’s other funds. If it is not separated then it cannot be identified as the builder’s money if the purchaser becomes insolvent. The necessary separation is therefore achieved by a contractual stipulation that the builder may require that the retention money be placed into a separate bank account designated as a trust fund. Once so separated and designated the retention fund is safe from

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Defective Construction Work the purchaser’s other creditors, and indeed from receivers, liquidators and trustees in bankruptcy. The purchaser will be obliged to separate and designate the retention fund in this way, even in the absence of an express requirement to do so, if the contract designates the purchaser as fiduciary. This is what occurred in Wates Construction (London) Ltd v. Franthom Investments Ltd (1991), where the standard clause in the JCT 1980 edition requiring that the retention be put into a separate account had been deleted. In that case the court concluded that the requirement to hold the money in a fiduciary capacity was enough, and created ‘. . . a clear trust in favour of the contractor . . . of the retention money of which the employer is the trustee. The employer would be in breach of his trust if he hazarded the fund by using it in his business and it is his first duty to safeguard the fund in the interests of the beneficiary.’

If necessary, the court will grant a mandatory injunction to compel the purchaser to establish the required trust account, as it did in Wates. There are two situations, however, when a mandatory injunction will not be granted:

• first, where the employer has a cross-claim against the builder for an

•

amount that is equal to or greater than the amount of retention (see Henry Boot Building Limited v. The Croydon Hotel and Leisure Company Ltd (1985)), and second, after the employer has become insolvent (see Mac-Jordan Construction Ltd v. Brookmount Erostin Ltd (1991)).

Once the trust fund is established, the builder is to that extent secured against the risk of the purchaser’s insolvency. Under the JCT SBC conditions the purchaser is not obliged to invest the trust fund, and has the benefit of any interest earned. Also, the purchaser may have recourse to the trust fund to the extent that he exercises his right to withhold and/or to make deductions from monies due to the builder under interim certificates. This means that the purchaser may avoid paying into the trust fund, or may divert the fund to his own use, if he has a claim against the builder and provided he gives proper notice to withhold or deduct in accordance with the contract. The purchaser will not be able to rely upon his own failure to set aside the retention money in a separate account in the event of the builder’s subsequent insolvency. This is because a party to a contract may not rely upon its own breach of contract. The result, as occurred in Re Arthur Sanders Ltd (1981), is that the purchaser will be treated as having set up the separate account and will be bound to deal with the retention as trust money so that he may have recourse to the retention only in accordance with the contractual arrangements and not otherwise.

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13.4 Retention bonds Although the taking of retention is a practice that has a long pedigree, it is not without its critics: it is said variously to be archaic, expensive and complicated to administer, unnecessary, and open to abuse. One response to these criticisms has been the willingness of some purchasers to accept a bond in lieu of retention. Some institutions, such as the JCT and ABI, have provided model form bonds for this purpose. The JCT SBC conditions, for example, now make provision for a bond in lieu of retention. If the latter is chosen, the builder is required, before taking possession, to provide a bond issued by an approved institution that conforms to a prescribed wording. If the builder does not provide, or does not maintain, the bond, then the provisions for the taking of a retention fund apply by default until such time as the bond is provided. These provisions also apply – but only to the balance – if the amount of the bond is less than the amount the retention fund would have been if a bond had not been used. The prescribed form of bond that accompanies the JCT SBC conditions is an ‘on demand’ bond, which may be called upon by the purchaser giving notice in the prescribed form to the surety and the builder. If so called upon, the surety must honour the bond. The JCT bond expires when the ‘certificate of making good’ is issued under the building contract, or when the surety has paid an amount up to the value of the bond. To be enforceable, any such demand must be made before the certificate of making good is issued.

13.5 Final certificates Whether a final certificate is required and, if so, its effect is entirely dependent upon the terms of contract. The JCT SBC conditions, the ICE conditions and the MF/1 conditions all make provision for the issue of a final certificate by an independent certifier, but the effect varies under each contract. The JCT DB conditions have a finality arrangement, which can be implemented by either the purchaser or the builder, but the effect is substantially the same as the effect under the JCT SBC conditions.

13.5.1 The JCT SBC conditions The JCT SBC conditions have the effect of barring claims by the builder for further payment and by the purchaser for compensation for a particular class of defects. This is because, under the JCT conditions, it is expressly stipulated that the final certificate amounts to conclusive evidence that certain parts of the work conform to the contractual

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Defective Construction Work requirements. This creates a de facto bar upon claims for compensation in respect of the affected class of defects, because no tribunal may receive evidence seeking to contradict the final certificate. On the contrary, any tribunal entertaining claims under the contract will be obliged to give effect to the parties’ agreement that the certificate is conclusive evidence of conformity. The result is that claims relating to the affected class of defects are generally barred much earlier than would otherwise be the case under the usual rules affecting the limitation of claims, because the JCT SBC conditions require that the final certificate be issued not later than two months after the last to occur of the end of the rectification period, the issue of the certificate of making good, or the dispatch of the statement of final adjustments for the final account. This has the effect, where the contract specifies a six-month defects period, that the final certificate could be issued and become conclusive within one year of practical completion, whereas under the usual rules of limitation claims are not barred for six years under simple contracts and twelve years under specialties. In this regard the duration of the defects period dictates the earliest date when claims will be barred under the final certificate provision, but it will generally leave the builder at a significant advantage – at least in relation to the affected class of defects – when compared with the usual limitation periods (see Chapter 19). 13.5.1.1 Qualifications to the conclusivity rule The JCT SBC conditions expressly qualify the conclusivity of the final certificate in two particular circumstances. First, where adjudication, arbitration or other proceedings are commenced before the issue of the final certificate, it shall have effect as conclusive evidence only from the conclusion of those proceedings and subject to their outcome, or upon the expiry of 12 months following the issue of the final certificate if during that period neither party has taken any further step in the proceedings – in which case the conclusive nature of the final certificate is qualified only by any settlement of issues in the proceedings as may have occurred prior to the certificate becoming conclusive. Second, where adjudication, arbitration or other proceedings are commenced within 28 days after the issue of the final certificate, it has effect as conclusive evidence except in relation to the matters raised in the proceedings. The 28-day period is extended where an adjudicator gives his decision after the issue of a final certificate, so that either party may refer the dispute or difference upon which the decision was given to arbitration or legal proceedings within 28 days of the decision. Where the conclusive evidence provisions apply, purchasers are at a disadvantage in relation to latent defects that fall within the affected class and which manifest themselves after the expiry of the 28-day

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period. It is for this reason that many purchasers insist on deletion of the finality provision (at least as far as it relates to the adequacy of work and materials) when the JCT conditions are used as the basis of the building contract. 13.5.1.2 The class of defects affected The narrow class of defects affected by the conclusive evidence effect of the final certificate under the JCT SBC conditions concerns those materials or goods or items of workmanship the particular qualities of which are described in the contract (or instructions issued under it) as being for the approval of the architect/contract administrator. Essentially this means those items of work and materials to which a subjective quality standard is applied. For the most part this class is likely to encompass work where a particular standard of finish is required that is easier to visualise than to describe, or where materials or workmanship are to be supplied by reference to a sample. The architect will know the standard he seeks – or is entitled to – when he sees it, and should not certify practical completion (or the making good of defects) until it is achieved. In relation to these aspects there is some justification for the conclusive evidence provision, as purchasers ought not to be allowed to complain about subjective aspects of quality long after the architect has signified his approval. The risks and potential prejudice to purchasers increase, however, if the contract leaves wider aspects of quality to the approval of the architect. It will therefore be in the best interests of purchasers to confine the requirement for architect’s approval to as few items as possible, and to avoid doing so where objective standards are available. So far as they assign a conclusive evidence effect upon the final certificate, all of the JCT conditions operate in the same way as the JCT SBC conditions. However, in those instances where a dispute arises but the building contract incorporates the JCT 80 conditions published before 1994, or equivalent conditions, the position will be different, and potentially highly prejudicial to the interests of purchasers. This is because the Court of Appeal in Crown Estate Commissioners v. John Mowlem & Co Ltd (1994) decided that the conclusive evidence provision included in the JCT 80 conditions (as worded prior to 1994) applied to all defects (whether the contract stipulated an objective or a subjective standard) and not just those affecting work and materials approved by the architect. This decision represented a windfall for contractors, who could walk away from all contracts they had performed up to that time that contained the JCT 80 conclusivity wording for which a final certificate had been issued, and any current contracts once the final certificate was issued. For purchasers it represented a significant disadvantage to be left without a remedy in respect of latent defects discovered more than 28 days after the issue of the final certificate, when they might have been

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Defective Construction Work expecting to be able to look to the builder for compensation for defects for either 6 years (for simple contracts) or 12 years (for specialties) after practical completion. The JCT took prompt action to remedy the disadvantage to purchasers created by the Crown Estates decision by issuing amendments to those of its conditions that were affected by it. These amendments effectively narrowed the class of defects affected by the final certificate (it is this new regime that has found its way into those of the current JCT conditions that include a final certificate provision). The Crown Estates decision was followed in London Borough of Barking and Dagenham v. Terrapin Construction Ltd (2000), which concerned the JCT design and build conditions 1981 edition. The Court of Appeal concluded in Terrapin that the final statement (which serves the same function as the final certificate) is conclusive evidence of conformity of the workmanship and materials with the contractual stipulations, including the statutory requirements, but not the design of the works. This may pose some difficulty of application in that workmanship and design often overlap, and sometimes the distinction between them is difficult to discern. The Terrapin decision may therefore have created a degree of uncertainty, because it is not clear whether ‘design’ for the purposes of that decision is confined to the information set out in the contractor’s proposals or whether it extends to any aspect of selection. For example, the contractor’s proposals may not specifically identify particular items to be used, such as nails. Nevertheless, if, as he must, the builder selects appropriate nails as the project proceeds, but they prove to be unsuitable for the purpose, does the selection amount to design or workmanship? If this represents an overlap between design and workmanship then the scope of the conclusivity provision under the former pre-Terrapin JCT design and build conditions offers the builder much less of an escape from liability than applied to the pre-Crown Estates work and materials contracts. The JCT amended its design and build conditions to limit the impact of these decisions for future projects by limiting the conclusivity of the final statement to subjective quality issues only. The result is that the narrow class of defects that are covered by the current conclusivity provision in the JCT DB conditions probably renders the distinction between design and workmanship largely academic.

13.5.2 The ICE conditions The ICE conditions do not expressly refer to a final certificate, but they do require that the builder must, within 3 months of the defects correction certificate, submit a final account of the value of work done. The engineer must then, within a further 3 months, issue a certificate of the amount ‘finally due’ to the builder. In this sense, this certificate is

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the final certificate, but it does not expressly impinge upon the purchaser’s rights under the contract in relation to latent defects, and so does not bar proceedings for compensation (this was the approach adopted by the Court of Appeal in relation to the JCT minor works agreement 1980 edition in Crestar Ltd v. Carr (1987)). In relation to latent defects the purchaser may instigate legal proceedings for compensation for defects discovered at any time after the issue of the engineer’s certificate, subject only to the expiry of the relevant limitation period and provided the contractual precondition to the issue of proceedings (i.e. the issue of an engineer’s decision in relation to the defects) is satisfied.

13.5.3 The MF/1 conditions The MF/1 conditions make provision for the issue of a final certificate after the expiry of the defects liability period. The final certificate operates (except in relation to any matter affected by fraud) as conclusive evidence that the works are in accordance with the contract, and that the builder has performed his obligations under the contract except in relation to latent defects appearing within 3 years of taking over of the works where they were caused by gross misconduct (as defined in the contract) on the part of the builder. The final certificate does not operate as conclusive evidence if legal proceedings arise out of the contract either before or within 3 months of the final certificate. Subject to the exceptions noted, builders working under the MF/1 conditions have no further defects liability after the final certificate is issued.

Chapter 14

The Professional Team

The professional team consists of the providers of services to construction projects. The members of the team are commonly referred to as ‘consultants’. For the most part these consultants are people with special skills of an intellectual nature, derived from training or experience. The professional team may include architects, every kind of engineer (e.g. structural, electrical, mechanical, civil, heating, ventilation, geotechnical and hydrological, to name but some), and surveyors, but may also include project managers, CDM coordinators and programmers. Often, though not exclusively, these latter three consultancies may be carried out by architects, engineers and surveyors. The professional consultants will usually enjoy membership of a recognised professional body that regulates their activities and enforces professional standards.

14.1 Membership of a professional body Whether a person is engaged in a professional activity was at one time important, particularly for tax purposes, but is less important nowadays. From the old tax cases it is possible to draw the conclusion that an activity will be regarded as a profession if it involves intellectual skill (ICR v. Maxse (1919)) backed by enforceable standards (Currie v. ICR (1921)), if it is reasonable in all the circumstances to do so (Carr v. ICR (1944)). It is not essential that practitioners of any of the construction professions be members of a recognised professional body, or even necessarily hold a recognised qualification. Nevertheless, it may be a criminal offence under the Trades Descriptions Act 1968 for a person to obtain remuneration by purporting to be a member of a particular profession when they are not. Also, under the Architects Act 1997, it is a criminal offence for a person to use the title ‘architect’ if not registered as such by the Architects Registration Board. The possession of professional qualifications and membership of professional bodies are nevertheless important criteria that purchasers and their advisers will take into account when appointing professional consultants. Further, the requirement under the CDM regulations (see Chapter 9, section 9.5) that the CDM coordinator and the designer should be ‘competent’ may well 132

Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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have the effect of driving purchasers to insist that the persons taking on these roles should be members of a suitable professional body, as this will act as a badge of competence. It is likely, therefore, that membership of an appropriate professional body will assume even greater importance in the future. All service providers – whether engaged in a profession or in a trade – must, pursuant to the Supply of Goods and Services Act 1982, exercise reasonable care and skill in providing their services. They may also owe a duty of care in tort to avoid causing physical and financial harm to others. The result, when defects arise, is that the liability of consultants is dependent not on membership of a particular profession, but upon whether the particular consultant owed a duty to the injured party and, if so, whether the requisite standard of care was achieved. In this respect the relevant professional standards provide the yardstick by which professional people (and all persons providing an equivalent service) will be judged.

14.2 The structure of the team The precise composition and structure of the professional team will vary from project to project. Composition is dictated by the requirements of the project itself (broadly its complexity), whereas structure depends on the procurement method. There are a number of procurement methods, but the three most common types are:

• first, where the purchaser engages the entire project team directly (i.e. • •

the consultants as well as the builder). This is sometimes referred to as the ‘traditional’ procurement method; second, where the purchaser engages only the builder and leaves it to him to employ those consultants he requires. This is usually referred to as the ‘design and build’ procurement method; third, where the purchaser engages only some of the consultants either for the whole or merely for part of the project duration. This can be described as a hybrid procurement method.

For modest domestic projects purchasers may choose to rely solely upon the skill of their builder, but it is commonplace for them to engage at least one professional consultant, such as an architect, or an engineer. As the scale and complexity of a proposed project increases so does the likelihood that it will involve a range of professional consultants, broadly providing design and management services. Where a multidisciplinary team is assembled for a project it has become commonplace – and sensible – to appoint a lead consultant charged with overall responsibility for implementing the purchaser’s requirements and therefore the

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Defective Construction Work coordination and management of the other professional consultants, as well as the builder. Depending on the precise arrangement chosen, the professional consultants may be wholly and separately engaged by, and be legally answerable to, the purchaser; or the builder; or they may be transferred from one to the other, with consequent changes to their responsibilities and liabilities. For example, under the traditional procurement method the purchaser may initially engage only an architect, who may then recommend that other consultants be employed by the purchaser to advise on specialist aspects of the project. Under this procurement arrangement the professional team may be said to belong to the purchaser, who must look to each individual consultant for recompense in respect of loss caused by defects for which each particular consultant is responsible. This may give rise to difficulty in proving which consultant is responsible for particular defects. Sometimes a consultant may agree to provide a complete multidisciplinary service to the purchaser. Under this arrangement, although the professional team still belongs to the purchaser, he looks only to the multidisciplinary service provider for recompense for poor performance. If this occurs, the multidisciplinary service provider may then look to his sub-consultants (if he has engaged any) for indemnity in appropriate circumstances. If, however, the purchaser wishes to procure a project on a design and build basis, then he will engage only the builder, leaving it to the builder to employ directly such consultants and specialists as may be required to achieve the design brief. Under a pure design and build arrangement purchasers look primarily to their builders for recompense in the event that defects arise. Pure design and build arrangements are probably relatively rare outside the domestic arena. Instead, it is commonplace for commercial purchasers to adopt a hybrid procurement arrangement rather than a pure design and build arrangement. Under these hybrid arrangements it is common for purchasers to engage some members of the professional team directly at the outset (commonly those who advise on concept, feasibility and planning issues), but on the understanding that, for some or all of them, their respective appointments will be transferred to the builder when he is engaged. Whether a pure design and build or a hybrid procurement arrangement is adopted, purchasers will usually insist that the key consultants (usually those providing a design service) provide a collateral warranty for the benefit of the purchaser, who may then have recourse to the particular consultant even though the latter was never directly employed by him, or where the consultant’s employment is subsequently transferred to the builder. Under these collateral warranties consultants usually undertake to perform their services properly – including both before and after any transfer to the builder. This means that purchasers

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may, in the event of defects arising, have recourse either to the builder or to the relevant consultants, or to all of them. The existence of these collateral warranties (and indeed the rights that may accrue under the law of tort and under the Contracts (Rights of Third Parties) Act 1999) usually means that the transfer to the builder of the appointments of the professional consultants is rarely accompanied by a complete discharge of the consultants’ liabilities to the purchaser.

14.3 Duties The scope of work and the duties of each consultant are determined by reference to the agreed terms of appointment. If the appointment is silent in relation to important matters then terms will be implied in appropriate circumstances (see Chapter 3). Generally, consultants must carry out their duties with reasonable care and skill (although sometimes, but rarely, a professional consultant may be bound to achieve a given outcome because he has agreed to do so – see section 14.3.2 below).

14.3.1 Reasonable care and skill Most model conditions for the appointment of professional consultants, in addition to identifying the scope of work, will generally stipulate expressly that the appointment be carried out with reasonable care and skill. For example, the RIBA conditions provide that: ‘The Architect exercises reasonable skill, care and diligence in conformity with the normal standards of the Architect’s profession in performing the Services.’ Similarly, the ACE conditions of engagement require that: ‘The Consulting Engineer shall exercise reasonable skill, care and diligence in the performance of the Services.’ If their appointment does not expressly oblige consultants to exercise reasonable care and skill, a term to this effect will be implied pursuant to Section 13 of the Supply of Goods and Services Act 1982 (see Chapter 3). Also, professional consultants will generally owe a concurrent and independent duty of care in tort to the appointer and, in some circumstances, to third parties to exercise reasonable care and skill in respect of the services they provide (see Chapter 6). The standard of skill and care required from a professional person is best summed up by the direction given in a medical negligence case, Bolam v. Friern Hospital Management Committee (1957), that: ‘Where you get a situation which involves the use of some special skill or competence . . . the test is the standard of the ordinary skilled man exercising

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Defective Construction Work and professing to have that special skill. A man need not possess the highest expert skill . . . it is sufficient if he exercises the ordinary skill of the ordinary competent man exercising that particular art.’

This ‘ordinary skill’ requirement was approved by the House of Lords in Saif Ali v. Sydney Mitchell & Co (1980) as the test for all professional people. In this case it was said that: ‘No matter what profession it may be, the common law does not impose on those who practise it any liability for damage resulting from what in the result turn out to have been errors of judgement, unless the error was such as no reasonably well-informed and competent member of that profession could have made.’

In Whitehouse v. Jordan (1981) the House of Lords confirmed that an error of judgement may or may not be negligent, but whether it is negligent depends on the application of the Bolam test. Subsequently, in Wimpey Construction UK Ltd v. Poole (1984) it was confirmed that the test requires a professional man to bring his actual knowledge to bear on matters affecting his retainer (even if his actual knowledge is greater than that possessed by the ordinary practitioner, so it is not a test that allows someone with special knowledge or expertise to be excused if they fail to use that special knowledge or expertise). The Bolam test was held to apply to architects in Nye Saunders & Partners (a firm) v. Bristow (1987). Application of the Bolam test is dependent on expert evidence as to proper peer group practice. This means that an independent professional person, of the same discipline as the alleged wrongdoer, must give evidence as to what amounts to common good practice in the particular profession. Matters of professional negligence are, in this sense, a form of judgment by one’s peers. This leads to each party calling one of his peers as an expert witness to give evidence at trial as to what constitutes common good practice – not what the particular expert would have done in the same circumstances (see Midland Bank Trust Company Ltd v. Hett Stubbs & Kemp (a firm) (1979)). Sometimes this may result in a clash of opinion as to what constitutes common good practice. Quite how such a clash is resolved was dealt with in the decision of the Court of Appeal in J.D. Williams & Co Ltd v. Michael Hyde & Associates (2000), where two of the appeals judges came to the same conclusion, but for different reasons – and the third judge agreed with them both. The first appeals judge, Lord Justice Ward, decided that it was appropriate to reject one of the opinions if (a) it is not capable of withstanding logical analysis, in which case it may not be accepted as reasonable or responsible (and relied on

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Bolitho v. City and Hackney Health Authority (1988) to support this point), or (b) because it is found by the court not to be the opinion of a responsible body of fellow professionals (as occurred in Nye Saunders), or (c) because the allegedly negligent act did not in fact involve any special skill so that the Bolam test does not apply (a proposition derived from Gold v. Haringey Health Authority (1988)). Applying this approach led to the conclusion that the error in the Williams case fell within the third exception, so that the trial judge was able to decide for himself whether the act in question amounted to negligence. The second appeals judge, Lord Justice Sedley, approached the matter on the basis that a professional person must not fall below a proper standard, and that the process of deciding whether he has done so depends on either the application of the Bolam test (which is appropriate where ‘the neglect is said to lie in the conscious choice of available courses’) or the application of ‘a single forensically determined standard’ (which may be appropriate where the neglect is one of ‘oversight’). Quite how these possibly divergent approaches will be reconciled is a matter for another court to consider in due course, but where the law has clearly got to is that it will not permit professional people to avoid liability on the basis that some of their contemporaries are guilty, from a common sense standpoint, of adopting equally lax practices. In these circumstances perhaps the Bolam test can be simplified by saying that it requires the application of the common good practice of the particular profession, but with the qualification that that good practice must be capable of objective justification.

14.3.2 Fitness for purpose Professional consultants do not generally guarantee a particular outcome, except where their appointment contains an express term to the contrary. In practice, professional designers will not guarantee the suitability of the materials selected or the fitness for purpose of their design, because they tend to appreciate that they cannot guarantee an outcome; and that they may be uninsured if they do so because their professional indemnity policy usually only extends to the skill and care obligation. Consequently professional people sensibly shy away from express terms that require them to guarantee the outcome of a project – or any particular part of it. The imposition of a fitness for purpose obligation in a professional appointment, or any other strict obligation guaranteeing a particular outcome, is more likely to arise – if at all – by implication, although the

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Defective Construction Work circumstances when it will do so are likely to be rare. In one case, Greaves (Contractors) v. Baynham Meikle & Partners (1975), such a term was implied. In that case a builder who was engaged to construct a warehouse on a design and build basis in turn retained structural engineers to design the structure of the warehouse. The engineers were informed that the floors of the warehouse had to take the weight of forklift trucks carrying barrels of oil. The floors were built to the engineers’ design, but began to crack once used, because they did not have sufficient strength to withstand vibration imposed by the forklift trucks. The Court of Appeal found that in the circumstances it was the common intention of the parties that the engineers should design a warehouse that would be fit for the purpose for which it was required, and that a term to this effect should be implied into the terms of appointment as a matter of fact. The Greaves decision has not been followed in later decisions, and was distinguished in George Hawkins v. Chrysler (UK) Ltd and Burne Associates (1986), where the Court of Appeal preferred the approach adopted in the Independent Broadcasting Authority case. In this latter case EMI contracted ‘for the design, supply and delivery of a 1,250 ft high stayed cylindrical mast in accordance with EMI line diagram Drawing No. 3 SP5134/4’, but had had little involvement in the design, which had been prepared by a sub-contractor, BICC, for the IBA. When the mast collapsed, the IBA sued EMI for failing to exercise reasonable care and skill, and for breach of an implied warranty that the mast would be reasonably fit for its intended purpose. The court found that as EMI had undertaken to design the mast therefore they had impliedly warranted that they would exercise reasonable care and skill in the preparation of the design, but had failed to do so, and thus caused the failure of the mast. In substance, the design errors of the sub-contractor BICC were imputed to EMI. Although the finding of negligence in the IBA case rendered it unnecessary for the court to express a view on the existence of a fitness for purpose warranty, it nevertheless did so. Four of the Law Lords who decided the IBA case were in no doubt that such a term would be implied. The rationale for this view was that EMI had undertaken to supply, as well as design, the mast. One of the Law Lords, Lord Scarman, expressed the opinion that: ‘one who contracts to design an article for a purpose made known to him undertakes that the design is reasonably fit for the purpose.’ At first glance this observation appears to equate the obligation of a professional designer with that of a designer/builder. However, it is an observation that has to be seen in the context of a speech where Lord Scarman also observed that: ‘I do not accept that the design obligation of the supplier of an article is to be equated with the obligation of a professional man in the practice of his profession.’ It does not follow, therefore, that the duty of professional designers was being elevated to equate with the much more stringent standard expected

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from designer/builders. That this is so is further confirmed by the observation that: ‘I see no reason why one who in the course of his business contracts to design, supply, and erect a television aerial mast is not under an obligation to ensure that it is reasonably fit for the purpose for which he knows it is intended to be used.’

It was this ‘supply’ element that influenced the other Law Lords. So while designer/builders are bound to achieve the more onerous fitness for purpose standard (unless their contract provides otherwise), a professional designer who provides only a design is required only to exercise reasonable care and skill, and so does not guarantee an outcome (unless his appointment provides otherwise). In Chrysler, where the engineer did not supply and manufacture the product that failed (but merely provided the design), the Court of Appeal considered the Greaves decision but concluded that it was based upon special circumstances that justified the finding that the engineers had warranted the fitness of their design for its purpose. The conclusion was, in essence, that Greaves had been decided on its own special facts. It is a struggle, however, to identify the special facts and special circumstances with any degree of certainty. What is clear is that whether a professional person will be treated as having undertaken to achieve a particular outcome instead of, or in addition to, exercising reasonable skill and care is a matter of construction of the contract in question, having regard to its factual context. As it was put in George Hawkins: ‘. . . it is not open to this Court, except where there are special facts and special circumstances, to extend the responsibilities of a professional man beyond the duty to exercise all reasonable care and skill in conformity with the usual standards of his profession.’

Consistent with this approach, the Court of Appeal in Midland Bank Plc v. Cox McQueen (a firm) (1999) indicated, in a case that concerned alleged negligence on the part of a solicitor, that strict liability for achieving a particular outcome will be imposed only where the retainer is expressed in terms that, having regard to context, clearly impose such a liability. While it cannot be said, therefore, that professional people will never be liable on a basis more onerous than the requirement to exercise reasonable skill and care, nevertheless it is clear that special facts and special circumstances are required in order to imply a stricter liability. It would nevertheless be sensible for designers – and professional people generally – to ensure that appropriate written terms of engagement are put in place, and that they clearly and expressly limit their duty to one of

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14.3.3 Concurrent duty of care In addition to their contractual duties, professional consultants will generally owe a concurrent non-contractual duty of care to their clients and others under the law of tort. This tortious duty of care obliges consultants to take reasonable care to avoid causing physical and, in some circumstances, financial harm. The scope and application of this duty are set out in Chapter 6.

14.4 Buildability, durability and maintenance The precise obligations of designers in relation to buildability, durability and maintenance depend upon the scope of work undertaken. Nevertheless, as a general rule designers are engaged to satisfy the purchaser’s requirements as set out in the design brief. Designers therefore run the risk of being in breach of contract if their design is not buildable, or does not meet the purchaser’s requirements concerning durability and maintenance. In this respect the RIBA Schedule indicates that the architect will provide a design ‘with due regard to functionality, build quality, impact, buildability, construction safety, operation and maintenance’. In the absence of express warranties to the contrary, the designer will usually undertake only to exercise reasonable skill and care to meet the employer’s requirements. This undertaking has been described as requiring the provision of: ‘a design which is skilful and effective to meet [the employer’s] requirements, including those of amenity, durability and ease of maintenance, reasonable cost and any financial limitations [the employer] may impose or make known, and comprehensive, in the sense that no necessary and foreseeable work is omitted’ (see Hudson’s Building and Engineering Contracts, 11th edition, paragraph 2.085 (i)).

If a design can’t be built or achieve the functional objectives of the design brief, then it isn’t effective and may well not be skilful. In this respect the designer will be liable for breach of his undertaking only if failure of the design results from a lack of care and skill (except where the Defective Premises Act 1972 applies – see below and Chapter 7). So, the mere fact that a design turns out not to be buildable (or its objectives unachievable) will not of itself render the designer liable. However, the designer must have regard to the skills of the persons likely to imple-

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ment his design. In this respect it was found, in Department of National Heritage v. Steensen Varming Mulcahy (1998), that the design must be such that: ‘. . . those who are responsible for implementing it, and those who are responsible for supervising that implementation, can do so by the exercise of the skill and care ordinarily to be expected of them.’

This may mean, as occurred in this case, that the designer is entitled to expect high standards from a builder who has undertaken to work to a high (rather than a reasonable) standard; but it does not mean that the design must be capable of supervision to a minute degree; rather it must be capable of overall supervision. A skilful design must, in addition to the employer’s requirements, have regard to relevant standards, including statutory standards (see Chapter 9), recognised guidance and good practice. Any departure from recognised guidance and good practice will have to be justified. To the extent that building regulations impose requirements that affect buildability, durability and maintenance, the design should as a minimum conform to them. Similarly, any statutory requirements that affect functionality and use of the completed structure should be taken into account in the design. Where the design relates to the provision of a dwelling, it must be capable of producing a finished product that is fit for habitation. If not, the designer will be in breach of the statutory duty imposed by the Defective Premises Act 1972 (see Chapter 7).

Chapter 15

Architects and Engineers

The traditional role of architects and engineers has been to guide and advise their clients from inception to completion of a building project. Architects and engineers may therefore undertake tasks that embrace feasibility, development of a design brief, preparation of concept design, planning approval, detailed design of the project, procurement of tenders, evaluation and appointment of builders and issuing information to them, inspection and supervision of work on site, and administration of the building contract. Hudson (11th edition, paragraph 2.085) describes four main interests that the purchaser has when engaging an architect or engineer. These interests may be summarised as requiring:

• first, a design that meets the requirements of the design brief; • second, the appointment of a competitively chosen and competent • •

builder on terms that protect the client’s price and quality interests; third, the efficient supervision of the work; and fourth, the efficient administration of the building contract.

The extent to which architects and engineers must address these interests will depend on the agreed scope of the work. In this respect, to the extent that architects and engineers are obliged to protect their clients’ interests they must (unless the contract expressly provides otherwise) exercise reasonable care and skill in doing so (see Chapter 14, section 14.3). The key tasks for architects and engineers, so far as defects are concerned, are the preparation of an adequate design, the selection of a suitable builder, the supervision of the works, the inspection of the works, and the certification of payments and of completion. To the extent that architects and engineers are required to carry out any of these tasks, carelessness may result in defects going unnoticed and therefore expose the architect or engineer to potential liability to compensate their client. Much of the case law in relation to these key tasks stems from claims concerning the services provided by architects, but the principles they establish will generally apply to engineers when performing these tasks (unless the terms of appointment provide otherwise). 142

Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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15.1 Design The design of the works must be complete, must show the final result required in accordance with the design brief, and must be buildable. It should also accord with current regulations (see the Townsends decision). This requires the preparation of drawings, plans and specifications, and includes the selection of materials. Architects and engineers may not be required to select all of the materials; sometimes this may be left to a specialist or even to the builder. If architects and engineers elect to adopt novel or innovative designs this will not amount to negligence if the design proves to be unsatisfactory, but in these circumstances a very high degree of care must be exercised, and the stricture, from the Independent Broadcasting Authority case, that ‘the law requires even pioneers to be prudent’ should be observed. This means that if the risk of injury to persons is manifest and substantial, but it is not possible with reasonable certainty to eliminate that risk, then abandonment of the project, or a radical change of the design, may be the only proper option. Even if an adverse risk may affect only the suitability of the structure itself (rather than the safety of builders, users and neighbours), abandonment or change may still be the proper course of action. Furthermore, prudent architects and engineers will advise of, and obtain their clients’ informed consent to, any adverse risks that the design entails before proceeding with a risky design. Failure to do so is highly likely to constitute negligence. Architects and engineers ought to inspect the site to verify dimensions, topography and subsoil conditions. Reliance on surveys or information provided by others is often appropriate and inevitable (especially as to ground conditions), but it may not be a defence that such information was relied upon in the event that a site visit would have demonstrated the inadequacy of the data provided. In one case, Eames London Estates Ltd v. North Hertfordshire DC (1980), an architect who relied on soil bearing data provided by a building inspector without examining the site and without procuring a site investigation was found to have failed to exercise reasonable care and skill. Similarly, in Clay v. A.J. Crump & Sons Ltd (1963) an architect was found to have been negligent when he accepted a builder’s assurance that a wall was safe to leave standing when an inspection would have shown it not to be. The design should be complete and comprehensive in relation to the requirements of the design brief. In this respect architects and engineers will not escape liability for those parts of the design that fall within the scope of their retainer but which they delegate to others if the delegated design proves to be inadequate owing to a lack of skill and care on the part of the delegate. In this respect, in Moresk Cleaners Ltd v. Hicks (1966), the court rejected a defence that it was an implied term of an architect’s appointment that specialist design tasks could be delegated to specialist

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Defective Construction Work designers. The result was that the architect, in Moresk, remained responsible for the design prepared by the specialist and liable to compensate his client when the design was not executed with reasonable care and skill. It is important to bear in mind, however, that not every aspect of design that is left to others necessarily amounts to a delegation by the architect or engineer. In this respect it was observed, in the Bellefield decision, that: ‘There is a blurred borderline between architectural design and the construction details needed to put it into effect. Borderlines of responsibility cannot be defined in the abstract. A carpenter’s choice of a particular nail or screw is in a sense a design choice, yet very often the choice is left to the carpenter and the responsibility for making it merges with the carpenter’s workmanship obligations. In many circumstance[s], the scope of an architect’s responsibility extends to providing drawings or specifications which give full construction details. But responsibility for some such details may rest with other consultants, e.g. structural engineers, or with specialist contractors or subcontractors, depending on the terms of their respective contracts and their interrelationship. As with the carpenter choosing an appropriate nail, specialist details may be left to specialist subcontractors who sometimes make detailed “design” decisions without expecting or needing drawings or specifications telling them what to do. In appropriate circumstances, this would not amount to delegation by the architect of part of his own responsibility. Rather that element of composite design responsibility did not rest with him in the first place.’

The question in all cases is therefore whether the item in question was ever a part of the scope of work assigned to the architect or engineer. If not, then he is not responsible if it is inadequately designed. Architects and engineers may choose to limit their role by excluding specialist areas from their appointment, or by advising their client to appoint a specialist to undertake particular aspects of the design. For example, in the RIBA conditions it is provided that the architect may recommend that his client appoint another consultant, contractor or specialist to perform some element of the services for which the architect has been engaged. If the client does so, the architect (under the RIBA conditions) is relieved of any liability for those services. The architect remains expressly obliged, however, to cooperate with such persons, must coordinate and integrate their work into his own, and must maintain effective monitoring and review procedures, which will include monitoring and review of the work done by other consultants, contractors or specialists. It was said of this review responsibility, in Investors in Industry Commercial Properties Ltd v. The District Council of South Bedfordshire (1985), that it is subject to an important qualification, namely that:

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‘If any danger or problem arises in connection with the work allotted to the expert, of which an architect of ordinary competence reasonably ought to be aware and reasonably could be expected to warn the client, despite what the expert says or does about it, it is in our judgment, the duty of the architect to warn the client. In such a contingency he is not entitled to rely blindly on the expert, with no mind of his own, on matters which must or should have been apparent to him.’

Although the current RIBA conditions expressly relieve the architect of responsibility for the work done by the expert (which the conditions in the Investors case did not), it is unlikely that this will relieve the architect of his review duty as set out in the Investors case. If an architect or engineer undertakes design work that falls outside his expertise, this does not provide a defence if the design fails owing to a lack of skill and care. In this respect, in Richards Roberts Holdings Ltd v. Douglas Smith Stimson Partnership (1988), architects assisted their client with the selection of a lining for a tank that they had designed for installation at their client’s premises. After obtaining the architects’ recommendation of a suitable lining, the client placed an order direct with the supplier (rather than through the main contractor). The lining failed. The client sued the architects, who defended on the basis that the lining was outside the scope of their appointment, as it was outside their expertise, and that they had merely acted ‘informally’, and gratuitously, to help their client. Both propositions were rejected by the court, as the linings were an integral part of the tank and were not expressly excluded from the terms of appointment. Further, the court found that, even though the linings were outside the architects’ expertise, it was nevertheless part of their expertise to collect information about materials of which they lacked knowledge and experience and to form a view about them, and to recommend the obtaining of advice from others if unable to form a reliable judgement on the materials despite their research. As the architects had not, in this case, exercised reasonable care and skill in the selection process they were liable to compensate their client. There may be a distinction to be drawn between those situations where architects and engineers actually prepare the design of a specialist element of the works (when the architect or engineer may be expected to apply the same standard of care to be expected of someone engaged in the relevant specialism) and those situations where architects and engineers select a special product for inclusion in the works (when the standard of care is that of a reasonably competent architect or engineer investigating the suitability of products for inclusion in the works). What is clear is that lack of expertise in itself does not provide a defence.

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15.2 Selecting builders and other specialists When architects and engineers recommend builders (and, indeed, specialist sub-contractors or other consultants), either as reliable or as suitable for inclusion in a tender list, they must exercise care and skill in selecting and recommending them. Architects and engineers will be liable if their recommendation is made carelessly with the result that their clients suffer loss because the appointed builder (or sub-contractor, or consultant) proves to be incompetent. The editors of the Building Law Reports (38 BLR 26) suggest that architects and engineers should go so far as to expressly advise their client if the competence of the builder cannot be vouched for – but this duty may require an express disavowal only when architects or engineers recommend a builder for inclusion in the tender list. If there is carelessness in the selection of the builder or others it will be necessary for their client to prove that it was the careless selection that caused the loss suffered. In this respect the subsequent insolvency of the builder or others may not afford a defence if the loss arises directly from careless selection that pre-dates the insolvency (see Pratt v. George J Hill Associates (a firm) (1987)).

15.3 Supervision At one time the RIBA conditions expressly provided for architects to supervise the work to be undertaken by the appointed builder. This did not create a strict requirement to control every aspect of the builder’s activities, but simply gave architects a responsibility for oversight of the work. The responsibility was explained, in Sutcliffe v. Chippendale & Edmondson (a firm)(1971), as follows: ‘No one suggests that the architect is required to tell a contractor how his work is to be done, nor is the architect responsible for the way in which the contractor does the work. What his supervisory duty does require of him is to follow the progress of the work and to take steps to see that those works comply with the general requirements of the contract in specification and quality.’

Generally architects and engineers are not responsible for the method of working (including safety precautions) adopted by the builder (see Sutcliffe above and Oldschool v. Gleeson (Construction) Ltd (1976)). Nevertheless, they may be required to give instructions where necessary, including to condemn non-conforming work. Sometimes they may be obliged to warn the builder if inappropriate methods are being adopted – as occurred in the Clay and Oldschool decisions. In this respect, in Hart Investments Ltd v. Fidler (2007), an engineer employed in respect of per-

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manent works who observed but failed to do anything about the dangerous state of the builder’s temporary works was found to have acted carelessly: ‘In my judgment if an engineer employed by an owner in respect of permanent works observes a state of temporary works which is dangerous and causing immediate peril to the permanent works in respect of which he is employed, he is obliged to take such steps as are open to him to obviate that danger. It seems to me that that follows, partly as a matter of common sense, but also because the engineer is, after all, instructed in relation to the permanent works as a whole. It would appear strange if he is under a duty to take such steps as he can to see that they survive for say, the next 25 years, or whatever the design life for the building is, but is not obliged to take any steps to warn of an immediate danger to those works caused by an imperilling act by the contractor.’

Under the RIBA conditions the obligation to supervise has been dispensed with as an express requirement. Instead the architect is charged only with inspecting the quality of work done and approving work elements left to his discretion, but this is not to say that a duty to supervise will not be implied in appropriate circumstances. In this respect an implied duty to supervise may arise out of necessity where the contract between an architect and his client will not work without it, or in order to give effect to the presumed intention of the parties (see Chapter 3). In one case, Townsend v. Stone Toms & Partners (1984), a duty to supervise was implied (but in that case the complaint was of inappropriate certification, rather than supervision of the work on site), although the implied term might have been better described as a duty to administer the building contract in accordance with its terms. Nevertheless, contract administration is itself a fairly broad concept covering a multitude of tasks, and may include taking steps to ensure compliance with the specification and quality standards – in other words an element of supervision in appropriate circumstances. So, architects and engineers who undertake administration of building contracts may be subject to an implied duty, as part of the administration role, to supervise the builder to some appropriate extent where supervision is a matter of necessity. An example of such necessity might be where the specification requires the architect or engineer either to explain something to the builder before he builds it, or to watch the builder while he does it. In these circumstances the undertaking in the RIBA conditions that the client hold the builder liable for the management and operational methods for the proper carrying out and completion of the works may not be sufficient to prevent the implication of a supervision duty in all circumstances. It should also be noted that it is sometimes difficult to draw a clear distinction between supervision and periodic inspection. The latter may involve elements of the former, and vice versa.

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Defective Construction Work The duty to supervise – when it applies – is one that increases as confidence in the builder decreases. In this respect it was observed, in Sutcliffe, that: ‘the degree of supervision required of an architect must be governed to some extent by his confidence in the contractor.’ It is a duty that is measured not in hours or days, but by reference to whether the supervision effort was enough in the given circumstances: see Corfield v. Grant (1992). To the extent that architects and engineers are required to supervise the works it is a duty owed to their clients. So, where the architect’s or engineer’s client is the purchaser, the builder is not entitled to expect the architect or engineer to take responsibility for the way in which the work is done: see Clayton v. Woodman & Son (Builders) Ltd (1962). If a clerk of works is appointed by the purchaser, that may be a factor in determining in any particular case whether the architect or engineer has adequately discharged his duty of supervision, but it does not reduce their liability to ensure conformity with the design: see Kensington and Chelsea and Westminster AHA v. Wettern Composites (1984). Ultimately, if architects and engineers undertake supervision of the works then, subject to any other express requirements of their appointments, they must do all that is proper in accordance with good practice, and will be liable for defects that would have been avoided or remedied but for failure to exercise reasonable care and skill in relation to this duty.

15.4 Periodic inspection Under the current RIBA conditions the architect is obliged to undertake periodic inspections of the work as it progresses on site. These inspections will, amongst other things, enable the architect to ensure that the specification is followed, and that subjective quality standards are adhered to, and to condemn defective and non-conforming work where appropriate. One particular consequence of proper periodic inspection is the ability of the architect to adjust – or to direct the quantity surveyor to adjust – interim valuations to reflect defective and non-conforming work, none of which should be included in interim valuations. The RIBA conditions do not indicate the frequency, duration or depth of detail of the required periodic inspections. They indicate merely that the architect must make the ‘appropriate number’ of visits to the site to inspect the quality of work done and to approve work left to his discretion. Helpfully, the judgment in McGlinn reviewed the authorities concerning periodic inspection and concluded that: ‘the frequency and duration of inspections should be tailored to the nature of the works going on at site from time to time.’ It is doubtful whether an architect under the RIBA conditions will be treated as acting reasonably if he expects to undertake a regime of periodic inspections of less frequency,

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duration and thoroughness than that described in McGlinn. The importance of inspection may be such, in any given appointment, that an architect or engineer appointed to administer the contract who desires to quantitatively limit the number of site inspections should advise his client of the risks and, if necessary, of the need to appoint a suitably qualified person to carry out additional inspections. What is clear from McGlinn is that it will not be good enough for the architect or engineer merely to arrange his inspections to coincide with regular progress meetings. Inspections should reflect a proper appreciation of the competence of the builder. In this respect it was found, in McGlinn, that the view expressed in Sutcliffe about supervision applies equally to periodic inspection – so that if confidence in the builder is lacking, then the standard of inspection required from the architect is correspondingly higher than if the architect or engineer has confidence in the builder’s competence. Architects and engineers will not be liable, however, if the builder deliberately conceals bad work so that it cannot be discovered (see Gray v. TP Bennett & Son Ltd (1987)). In McGlinn it was decided that inspections should coincide with significant elements of the work, especially those of a risky or novel character. In this respect the approach adopted in the George Fischer decision was followed. In the Fischer case it was found that an architect who allowed the use of very risky and inadvisable lap joints in a shallow roof slope ought to have exercised ‘the closest and most rigorous inspection . . . of the process’. In McGlinn it was also explained that if an element of the work is to be repeated throughout the structure, such as a proprietary product or a particular standard of finish, then it is incumbent upon the architect to view that element early on to satisfy himself that the required standard is achieved; and he should continue to monitor the repeated elements to ensure that the required standard is maintained. Further, McGlinn also followed the decision of the Australian court in Florida Hotels Pty Ltd v. Mayo (1965), which confirmed that an architect ought to instruct the builder not to cover up important elements of the work until after inspection has occurred, and that this ought not generally delay progress if the inspections are tailored to the works proceeding on site. This led to the conclusion, in McGlinn, that: ‘c) The mere fact that defective work is carried out and covered up between inspections will not, therefore, automatically amount to a defence to an alleged failure on the part of the architect to carry out proper inspections; that will depend on a variety of matters, including the inspecting officer’s reasonable contemplation of what was being carried out on site at the time, the importance of the element of the work in question, and the confidence that the architect may have in the contractor’s overall competence: see Sutcliffe v. Chippendale and paragraph 8-242 of Jackson & Powell.’

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Defective Construction Work It follows that, where the architect is obliged to carry out periodic inspections, it should be borne in mind that inspection is a dynamic process, of which the frequency, duration and depth will vary depending on the circumstances. If a failure to carry out an adequate inspection regime results in failure to identify defective work, then the architect will be liable for any loss caused to his client. It does not follow, however, from the presence of defects that the architect has failed to carry out a proper inspection. In this respect it was observed in East Ham Corporation v. Bernard Sunley & Sons Ltd (1966) that: ‘It by no means follows that, in failing to discover a defect which a reasonable examination would have disclosed, in fact the architect was necessarily thereby in breach of his duty to the building owner . . . It may well be that the omission of the architect to find the defect was due to no more than error of judgement, or was a deliberately calculated risk which, in all the circumstances of the case, was reasonable and proper.’

Later, in Consarc Design Ltd v. Hutch Investments Ltd (2002), it was concluded, despite the inspection duty being vague, that it did not amount to a guarantee to detect or prevent all defective work – an approach that was agreed with and adopted in McGlinn. It is judicially recognised, therefore, that some defects will inevitably escape the attention of the architect. Even so, calculated risks ought to have a sound justification consistent with good practice. If not, what appears calculated at the time may look careless when viewed with hindsight.

15.5 Certification The obligations of architects and engineers in relation to certification – which usually arise where they are appointed to administer building and engineering contracts – have particular relevance to defects. As contract administrator an architect or engineer is usually required to certify interim and final payments and issue a final certificate. The obligation in relation to payment under, for example, the JCT SBC conditions is to certify the value of work ‘properly executed’ and of materials delivered to the works for incorporation, provided delivery is not premature (and subject to discretion to certify advance payments for materials off-site). If work or materials are not ‘properly executed’, or do not conform to the specification, then they are defective and so have no value if condemned, or have a reduced value if the architect does not demand their removal. In either case the architect should exclude the value of the condemned work from valuations – whether interim or final – pending rectification by the builder (unless the purchaser consents to

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the acceptance of the poor work or materials – something that he may do in return for a price reduction, and something for which the JCT forms make express provision). Broadly the same approach applies to most other model conditions. If a quantity surveyor is retained by the employer then the architect or engineer should ensure that the quantity surveyor is made aware of any defects discovered during periodic inspections so that they may be disregarded when the work is valued. An architect or engineer who negligently includes defective work in valuations is liable to compensate his client if the latter suffers loss as a result (see Sutcliffe v. Thackrah (1974)), and this right is not inhibited by a subsequent settlement between client and builder of the overcertification issue (see Wessex Regional Health Authority v. HLM Designs Ltd (1995)). However, careless overvaluation may be corrected in a later certificate. If any such adjustment corrects an earlier overpayment, the only loss will be the cost of having paid prematurely (usually expressed as interest). If, however, following an overvaluation, the builder becomes insolvent, any consequent loss from careless overvaluation will be assessed by reference to the amount overpaid – although the actual value of the work done at the date of termination must be deducted from the careless valuation, as any additional work properly executed since the careless valuation should be taken into account in assessing the actual loss (see Rae v. Broad (2000)). As the purpose of retention money is to provide the purchaser with security against latent defects, architects and engineers should not, when certifying interim payments, include the defective items for payment on the basis that the retention is sufficient to protect the purchaser if the builder does not rectify the defective items. Such an approach eats into the purchaser’s security in the event that latent defects manifest themselves at a later stage, or if the builder subsequently becomes insolvent without rectifying the defects; and it amounts to a breach of duty on the part of the architect or engineer. In this respect it was stated, in Townsend, that: ‘The whole purpose of certification is to protect the client from paying to the builder more than the proper value of work done, less proper retentions, before it is due.’ In these circumstances a deliberate over-certification will amount to negligence on the part of the certifier. Particular care should be exercised when issuing the final certificate if the contract stipulates that this certificate will bar claims by the purchaser for defective work (see Chapter 13, section 13.5). Under the current JCT conditions the bar on defects claims is quite narrow in its scope, so that the prejudice to the purchaser may be negligible or non-existent. But if the bar relates to all work, as for example occurs under the MF/1 conditions, then the purchaser may well be seriously prejudiced by a carelessly issued final certificate. If the purchaser is in fact prejudiced he will inevitably look to his architect or engineer for compensation.

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15.6 Design review Architects and engineers are under a duty to check and correct their design. The RIBA conditions simply state that the architect will ‘maintain effective monitoring and review procedures.’ The RIBA Schedule adds that the architect provides ‘advice . . . concerning the design for which he is responsible’. However, the degree of design review required has been extensively considered by the courts. In this respect, in the Brickfield decision it was stated that: ‘The architect is under a continuing duty to check that his design will work in practice and to correct any errors which may emerge. It savours of the ridiculous for the architect to be able to say, as it was here suggested that he could say: “True, my design was faulty, but, of course, I saw to it that the contractors followed it faithfully” and be enabled on that ground to succeed in the action.’

But it is important to understand exactly how the duty continues, because on the current state of the authorities it varies at different stages of the retainer. These stages are first until the design is implemented, second from implementation until practical completion, and third after practical completion.

15.6.1 Stage one: up to implementation The first stage of the design review duty continues until the design has been implemented by being incorporated into the works, at least where the architect or engineer also undertakes the supervision and/or inspection of the works on site. (If the architect or engineer is retained solely to prepare the design, the duty to review may well cease once the design is delivered – although in all cases the exact time will depend on the terms of appointment.)

15.6.2 Stage two: implementation to practical completion The second stage when design review is required is after implementation of the design (or any particular element of it) into the works until practical completion of the works as a whole (or possibly the relevant section where sectional completion is required). However, during this stage the obligation to review arises only if something occurs to trigger the need for a review. In this respect, in New Islington and Hackney Housing Association v. Pollard Thomas & Edwards Ltd (2000), the court was not prepared to adopt the approach indicated in the earlier authorities,

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which had held that the duty to review continued until practical completion. Instead the court felt it necessary to consider the scope of the duty in more detail, and in so doing concluded that an architect engaged under the relevant RIBA conditions to design work and to administer a contract in the standard JCT form commits a breach of contract when he completes (albeit negligently) a part of the design and gives instructions to the builder to construct in accordance with it. But once the design is constructed (whether it has been carelessly prepared or not), the architect is not obliged to specifically review any part of the design unless something occurs to render it necessary, or prudent, for a reasonably competent architect to do so. Subsequently, in the Samuel Payne decision it was stated that: ‘It is now in my view well established that a designer’s continuing duty of care only requires a reconsideration of the design if the designer becomes aware or should have been aware of the need to reconsider the design.’

This might occur if problems with the works manifest themselves during construction. For example, the structure may show signs of distress so that the foundation design ought to be reviewed, or information may be published, or otherwise come to the attention of the architect or engineer, calling into question the suitability or safety of specified materials, or even the overall design itself. Another example might be if a significant variation is instructed that demands reconsideration of some other part (or the whole) of the design. In these circumstances the New Islington decision leaves no doubt that the architect or engineer ought to review the design and, if necessary, issue variation instructions to remedy the problem. The review may reveal that the design was negligently prepared in the first place, or it may simply be that unforeseen, and unforeseeable, conditions have occurred. But whatever the cause of the problem may turn out to be, the architect must not shrink from undertaking a proper review once alerted to the need to do so. If he does, that will be negligence.

15.6.3 Stage three: after practical completion The third stage duty to review the design may occur after practical completion of the works, if the contractual arrangements envisage the designer undertaking such a review after practical completion. In this respect the New Islington case determined, as a primary finding, that the relevant RIBA conditions when read in conjunction with the building contract did not require the architect to review his design after achievement of practical completion. This primary finding was based on the contractual arrangements, which:

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• did not expressly require any review of the design after practical • •

completion, did not authorise the issue of variation instructions after practical completion, and made practical completion the point at which the building was fit for occupation and the point at which it was handed over to the purchaser for that purpose.

Having regard to these points it was found to be unsurprising ‘that practical completion is treated as the watershed for the purposes of the architect’s duty to review his design.’ In the circumstances, unless the particular contractual arrangements either expressly require design review after practical completion (or substantial completion – as the case may be), or can be construed so as to impliedly require such a review, then it appears that designers do not owe a general duty to review their design once the works are complete. Despite rejecting the claim made by the Housing Association owing to the primary finding, the court in New Islington also made a secondary finding, which addressed the possibility that the primary finding might be found on appeal to be wrong. This secondary finding was that if the contractual duty to review the design survived after practical completion it would arise only if something occurred that would indicate to a reasonably competent architect that he should review the design. The facts of New Islington were that the architects’ design allegedly made inadequate provision for sound insulation in a block of flats. The existence of a noise problem first came to the attention of the purchaser within one month of practical completion, when the tenants complained of problems with noise disturbance. Almost one year later the purchaser asked the architects to provide clarification regarding noise insulation, and confirmation that the design complied with building regulations. The architects quickly provided the requested clarification and confirmation, and invited the purchaser to say whether they required anything else. They did not. Just over another year went by when the architects issued a certificate of making good of defects followed by a final certificate. Two months after the final certificate the client was served with a notice of failure to comply with building regulations, and appointed experts to advise. Upon receiving adverse advice from its experts the client appointed solicitors, who sought more information from the architects about the design. In these circumstances the court found that nothing had occurred after practical completion that amounted to a good reason for the architect to review the design – if indeed he was obliged to do so at all. In particular the judge did not regard any of the post-practical completion correspondence as making a request for the architect to investigate the noise problem. It is conceivable, therefore, that the outcome of the New Islington case, at least in

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relation to the secondary finding, might have been different if there had been an explicit, or at least an inferential, request to investigate the noise problem.

15.7 Defects investigations The duty to review the design, and in particular the tenuous stage three duty (see section 15.6.3 above), must be contrasted with the designer’s responsibilities when he agrees to carry out a defects investigation. In this respect the New Islington decision may be contrasted with the decisions in London Borough of Merton v. Lowe (1981) and The University Court of the University of Glasgow v. William Whitfield and John Laing (Construction) Ltd (1988). In the L.B. Merton case architects responsible for the design of a swimming pool were notified of cracks in the ceiling arising after practical completion. They asked the manager of the pool to keep an eye on the ceiling, but six years later issued a final certificate without making any further enquiry into the state of the ceiling. One year later more cracks appeared, and upon expert examination the ceiling was condemned as unsafe. The architects were sued for negligence, and held liable for failing to carry out an adequate investigation of the problem. The court found that, had they done so, the cause and magnitude of the problem would have been appreciated, and the builder could have been invited to put it right and sued for compensation if he refused. Once the final certificate was issued this was no longer possible, as the claim was barred by the conclusive evidence provision of the building contract. The decision in LB Merton can be distinguished from New Islington on the basis that the defect in the former case was really one of poor workmanship by the builder, who had not correctly mixed the mortar. However, once the architect was apprised of the existence of potentially serious defects, and began an investigation, he was bound to carry it out with reasonable care and skill, but did not do so. In this sense the secondary finding in New Islington does not appear inconsistent with LB Merton, and the primary finding can be distinguished on the basis that in New Islington no one appears to have pointed out to the architect that there was a defect that required investigation. Matters were taken one stage further in the University Court decision, where architects reconsidered their design after practical completion, and did so carelessly and were therefore liable to compensate their client. However, in this case the architects had agreed to carry out a post-practical completion review for an additional fee. As a result the court in New Islington was not prepared to regard the University Court decision as an example of the performance of a continuing duty to review the design under the original appointment. Furthermore, the

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What is tolerably clear, therefore, is that once architects and engineers are actually or constructively aware of a defect in the design, or in the works as they are being constructed, they ought then to decide what proper steps should be taken or recommended to investigate the problem and to remedy it; and they should advise their clients and instruct the builder accordingly. However, after practical completion the position will very much turn on the proper construction of the contractual arrangements. There may be no duty to review the design, even though there may be a duty to inspect for defects in workmanship and materials. If there is a duty to review the design post-practical completion, it is a duty (subject to any express terms to the contrary) that may arise only if there is good reason to review the design, and, as it was explained in New Islington: ‘What is a good reason must be determined objectively, and the standard is set by reference to what a reasonably competent architect would do in the circumstances.’

15.8 Honest reporting It should also be noted that the obligation to inform clients of inadequacies in the design – where such a duty exists – is not limited to nonnegligent shortcomings. In New Islington it was decided that whether the architect should report his own negligence depends on the terms of his

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retainer where those terms remain to be performed: ‘he may well be under a contractual obligation to review his earlier performance, and advise his client honestly and competently of his opinion.’ The position should be contrasted, however, with the decision in Chesham Properties Ltd v. Bucknall Austin Project Management Services Ltd (1996), where the court refused, on the facts, to imply a term that an architect (or indeed a project manager or structural engineer) is obliged to inform his client of deficiencies in his own performance. To the extent that an architect or engineer is obliged to report his own negligence to his client, this may give rise to a conflict between the architect’s or engineer’s duty to his client and the requirements of his professional indemnity insurance policy – the latter of which may forbid the making of admissions. In these circumstances the architect or engineer ought to consult with his insurers before making any admissions. It would be surprising, however, if the requirements of the policy were found to override the duty owed to clients. Any conscious decision not to report in contravention of this duty – even if at the instigation of insurers – will most likely amount to deliberate concealment, and therefore render the careless act outside the protection of what would otherwise be the applicable limitation period.

15.9 Termination of performance The duty of architects and engineers to advise of shortcomings in the design will depend on whether their contract is still being performed. This was confirmed in New Islington in the following terms: ‘Whether he is in fact under such a duty when he has actual or constructive knowledge of his earlier breach of contract will depend on whether the contract is still being performed.’ In this respect, no further performance is generally required at all once the final certificate is issued. Before the final certificate some obligations may be at an end even though others remain to be performed. So, the end of the contractual obligation to review the design may occur earlier than the final certificate, depending on the terms of appointment. If the appointment is terminated early no further performance is required. It should be noted, however, that even after termination of performance there may well remain a duty of care in tort that obliges architects and engineers to advise their clients of negligence in the design.

Chapter 16

Project Managers, Surveyors and Others

Architects and engineers often, though not exclusively, take the lead role in relation to projects from inception through to completion. Even where they are not the lead consultant the nature of their work as designers and (where applicable) inspectors of quality issues gives them particular responsibilities in relation to the avoidance and detection of defects, as discussed in Chapter 15. Nevertheless, the duties imposed on architects and engineers do not operate to the exclusion of similar duties being imposed on other consultants whenever they undertake any of the tasks normally associated with the role of the architect or engineer. In addition, the role and responsibilities of other professional consultants, such as project managers, quantity surveyors, CDM coordinators, clerks of works and engineer’s representatives are such that these persons may be liable if their client suffers loss as a result of defects that should have been, but were not, detected.

16.1 Project managers Project management, in its widest sense, involves managing or coordinating all elements of a project from start to finish. However, the precise role of a project manager will vary from project to project, depending upon the purchaser’s requirements. Many of the tasks traditionally undertaken by architects and engineers can be described as project management. It is not uncommon for organisations to appoint an employee to act as project manager for a significant procurement task. Often this person undertakes a liaison role between the purchaser and the lead consultant, but there has been an increasing trend for independent consultancies (and even contracting companies) to offer project management services. Sometimes a project manager may manage the project from inception to completion, but on other occasions the project manager may be responsible for only part of the project, such as the construction phase. The JCT publishes a construction management agreement that in some respects represents the high water mark of project management. In Great Eastern Hotel Co Ltd v. John Laing Construction Ltd (2005) the court referred to this type of project management in the following terms: 158

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‘As a concept, it can be described as a method of procurement whereby the Construction Manager manages the construction of the Project without accepting the principal risks of time and cost, which remain with the client. Thus it is the obligation of a Construction Manager to plan, programme and organise the Project and the Trade Contractors who actually carry out the work, so that the Client’s risks in relation to time and money are minimised. The advantage to the Client of this form of procurement is that the responsibility for the construction can be handed to professionals who can manage the risks and the work can be started before the whole design is complete. The disadvantage from the client’s point of view is that he contracts directly with many Trade Contractors and retains the risk as to time and cost. From a Construction Manager’s point of view, these risks are borne by the Client and the CM simply receives his agreed fee for managing the construction of the job.’

This is not to say, however, that this or any other form of project management is risk free for the project manager. Nor can it be said that this represents a conclusive definition of construction, or indeed project, management. Under other contracts the project manager, if formally recognised at all, may have a lesser role to play than the JCT C/CMA conditions envisage. For example, the NEC3 conditions envisage the appointment of a project manager to oversee – but not manage – what is essentially a traditional contracting arrangement. In addition, the JCT DB conditions envisage the appointment of an ‘employer’s representative’, whose role is even more restricted. Further, the appointment of a project manager may still require that an architect or engineer be appointed, either as a lead consultant or in a subsidiary role. The RIBA Schedule sets out the activities that the RIBA expects project managers to perform, which can be summarised as requiring: an initial statement of project objectives; identifying the requirement for professional consultants and managing their appointment; issuing information to the lead consultant; developing and maintaining a project strategy, structure and procedures; managing the development of the design brief and its implementation; maintaining a master programme and cost plan; and monitoring, regulating – and reporting to the client on – performance. Many of these activities overlap with the RIBA work stages, and so are services habitually offered by architects to their clients under the standard RIBA conditions (and indeed by engineers). It is to be expected, therefore, that whenever a project manager is appointed to undertake these activities the terms of appointment of the architect (or engineer) will be tailored accordingly to avoid overlap. It can be seen, however, that what is envisaged by the RIBA is that the project manager will take responsibility for managing the project team and reporting to the client. The extent to which project managers may have a responsibility and liability in relation to defects depends ultimately upon the precise role and activities undertaken. For example, in Pozzolanic Lytag Ltd v. Bryan

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Defective Construction Work Hobson Associates (1999) a project manager who failed to procure project insurance was found liable for losses suffered by his client. The court was satisfied in that case that the terms of engagement imposed a duty upon the project manager to procure the relevant insurance. It follows that project managers may be liable if, under their terms of appointment, they have a duty to ensure that quality issues are adequately addressed, either through their own efforts or through their management of the other consultants and the builder. In this respect the references in the RIBA Schedule to the project manager being responsible for project procedures, for managing implementation of the design brief, and for monitoring and regulating performance, all point in the direction of potential liability for defects if any failure to avoid, detect or address them results from inadequate procedures or careless oversight of the implementation of the project procedures. Project managers must, just like any other service provider, exercise reasonable care and skill (see Chapter 14). The Great Eastern decision confirms that very clear words are required to elevate their duties to the status of guaranteeing an outcome. Although in this case the court was not prepared to construe the contract as imposing an absolute duty to ensure that the trade contractors complied with their contractual obligations, it nevertheless found that the construction manager had failed to exercise reasonable care and skill, and was therefore liable to compensate the purchaser. It is also worth noting that in John Mowlem & Co Ltd v. Eagle Star (1995) the court had imposed what amounted to absolute duties upon a management contractor, but this was in circumstances where the management contractor’s obligations were construed in the light of an overall obligation to deliver the completed project, rather than just provide a service. Project managers, depending on the scope of their retainers, may be persons upon whom a duty has been placed for the purpose of the CDM regulations, or it may be that the purchaser has delegated to the project manager the task of ensuring that the purchaser’s duties are fulfilled. Although such a delegation does not relieve the purchaser of his responsibilities, he will inevitably look to the project manager for indemnity if the relevant duties are inadequately discharged. Further, in these circumstances the project manager will be a person concerned with the project working under the control of another, and therefore bound to report any danger of which he is aware.

16.2 Quantity surveyors Quantity surveyors (as opposed to valuation or building surveyors) are engaged in the business of costing and valuing building work. They are habitually employed by purchasers as cost consultants for the purpose

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of estimating the cost of proposed projects, preparing cost plans, evaluating tenders, valuing work in progress, preparing final accounts, and assessing claims for additional payment submitted by builders. They carry out a similar role for builders (and their sub-contractors); and they are also employed by funders to represent their interests in relation to the financial aspects of projects. Quantity surveyors are skilled in the preparation of schedules (usually referred to as bills of quantities) of work and materials described in drawings and specifications so that the items can be costed or valued (as the circumstances require), and they often make a significant contribution to the development of specifications. They are also specialists in the sometimes arcane, but usually intricate, methods of measurement that are published and much used in the UK. Hudson rightly describes quantity surveyors as ‘in general highly skilled’ and ‘likely to be at least as well qualified, in matters of technical building construction, as are architects’. It is their detailed knowledge of technical building construction that places them in a unique position to protect the interests of their clients when defects arise. In this respect, quantity surveyors tend to play a pivotal role when undertaking interim valuations of work in progress for the purpose of interim payments, but this is not to downplay the importance of their role at other stages of development and construction of a building project. The role played by quantity surveyors in identifying, recommending and sourcing materials for inclusion in specifications and bills of quantities requires that they must exercise reasonable care and skill when doing so – and this role will make them designers for the purposes of the CDM regulations (and thus bound to discharge the duties of designers under the regulations, as well as being bound to report dangers of which they become aware). An interim valuation of work in progress is required by most model conditions to represent the value of work properly done and of satisfactory materials supplied. The starting point for an interim valuation will, generally, be the application submitted by the builder, but it is only the starting point. In the absence of a visit to site, the builder’s application has to be taken on trust, as to both the quantity and the quality of work done. However, enquiry of the architect or other consultants may reveal dissatisfaction with the quality of work done, and disagreement with the quantities. In the Sutcliffe v. Thackrah decision it was found that: ‘. . . since everyone agreed that the quality of the work was always the responsibility of the architect and never that of the quantity surveyor and since work properly executed is the work for which a progress payment is being recommended, I think that the architect is in duty bound to notify the quantity surveyor in advance of any work which he, the architect, classifies as not properly executed, so as to give the quantity surveyor the opportunity of excluding it.’

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Defective Construction Work It is highly doubtful, however, that the court intended, by this pronouncement, to rule out liability for defects falling on quantity surveyors in all circumstances. In Sutcliffe the architect was at fault for not telling the quantity surveyor of defects of which he was aware, which resulted in the builder, who subsequently became insolvent, being overpaid. But it does not follow that the quantity surveyor is always absolved because the architect noticed but failed to inform him of defects. Indeed, it is a distinguishing feature of Sutcliffe that the witnesses agreed that the quality of work was the responsibility of the architect, but this is not to say that quality issues are exclusively the preserve of the architect or engineer. Indeed, whenever the quantity surveyor is obliged to inspect the works for the purposes of preparing a valuation, he should identify not only the quantity of work done but also its quality, and should independently exclude any non-conforming work from the valuation. This means that quantity surveyors should apply their knowledge of technical building construction when valuing work. They should also adopt an appropriate level of rigour, which will depend on a variety of factors such as the importance, value and complexity of the particular item of work and the general level of confidence in the competence of the builder and his sub-contractors. It will be careless of a quantity surveyor not to be appropriately rigorous, and that carelessness will result in a liability to compensate the purchaser if he suffers loss as a result of careless failure to identify – or to make the proper enquiries necessary to identify – patent defects that a reasonably competent quantity surveyor would have identified. During the valuation stage, quantity surveyors ought to bear in mind the duties they are under as a result of the CDM regulations: they may be designers for the purposes of those regulations; or they may be obliged to report dangers. So, for example, if the quantity surveyor notes when valuing an item that, although it was regarded as a suitable material when specified, it has since become a matter of common knowledge that it is no longer regarded as safe or suitable, then he will be obliged under the regulations to report the danger. Even if the item is nondangerous the quantity surveyor may be duty bound to inform his client of the unsuitability of the item once he has actual or presumed knowledge of its unsuitability. Although quantity surveyors must exercise reasonable care and skill to avoid including defective work in valuations, they are not obliged, unless their terms of appointment expressly provide to the contrary, to report to their client on deficiencies in their own performance or that of other consultants engaged by the purchaser (see Chesham Properties Ltd v. Bucknall Austin Project Management Services Ltd and others (1996)). This does not, however, discharge them from their responsibilities under the CDM regulations.

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16.3 CDM coordinators Any person undertaking the role of CDM coordinator under the CDM regulations (see Chapter 9, section 9.5) is bound to coordinate with the other persons upon whom duties are imposed by the regulations to ensure the health and safety of persons carrying out and affected by the construction work. In addition such persons must cooperate with one another. The CDM coordinator must see to it that these duties are discharged. In addition he must take all reasonable steps to ensure that designers comply with their duties under the regulations. In this sense the duty is strict: if the step is reasonable then it must be taken. This means that there may be circumstances where a professional consultant who takes on the role of CDM coordinator may be required to do more than just exercise reasonable care and skill. Apart from any strict duties imposed upon the CDM coordinator by the regulations, he is bound to exercise reasonable care and skill in the discharge of his duties. This probably means that CDM coordinators will be bound to issue warnings to their clients and to builders and others where they have actual or presumed knowledge of dangers or defects. In this sense the obligations of CDM coordinators may ultimately prove to be not dissimilar to the obligations of architects and engineers as indicated in cases such as Clay, Oldschool and Hart.

16.4 Clerk of works/engineer’s representative Some model conditions and some ad hoc contracts make provision for the appointment of a clerk of works or engineer’s representative. The precise role of this person may vary from contract to contract, but under the JCT SBC conditions the clerk of works acts as an inspector on behalf of the purchaser, but under the direction of the architect. Essentially, the clerk of works is the eyes of the purchaser and the architect in relation to the quality of work done. The engineer’s representative under the ICE conditions is much more a delegate of the engineer. Where appointed, the clerk of works and the engineer’s representative may be employees of the purchaser, but they may also be independent professional consultants. If independent they will be subject to the usual duty (owed to the person by whom they have been retained) to exercise reasonable care and skill. Whether employee of the purchaser or independently retained, the persons performing these roles will be bound to report dangers in accordance with the CDM regulations (see Chapter 9, section 9.5).

Chapter 17

Compensation

When defects occur as a result of breach of contract or duty, the injured party is entitled to an award of compensation for loss suffered – put simply, a sum of money that recognises and reimburses all of the losses suffered as a result of the breach. Sometimes, however, the injured party may want to enforce performance either as an alternative or in addition to claiming compensation. Obtaining compensation can be achieved in one of three ways:

• The first is a form of judicially recognised self-help called abatement •

•

– put simply, a right not to pay for bad work (see section 17.1). The second is another judicially recognised form of self-help called set-off – put simply, a right to offset the loss suffered against money otherwise due under the same or another contract (see section 17.2). The third is by way of an action for damages – put simply, a right to commence legal proceedings (see Chapter 20) for an award of compensation.

17.1 Abatement The remedy of abatement is a defence to a claim for payment, and a narrow remedy. It derives from the decision in Mondel v. Steel (1841), and enables purchasers of goods to defend themselves by showing how much less the subject matter of the contract is worth by reason of the breach of contract. Defects amount to a breach of contract and reduce the value of the subject matter, i.e. the work done. This right to abate the price is now enshrined in Section 53(1) Sale of Goods Act 1979 for the purposes of sale of goods contracts, but there is no equivalent statutory provision in relation to work and materials contracts – so the common law remedy of abatement remains the basis of the right to withhold payment for this class of contract. The right to abate the price does not permit anything other than a deduction against the price. It was confirmed by the Court of Appeal in Mellowes Archital Ltd v. Bell Projects Ltd (1997) that abatement applies only to the subject matter of the contract in question, i.e. the work and 164

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goods supplied, and then only where the breach results in diminution in value of the subject matter. In this respect it was said that: ‘It is therefore clear that, for a party to be able to rely upon the common law right to abate the price which he pays for goods supplied or work done, he must be able to assert that the breach of contract has directly affected and reduced the actual value of the goods or work – “the thing itself”.’

The result in this case was that the purchaser could not abate the price by reference to delay costs. There is some uncertainty as to the extent to which the defence of abatement applies to a professional consultancy contract (see Hutchinson v. Harris (1978)). The importance of abatement is that the alleged wrongdoer must sue for his money if he disagrees that he is in breach or disagrees with the amount deducted, but the court will not order the injured party to pay the sum withheld pending trial (i.e. it will not grant summary judgment) unless it is satisfied that the defendant has no real prospect of successfully defending the claim (see Civil Procedure Rules Part 24.2 (a) (ii)). In Barrett Steel Buildings Ltd v. Amec Construction Ltd (1997) it was decided that the cost of remedying defects might be relied upon as the measure of the diminished value. However, that was a case where the court was asked to determine an application for summary judgment under Order 14 of the former Rules of the Supreme Court, where all the court had to do was determine whether the defendant had an arguable defence to the claim (in which case summary judgment had to be refused), so the position may be different on a final determination of the defence. The right to abate does not require the alleged wrongdoer to pay money to the injured party. If the abatement extinguishes the price (or any unpaid balance) altogether (as may occur if the cost of remedial work exceeds the price – or any unpaid balance), the injured party must, if he wishes to recover the balance, bring an action for compensation and prove his entitlement (unless he can set off the balance against money owed to the builder under a different contract (see section 17.2). The common law right to abate the price is one of those rights that the law presumes to be available unless clear words in the relevant contract expressly exclude it (see the Gilbert-Ash decision). Nevertheless, the decision in Halesowen Presswork v. Westminster Bank (1972) confirms that the presumption may be impliedly rebutted. Further, the right of abatement may be expressly excluded or restricted, but it was decided in the Mellowes case that words that excluded the right of set-off did not operate to exclude the right to abate. If the right to abate is expressly excluded, the exclusion will be subject to the requirements of the Unfair Contract Terms Act 1977, as occurred in Stewart Gill Ltd v. Horatio Myer & Co Ltd (1992).

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17.2 Set-off The remedy of set-off is a procedural device that permits the injured party to offset the compensation he claims against money claimed by the alleged wrongdoer under the same or any other contract. It is a remedy that overlaps with abatement. The right of set-off is not unfettered. It applies only to claims and counterclaims in three situations:

• First, where the amounts claimed by each party amount to a liqui-

•

•

dated debt or money demand that can be ascertained with certainty at the time of pleading (known as common law set-off) – but a claim for damages will not generally fall into this category (see B. Hargreaves Ltd v. Action 2000 Ltd (1992)). Second, where there is a close and inseparable connection between claim and counterclaim such that it would be manifestly unjust to give judgment on the claim without taking into account the counterclaim (known as equitable set-off). Generally, this requires the claim and counterclaim to arise from connected dealings (see Bim Kemi AB v. Blackburn Chemicals (2001)), but the mere existence of two or more contacts between the parties does not of itself amount to a connected dealing (see Anglian Building Products Ltd v. W&C French (Construction) Ltd (1972)). Third, where the claimant is insolvent, a set-off of mutual dealings is permitted under the Insolvency Act 1986 and the Insolvency Rules 1986.

The effect of a set-off is that the court will not permit the enforcement of the claim, even if it is admitted, until the counterclaim has been determined. The right of set-off may be excluded or restricted by contractual terms, although, in accordance with the Gilbert-Ash principle, clear words are required to effect an exclusion of the right of set-off. Where the contract out of which the claim arises is a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996 the right of set-off may be exercised only if notice is given in accordance with that Act (see Chapter 3, section 3.4, and Chapter 11, section 11.3).

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17.3 Compensation At common law financial compensation is payable by way of an award of damages for either

• breach of contract, or • breach of a tortious duty. In relation to both contract and tort the breach must cause foreseeable harm capable of quantification. In this respect the object of an award of damages is to put the injured party, so far as money can do so, in the same position as he would have been if the breach of contract or duty had not occurred (see Robinson v. Harman (1848) and Livingstone v. Rawyards Coal Co. (1880)). This principle was subsequently qualified in British Western House Electric & Manufacturing Co Ltd v. Underground Electric Railways Co of London Ltd (1912) by substituting the proposition that the injured party had to be put into ‘as good a situation’, not the same situation (something that is returned to in the Ruxley decision below). The causation requirement deals with the self-evident issue that it must be the breach that caused the loss in question. If it did not, then it is not recoverable (see Liesbosch Dredger v. Edison (1933) and Compania Financiera Soleada SA v. Hamoor Tanker Corp Inc, (The Borag) (1981)). The courts are entitled to take a robust approach to causation (see Roadrunner Properties Ltd v. Dean (2003)), which in the context of damage caused by defects means that, if the damage in question is of the kind to be expected from the nature of the work, then the court is entitled in the absence of evidence of any other cause to infer that it was the defective work that caused the loss (see Drake v. Harbour (2008)). The foreseeability requirement can be expressed in another way: losses cannot be recovered if they are too remote. For the purposes of contract losses will be too remote if either (a) they do not arise naturally from the breach, or (b) they were not actually contemplated by the parties at the time the contract was entered into as losses likely to occur in the event of breach (see Hadley v. Baxendale (1854)). If losses arise naturally, or are contemplated, then they are foreseeable. Subject to overcoming the causation and foreseeability hurdles, there is no limit on the amount of compensation payable, unless the contract expressly provides otherwise. In building cases there are broadly two types of loss that may be suffered when defects occur. First, there is physical damage, and, second, there is non-physical economic damage that is parasitic upon the physical damage (sometimes referred to as consequential loss). So, for example, a defect may result in harm to the structure itself, which will need repair and therefore be the subject of an award of compensation; and it may also result in consequent economic losses, in the sense that, if the

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Defective Construction Work building has to be emptied while repairs are carried out, then this may result in loss of use, which may also be the subject of an award of compensation. Sometimes building contracts make provision for the payment of compensation in specific circumstances (for example, the JCT conditions provide for the payment of direct loss and/or expense where the purchaser is responsible for a material effect on regular progress), but unless the contract contains clear words to the contrary the right to claim damages will not be excluded by the inclusion of such a provision (see Gilbert-Ash). At one time the approach to the assessment of damage to property was based on the diminution in value, but this approach has generally though not exclusively given way to assessment based on the cost of reinstatement. Where the cost of reinstatement is not the appropriate measure of damages, diminution in value may instead be the basis of assessment in appropriate cases. Nevertheless, there may be circumstances when both reinstatement and diminution are recoverable.

17.3.1 Cost of reinstatement It was explained in McGlinn that the cost of reinstatement is the ordinary measure of damages for defects, because it is generally foreseeable that the injured party will repair the defects. This measure was approved in East Ham Corporation v. Bernard Sunley & Sons Ltd (1966), where the House of Lords approved the proposition that ‘wherever it is reasonable . . . to insist upon reinstatement the courts will treat the cost of reinstatement as the measure of damage.’ In this case the cost of repairs was greater at the date of discovery of the defects, owing to inflation, than it would have been had the defects been discovered at or before completion; nevertheless, the cost of repair was awarded as compensation. It seems to be the case, therefore, that an unreasonable course of action is not foreseeable. Later, in Radford v. De Froberville (1977), damages were claimed for failure to build a wall between two properties. The wrongdoer contended that damages should be measured by reference to the diminution in value of the property entitled to the benefit of the wall, which was nominal. The court rejected this contention, and awarded damages on the basis of the cost of building the wall, as it conferred a benefit on the injured party’s land and he intended to carry out the work. In these circumstances it was reasonable and therefore foreseeable that the injured party would reinstate. That the cost of reinstatement is not always appropriate is demonstrated by the decision in CR Taylor (Wholesale) Ltd v. Hepworths Ltd (1977), where the court refused to award the cost of reinstatement when

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the injured party, whose property had been burnt down, was found to have no intention to reinstate, as he intended to develop the site. In these circumstances it was not reasonable (and therefore not foreseeable) that the injured party would want to reinstate. Further, in GW Atkins v. Scott (1980) it was also decided that the assessment of compensation based upon the cost of reinstatement was not reasonable despite the intention to reinstate. In this case the proportion of bad work was small; it had been unremedied for four years and was found only to affect the amenity value of the property. This tends to suggest that the intention to reinstate must itself be reasonable in all the circumstances. It does not follow that the cost of reinstatement is inappropriate as the measure of damage just because the property has been demolished and there is no intention to repair. This is what occurred in McGlinn, where it was accepted that the difference between demolition/rebuilding on the one hand and repair on the other is one of degree, and that: ‘It is for that reason that I reject the submission . . . that, because Maison d’Or has been demolished and so will never be repaired, the assessment of damages by reference to the cost of repair is inappropriate. It seems to me that it is not: the cost of repair represents a valid way of arriving at an assessment of the Claimant’s loss if, for whatever reason, I conclude that the primary case fails and the costs of demolition and rebuilding are not recoverable. . . . This is unquestionably a case in which the correct measure of loss is reinstatement.’

It is important to note that in this case the court was not persuaded that demolition was necessitated by the defects, or reasonable in any event.

17.3.2 Diminution in value The Radford decision had been preceeded by an earlier decision in Applegate v. Moss (1971), where the court had awarded damages on the basis of diminution in value. In that case the foundations of a house had, after completion of construction, been found to be so defective that the house was unsaleable, unsafe to live in, and irreparable. In these circumstances it was clearly unreasonable to expect the injured party to reinstate, and it was not foreseeable that he would do so. This necessarily left diminution in value as the appropriate measure of damages. Later, in Darlington Borough Council v. Wiltshire Northern Ltd (1994), the Court of Appeal approved the East Ham decision, but with the qualification that ‘. . . where the cost of remedying the defects involves expense out of all proportion to the benefit which could accrue from it, the court is entitled to adopt the alternative measure of difference of the value of the works.’

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Defective Construction Work This was followed by the decision in Ruxley that is mentioned at the beginning of Chapter 1. It was Mr Forsyth’s pool that, after completion, was discovered to be 9 inches shallower than the specification called for. Mr Forsyth had demanded compensation on the basis of the cost of reconstructing the pool so that it met the specification; but the trial judge found that he had no intention of reconstructing the pool, and that it would be unreasonable to do so, since the advantage to be gained was disproportionate to the cost. Instead, a modest award of general damages was made in respect of the loss of pleasure and amenity that resulted from having a shallower pool than the contract called for. The Court of Appeal overturned the decision of the trial judge in Ruxley, but the House of Lords restored it. One of the Law Lords returned to the British Western qualification to the general principle of assessment (see above), and observed that: ‘This necessarily involves measuring the pecuniary loss . . . in fact suffered.’ In this respect the Law Lords restated that the cost of reinstatement is not the only measure of damages, and is not appropriate where the expenditure would be out of all proportion to the benefit to be gained, even if the alternative measure, i.e. diminution in value, would lead only to an award of nominal damages: ‘Once again one finds the court emphasising the central importance of reasonableness in selecting the appropriate measure of damages. If reinstatement is not the reasonable way of dealing with the situation, then diminution in value, if any, is the true measure of plaintiff’s loss. If there is no diminution in value, the plaintiff has suffered no loss. His damages will be nominal.’

In this sense the House adopted the approach taken in the East Ham decision and appears to be using the reasonableness of the course of action as a component of foreseeability. Further, the House of Lords confirmed that in assessing damages the question of reasonableness entitled the court to consider and take into account the intentions of the injured party with regard to reconstruction. This meant, in practice, that the finding by the trial judge that Mr Forsyth did not have an intention to reinstate, and that it would be disproportionate, resulted in the dismissal of Mr Forsyth’s appeal. Ruxley was followed in the subsequent decision in Freeman v. Niroomand (1996), and led to the Court of Appeal not only refusing to award the cost of reinstatement because the injured party did not intend to reinstate, but also refusing an award of damages based on diminution in value because there was none. It was decided in the Murphy case that the cost of reinstatement sets the limit on the amount that can be awarded by way of diminution in value. This aspect of the Court of Appeal decision was not expressly overruled by the House of Lords, but it may not be a principle of universal application. It probably indicates no more than that it is necessary

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in all cases to determine the reasonable measure of damages. In IMI Cornelius (UK) Ltd v. Bloor Ltd (1991) it was decided that an injured party who had parted with his interest in the affected property was entitled only to recover the diminution in value. In that case the parting from ownership was the result of an internal reorganisation of a group of companies. Subsequently, in Birse Construction Ltd v. Eastern Telegraph Company Ltd (2004), the court refused to award the cost of reinstatement when the property was, at the date of trial, due to be sold without any reduction in value due to the defects, and where the injured party had instructed the builder to cease rectifying those defects that – some eight years after completion – remained unremedied. In this case the court was satisfied that there was no intention to remedy, and that it would be unreasonable to do so in any event. One of the factors that influenced the trial judge in Birse was the observation in the decision in Ruxley that: ‘If it is unreasonable in a particular case to award the cost of reinstatement it must be because the loss sustained does not extend to the need to reinstate.’

17.3.3 Reinstatement and diminution If, despite the work of reinstatement, there remains a residual diminution in value of the property, then damages for diminution may be recoverable in addition, rather than as an alternative, to reinstatement. This occurred in Thomas v. T.A. Phillips (Builders) Ltd and Taff Ely Borough Council (1985), although it was subsequently called into question in the Murphy decision, which, while supporting the general principle, doubted whether a local authority could be liable in this way. Later, in the George Fischer decision it was found that: ‘In point of principle a plaintiff who carries out the best and most economical repair which can be devised to defective property but is left at the end with an asset for which purchasers in the market are not prepared to pay as much as for one which never had the defects has plainly lost both the money expended on the repair work and the residual difference in value.’

17.3.4 Date of assessment The usual rule when assessing damages is that the loss is assessed at the date of breach (see Miliangos v. George Frank (Textiles) Ltd (1976)). However, this is not a rule of universal application. In, for example, the East Ham decision defects were discovered two years after the final certificate, with the result that the cost of reinstatement was much greater because of inflation than it would have been if, as the builder contended

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Defective Construction Work he should have done, the architect had detected the defects during his inspections of the works. The court rejected this argument and allowed recovery of the inflated cost of reinstatement, as it was reasonable and must have been contemplated by the parties that some defects would escape detection during inspections. Later, in Dodd Properties (Kent) Ltd v. Canterbury City Council (1980), some 10 years had elapsed between the damage and the trial when the reinstatement had still not been carried out, because the wrongdoer had denied liability and the injured party was concerned not to spend large sums of money on his landlord’s property. The injured party was awarded the cost of reinstatement at prices current at the date of trial, on the basis that it was reasonable in these circumstances to defer reinstatement until the funds to do so were made available.

17.4 Betterment Where the cost of reinstatement is the appropriate measure of damage, the wrongdoer is not entitled to a reduction in the amount to reflect the replacement of old items with new ones. This approach was adopted in Hollebone v. Midhurst & Fernhurst Builders Ltd (1968), where the fact that the injured party was able to put off rewiring for at least 15 years was not a reason to discount the damages. Similarly, in Harbutt’s Plasticine Ltd v. Wayne Tank and Pump Co Ltd (1970) no discount was required when the injured party’s factory was burnt down and had to be rebuilt. In the latter case there was no option but to rebuild. Again, in Imperial College of Science and Technology v. Norman & Dawbarn (1986) the injured party had no choice but to replace the defective items, even though the defect was not discovered until nine years after completion, and replacement did not occur for another seven years. However, the items were required to have a 30-year life, and replacement was the only option. In all of these cases it appears to have been reasonable in all the circumstances to reinstate, and reasonable – because the injured party had no other option – to refuse to discount the award for betterment. The position may be different where the reinstatement involves providing something of a higher standard than originally specified. The correct approach was summarised in the Richard Roberts decision in the following terms: ‘If the only practical method of overcoming the consequences of the defendant’s breach of contract is to build to a higher standard than the contract had required, the plaintiff may recover the cost of building to that higher standard. If, however, a plaintiff, needing to carry out works because of a defendant’s breach of contract, chooses to build to a higher standard than is strictly neces-

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sary, the courts will, unless the new works are so different as to break the chain of causation, award him the cost of the works less a credit to the defendant in respect of betterment.’

17.5 Mitigation The injured party is always obliged to mitigate the loss suffered, which seems to mean acting reasonably. In this respect it was stated in Southampton Container Terminals Ltd v. Hansa Schiffahrts GmbH (The Maersk Colombo) (2001) that: ‘As I read the authorities, where reinstatement is the appropriate basis for the assessment of damages, it must be both reasonable to reinstate and the amount awarded must be objectively fair as between the claimants and the defendants.’

Mitigation involves making proper enquiries about repair options, and adopting the cheapest. In this respect it was said in The Board of Governors of the Hospitals for Sick Children v. McLaughlin & Harvey Plc (1990) that: ‘The plaintiff has, whether as part of the requirement that he act reasonably or otherwise, a duty to mitigate his loss. This may require him, if presented with two or more choices, to choose the one which will keep his losses to the minimum.’

However, he went on to add that this is not an invariable rule: ‘If he is incurring loss because he cannot use his property, his duty to mitigate may require him to repair it as quickly as possible, even if earlier repairs would cost more than later repairs would.’

Later, in the George Fischer case the court was unable to discern any greater detriment between two competing reinstatement schemes despite criticisms of the effectiveness of the cheaper scheme. As those criticisms were not well founded, damages were awarded based upon the cheaper scheme. The Fischer approach was followed in Iggleden v. Fairview New Homes (Shooters Hill) Ltd (2007), where the court awarded damages on the basis of the cheaper of two competing schemes because it would achieve the same result as the more expensive scheme. In The Board of Governors case the court awarded damages based on a scheme of reinstatement undertaken by the injured party on the advice of an expert and which had been implemented by the time of trial. Although the reasonableness of the scheme was disputed, recovery based upon it was allowed, as it had been undertaken upon expert

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Defective Construction Work advice. However, it has since been questioned whether this case can be regarded as authority for the proposition that the existence of expert advice automatically means that the wrongdoer is liable for the costs of such work, and that all other considerations are essentially rendered irrelevant. This occurred in McGlinn, where the court distinguished The Board of Governors decision on its facts but nevertheless followed The Board of Governors principle, with the qualification that, while reliance on expert advice is always highly significant, it is not on its own enough in every case to prove that the injured party acted reasonably, and that putting in issue the expert advice does not require proof of professional negligence on the part of the expert. In this respect the court, in McGlinn, followed the decision of the Court of Appeal in Skandia Property UK Ltd v. Thames Water Utilities Ltd (1999), where damages were reduced when a scheme of reinstatement prepared by an expert made assumptions (about the damage done to accessible and inspectable parts of the damaged works) that turned out to be unwarranted. The factual distinctions made between The Board of Governors case and McGlinn were that, in the former case, it was agreed that remedial work was necessary but the precise scheme was disputed, whereas in the latter the scheme was driven by factors that were not directly connected to the breaches of contract. It was also a feature of this case that damages were sought on the basis of the cost of demolition and rebuilding, when many of the defects were aesthetic and did not affect the structural soundness of the building. However, the most important distinction was the large number of claims against four separate defendants, and the fact that ultimately the allegations in respect of many of the defects failed.

17.6 Parasitic losses The range of parasitic (or ‘consequential’) losses includes loss of use, loss of profit or income, additional expenditure, and damage to contents or other property suffered by the injured party or third parties to whom the injured party is liable for loss suffered. In, for example, the Surrey Heath case damages were claimed for interest on capital, damage to other property, loss of revenue and increased staff costs. So far as these sorts of losses are caused by the breach and are foreseeable, they are recoverable from the wrongdoer. Loss of use of capital may be recoverable in some circumstances, and was permitted in Earl Terrace Ltd v. Nilsson Design Ltd and Charter Construction Plc (2004), but not in Bella Casa Ltd v. Vinestone Ltd (2006). In the latter case the injured party was nevertheless allowed to recover service charges and utility bills paid while the premises were not in use. In addition, sometimes a purchaser may engage third party advisers to investigate and recommend an appropriate solution when defects

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arise. Such expenditure is, as the decision in Maersk confirms, foreseeable and, as such, recoverable, provided the breach is the cause of the expenditure. Expenditure of this sort is recoverable even if it proves abortive, provided the investigations are an ‘appropriate response’ to the breach. It is important to distinguish, however, between the costs of this type of investigation and the expense of retaining an expert witness to give evidence in connection with litigation. The latter expenditure is recoverable as costs of the action (if the action succeeds and costs are awarded), and not as damages. It is commonplace for building contracts to provide that the builder will pay liquidated damages for delay to completion (which may be payable on a daily, weekly or monthly basis), in which case delay to completion caused by defects will be compensated by the stipulated sum multiplied by the relevant period. Unless the contract makes express provision to the contrary, the liquidated damages are usually the exclusive remedy for delay to completion. Liquidated damages should be a genuine pre-estimate of the loss that will be suffered in the event of delay, if not they will be characterised as a penalty and will not be enforceable. However, when this occurs there is substituted a right to general damages, i.e. a right to recover the actual losses suffered by reason of the delay so far as provable. This is the advantage of liquidated damages: they remove the need for proof. If the contract does not provide for liquidated damages, or if the relevant provision fails for any other reason, then the right to claim general damages once again applies. Once the work is complete, defects may result in the purchaser having to vacate the property while repairs are carried out. If so, the liquidated damages do not apply, as they usually relate only to delay to completion, not post-completion events. If the purchaser vacates, he will be entitled to the cost of alternative accommodation, and the cost of decanting and reoccupying the premises, as well as storage costs for furniture and other items. Profits that would otherwise have been earned are also recoverable. Sometimes purchasers may have to divert staff on to tasks related to the breach, in which case the cost of the relevant staff is in principle recoverable, although often difficult of proof. In Tate & Lyle Distribution Ltd v. Greater London Council (1982) it was found that: ‘I have no doubt that the expenditure of managerial time in remedying an actionable wrong done to a trading concern can properly form the subject matter of a head of special damage. In a case such as this it would be wholly unrealistic to assume that no such additional managerial time was in fact expended. I would also accept that it must be extremely difficult to quantify.’

Later, in Admiral Management Services Limited v. Para-Protect Europe Limited (2002), the court refused to allow the recovery of expenditure for employees engaged investigating torts committed by the defendant, on

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Defective Construction Work the basis that the salaries of the relevant staff would have been paid in any event. However, the Admiral approach was not followed in R+V Versicherung AG v. Risk Insurance and Reinsurance Solutions SA (2006), where the court, in relation to a claim based in the tort of conspiracy, concluded that: ‘. . . as a matter of principle, such head of loss (i.e. the cost of wasted staff time spent on the investigation and/or mitigation of the tort) is recoverable, notwithstanding that no additional expenditure “loss”, or loss of revenue or profit can be shown.’

The court also added that such expenditure is, however, recoverable only where there is sufficient proof that the additional expenditure was incurred as a result of the tort in question. Later, in Aerospace Publishing Ltd v. Thames Water Utilities Ltd (2007), the Court of Appeal did not consider that there was a real divide between these two cases, but if there was it preferred the approach in the R+V decision. In addition the court concluded that the fact and extent of staff diversion must be proven, it must cause disruption to business and, subject to proof to the contrary, the court may infer that but for the disruption the injured party would have generated revenue at least equal to the cost of employing the disrupted staff during the relevant period. Although the Aerospace decision was not cited in the judgement in Bridge UK.COM Ltd v. Abbey Pynford PLC (2007), the court nevertheless followed the same approach and awarded a proportion of the cost of employing a marketing director to reflect the time he had not been able to devote to marketing because of the breach. Loss of profit is an allowable head of loss, although in appropriate cases it is necessary to discount wasted expenditure, if to do otherwise would result in double recovery (see, for example, the approach taken in the Bridge decision). Interest is recoverable as damages in appropriate circumstances. It is also recoverable under section 35A of the Supreme Court Act 1981 and the Arbitration Act 1996, in which case the relevant tribunal may award interest at a commercial rate (see Tate & Lyle).

17.7 Distress and inconvenience It is a general principle of the common law that damages cannot generally be awarded for distress, anxiety or disappointment caused by a breach of contract. However, there is a limited exception where one of the important objectives of the contract is to provide enjoyment, security, comfort or sentimental benefits (as occurred in the ‘holiday’ cases such as Jarvis v. Swan Tours Ltd (1973) or, in the case of tortious claims, where the purpose of rendering the service is to secure relief from an

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existing state of anxiety (as occurred in Heywood v. Wellers (1976), where a solicitor negligently failed to protect his client from domestic violence). The exception was applied to surveyor’s negligence cases in Perry v. Sydney Phillips & Son (a firm) (1982), where the claimant had to live in a defective house for five years because he could not afford to repair it. Similarly, compensation for distress was awarded in Watts v. Morrow (1991), although the Court of Appeal stressed that the anxiety had to result directly from physical discomfort or inconvenience caused by the presence of defects, the need to repair them while in occupation, or the need to move to unsuitable temporary accommodation. There is no reason why damages for distress should not be awarded to occupiers of residential premises who suffer distress as a result of defective building work. In this respect an award of general damages for loss of use and enjoyment was made in connection with a claim under the Defective Premises Act 1972 (see Bayoumi). Damages for distress are not, however, recoverable by commercial occupiers.

17.8 Contribution The wrongdoer is liable to compensate the injured party for all of the foreseeable losses caused by the breach. In claims for breach of duty, if there are two or more joint wrongdoers (referred to as ‘tortfeasors’), then each is fully liable for all of the loss suffered. This means that the injured party can elect to pursue one only, or all, of the wrongdoers for compensation – even so, he is not entitled to make a double recovery. At one time there was no power to make adjustments between joint wrongdoers, but such a power was introduced by the Civil Liability (Contribution) Act 1978, which allows a person who is liable for a loss to recover a just and equitable contribution from any persons liable for the same damage. The contribution is obtained by making a contribution claim in current proceedings against another party, or by joining someone as a party to the action for the purpose of making a contribution claim, or by commencing separate contribution proceedings against the other wrongdoer. One curious effect of the Act has been a tendency on the part of consultants to demand that their liability to the injured party should be limited by reference to the contribution they should make to the overall loss under the Act. This has led to the advent of the ‘net contribution clause’, which seeks to limit the liability of the wrongdoer towards the injured party by reference to the just and equitable contribution. The justification that is usually offered for these provisions is that the wrongdoer should not be made to pay more than the loss he is liable for, but this misses the point that a wrongdoer is never ordered to pay more than the amount of loss he has caused. It’s just that sometimes someone else has caused exactly the same loss.

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Defective Construction Work The result of the use of net contribution clauses is that the injured party must then sue all of the wrongdoers and collect their respective share of the loss from them. This exposes the purchaser to the need to commence multi-party proceedings, and imposes on the purchaser the risk that a particular wrongdoer may become insolvent and unable to pay his share of the loss. This was not the purpose that Parliament had in mind when the Act was passed. On the contrary, the Act was intended to effect just contributions as between joint wrongdoers to the whole loss they have respectively caused, not to allow them to limit their liability for that loss. Insurers, in particular, appear keen to promote the use of net contribution clauses, for the obvious reason that they limit the indemnity that insurers may have to provide. As the right to obtain a contribution applies only to claims in tort, it is often important for wrongdoers to be able to establish the existence of a concurrent duty of care in tort so that they can then claim a contribution from other wrongdoers under this Act (see the University Court and Oxford University Press decisions).

17.9 Contributory negligence Sometimes the purchaser may have contributed to his own loss, as for instance where the purchaser has had a hand in the design or the work done, or in some way interferes in the work as it is done on site. At common law such contributory negligence operated as a complete defence to a claim in tort. This sometimes, if not always, led to injustice, especially where the injured party’s contribution to his own loss was minimal. Once again Parliament intervened, this time in the form of the Law Reform (Contributory Negligence) Act 1945, under which the court was empowered to reduce the damages due to an injured party proportionately by reference to the degree of his own culpability. The Act applies to contractual claims where there is a concurrent liability in tort. This is one reason why defendants are often keen to establish the existence of a concurrent duty in tort, so that they can then rely on the Act and thus obtain a reduction in damages to reflect the injured party’s contribution to his own loss. This Act is potentially applicable to defects wherever the purchaser has played an active role in the project or otherwise contributed to the loss by interfering in the work.

17.10 Enforcement of performance Sometimes compensation by way of an award of damages is not an adequate remedy. In these circumstances the court may grant an injunction to compel performance. In addition, the court has power to grant

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an order for specific performance of a contract by the reluctant party. These remedies may be granted in addition to compensation, or as an alternative. However, these remedies are rarely, if ever, granted in relation to defects where damages usually are an adequate remedy, and where the court’s inability to effectively supervise an order for specific performance of building work is likely to render the order useless.

Chapter 18

Termination

In some circumstances defects may entitle purchasers to terminate the building contract or professional appointment. This may occur if the builder or consultant is in breach of a condition, or if they repudiate their contract, or if an express term permits termination.

18.1 Breach of condition At common law, breach of a condition normally permits the innocent party to treat himself as discharged from further performance and to sue for compensation (see Chapter 3, section 3.3). However, it is rare that the terms of building contracts or professional appointments are treated as conditions, and is therefore unusual to find such contracts terminated for breach of condition. Under section 5A of the Supply of Goods and Services Act 1982 breaches of condition are to be treated as breach of warranty where the breach is so slight that it would be unreasonable for the purchaser to terminate the contract. However, this provision applies only in nonconsumer cases, and may be disapplied if the contract expressly or impliedly provides to the contrary. In all cases the burden is on the wrongdoer to show that the breach is slight.

18.2 Repudiation Just as contracts are formed by the process of offer and acceptance, so they may be discharged by it. The process involves one party (the wrongdoer) evincing an intention no longer to be bound by the contract. In effect this is an offer to terminate, and it may arise expressly, e.g. where the wrongdoer states that he will no longer perform his obligations, or by conduct, e.g. by abandoning the works. However communicated, such an intention is commonly referred to as ‘repudiation’. Once the contract is repudiated, the other party to it (the innocent party) may elect either to accept the repudiation (thus treating himself as discharged from further performance and entitled to damages) and effectively terminate the contract, or affirm the contract, in which case 180

Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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it carries on – but the innocent party may still sue for compensation. If the innocent party elects to terminate the contract this does not affect the antecedent rights of the parties under the contract. The acceptance of the repudiatory conduct must be communicated either expressly or by conduct, and without undue delay (see Vitol SA v. Norelf Ltd (The Santa Clara) (1996)). Unless the innocent party expressly reserves his position, any further performance by the innocent party is likely to be treated as an affirmation of the contract. Allowing the wrongdoer to go on with the contract is likely to have the same effect. Where defects occur, it may be difficult to characterise the conduct of the person responsible as repudiatory. Defects can occur despite the best efforts to perform properly, and the fact that some workmen are tardy or sloppy does not mean that the builder is not doing his best to get proper standards of work out of them. Indeed, in Tomlinson v. Wilson (2007) builders were barred from site by the purchaser because work was defective, but this was found not to be justified, leaving the purchaser as the party who had breached the contract and therefore liable to compensate the builder. The position may be different if there is persistent bad work, but even then purchasers should exercise great caution before treating minor defects as a repudiatory breach of contract. In this respect it was recognised by the Court of Appeal in Rice (T/A The Garden Guardian) v. Great Yarmouth Borough Council (2000) that the cumulative effect of breaches may be sufficiently serious to justify bringing a contract to a premature end, but that the test is severe and involves a consideration of whether the purchaser is deprived of substantially the whole benefit of the contract. Rice concerned a term contract for maintenance work, and the court did not regard the particular breaches, when considered over a 12-month period, to be repudiatory. In the context of a building contract the court is likely to view the seriousness of breaches by comparing them with the overall work requirement. It was also recognised in Rice that the parties may agree that a particular term is so important that any breach will justify termination, or the particular breach may be so important that it justifies termination.

18.3 Express termination provisions Building contracts often contain an express right to terminate in the event of breach of contract. This is certainly true of the model conditions published for building and engineering work. Such a provision usually offers purchasers the opportunity to determine the contract in the event that defects occur and are left unremedied. Contractual determination provisions tend to define the circumstances when the contract may be terminated, and usually contain a procedure

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Defective Construction Work to be followed. The termination provision may indicate that ‘all’ breaches justify termination (although in Rice the court found this to mean only those breaches that were in nature repudiatory), or it may identify only a limited category of breaches as justifying termination. Under the JCT SBC conditions it is expressly provided that purchasers may terminate the contract if before practical completion their builder refuses or neglects to comply with an instruction to remove nonconforming work or materials ‘and by such refusal or neglect the Works are materially affected’. Quite what a material effect may be is something yet to be decided upon by the courts, but it is clearly an issue of fact in each case, although it appears to rule out minor defects. Under the JCT SBC conditions the architect must give notice to the builder specifying any defaults (which includes defects), and if they persist after 14 days from the notice then the purchaser has a further 10 days in which to serve a notice terminating the builder’s employment under the contract. Under the MF/1 conditions there is also a provision for terminating the contract in the event of failure to rectify non-conforming work that requires the giving of notice; and there is an express termination provision in the NEC3 conditions.

Chapter 19

Limitation

The right to bring an action for compensation is time limited. The precise period of time may be prescribed by law, or it may be stipulated by way of a contractual term. Under the law there are different starting points for the right to bring a claim (or ‘the accrual of a cause of action’ as lawyers call it) and for the expiry of that right, depending on whether the action is in contract or in tort.

19.1 Contract The Limitation Act 1980 sets out the limitation periods for claims based in contract. For simple contracts the limitation period expires 6 years after the accrual of the cause of action, whereas under specialties it expires after 12 years (see Chapter 3, section 3.2). It is because of this much longer limitation period that many building contracts and professional appointments are entered into as ‘deeds’.This is for the obvious reason that purchasers want to protect themselves for as long as possible in relation to latent defects, which, by their very nature, may not manifest themselves until long after completion. The cause of action accrues when the breach of contract occurs. This does not generally require purchasers intending to sue for defective work to identify the precise date when bad work occurred, because defects are a breach of the obligation to complete the work, with the effect that the contract is breached at the date of completion (or substantial or practical completion, as the case may be) if it is subject to defects. However, the position is different in relation to independent designers (and may under some model conditions be different in relation to designer/builders in relation to their design obligations). In the case of independent professional designers they are in breach of their obligation to exercise reasonable care and skill when their design is delivered for implementation. This event occurs long before completion of the work. However, as designers are subject to a continuing duty to review their design, the cause of action for breach of this obligation may occur much later than the date of delivery for implementation. Nevertheless, it may still accrue before the date of completion if, as the New Islington decision shows, after construction of the defective item Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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Defective Construction Work nothing occurs that renders it necessary or prudent to review the design. This means that in actions against designers the date of accrual of the cause of action for failure to review may well have to be identified if the limitation period for the breach that occurs when the defective design was delivered for implementation has expired. The position appears to be the same for designer/builders working under the JCT DB conditions, who have the ‘like liability’ in relation to design as do independently employed professional designers. This means that if defects in design, as opposed to work and materials, are discovered after practical completion, it is unwise to rely on the date of completion as the date of accrual of the cause of action for careless review of the design; it may be much earlier (see also Chapter 15, section 15.6).

19.2 Tort For the tort of negligence the limitation periods are found in the 1980 Act and the Latent Damage Act 1986, and are divided into primary and secondary periods. These periods run for different lengths of time and are triggered by different events.

19.2.1 The primary limitation period The primary period, which arises under the 1980 Act, expires after either

• 3 years from accrual if the claim relates to personal injuries and losses •

parasitic upon them, or 6 years from accrual for all other negligence claims.

For claims in the tort of negligence the cause of action accrues when damage occurs so that the primary limitation period starts to run. However, it is not entirely straightforward to identify the date when damage occurs, because it is necessary to distinguish between bad work and the harm it causes, and it is also necessary to differentiate between physical and economic harm. This means that the date of damage cannot necessarily always be traced to the date when the defective work was done, or even the date of completion (as occurs in contractual claims). Potentially it can be an earlier or a later date. Unfortunately, some of the cases that address the date of damage issue pre-date the Murphy decision, and therefore pre-date the current state of the law concerning liability for pure economic loss (see Chapter 6, section 6.1.2), which leads to a degree of uncertainty.

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19.2.1.1 Physical damage Putting the difficulty created by the chronology of the decisions to one side, the position – where physical damage to property is required – is very much to distinguish between the defect and the harm it causes. This was the outcome in Pirelli General Cable Works Ltd v. Oscar Faber & Partners (1983), where the House of Lords decided that damage occurred on the date when cracking appeared in a chimney, but that there might ‘perhaps’ be an exceptional category ‘where perhaps the defect is so gross that the building is doomed from the start, and where the owner’s cause of action will accrue as soon as it is built, but it seems unlikely that such a defect would not be discovered within the limitation period.’ Later, in Ketteman v. Hansel Properties Ltd and others (1984), the Court of Appeal (following Pirelli) also decided that the date when cracking appeared in some houses was the date of damage, and sought to limit the impact of the ‘doomed from the start’ exception. In this case foundations were carelessly designed so that they were too shallow, had the wrong infilling, and were too near to trees. This caused the architects to argue that the houses were doomed from the start, so that the date for completion should be treated as the date of damage (which put the claim outside the limitation period), rather than the date when cracking appeared (which put the claims within the limitation period). The Court of Appeal decided that the facts of Ketteman were not exceptional. Later, in 1987, the House of Lords when hearing the final appeal in the same case appears to have done away with this exception altogether. In the meantime, in London Congregational Union Incorporated v. Harriss & Harriss (1986), the court used the date when the defect caused harm to the structure as the date of damage. In that case architects failed to notice that builders had not provided a damp-proof course. After completion, flooding occurred owing to defectively designed drains, which caused additional water damage to the structure owing to the absence of the damp-proof course. The claim was not issued until 8 years after completion, so the architects argued that the claim was time-barred on the basis that time ran, at the latest, from completion because the building was then in its damaged state. This argument was rejected by the Court of Appeal, which concluded that the defects did not constitute actionable damage until flooding occurred, leading to damage to the structure. Similarly, in the Nitrigen case it was only when the explosion happened that damage occurred. In that case the court said that it is necessary to distinguish between defects and the damage they cause. This does not mean, however, that damage can occur only long after completion, as the New Islington decision shows. In that case the court found

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Defective Construction Work that the damage had occurred as soon as the building was complete, because it was immediately apparent that its noise insulation was ineffective, as the occupiers were suffering from and complaining about noise from adjoining units. In this case the court said that to complete the cause of action it is ‘the building that suffers from the defect.’ In the Pirelli, Ketteman and London cases the buildings did not suffer until some time after completion, and it was only when they did suffer that the cause of action accrued. In New Islington the building was suffering immediately upon completion. 19.2.1.2 Economic damage The opportunity to consider the date of damage in economic loss claims arose in Invercargill City Council v. Hamlin (1996), where the Privy Council ruled on an appeal from New Zealand. There were two specific features of New Zealand common law that are different from English common law as it has developed since Murphy. First, New Zealand law allows claims against local authorities for negligent inspection of foundations; and, second, it treats time as starting to run from the date of discoverability of damage, not the date of damage itself. Nevertheless, when seeking to establish when the loss occurs the Privy Council observed that in claims for ‘loss to his pocket’ the loss occurs ‘when the market value . . . is depreciated by reason of the [defect] . . .’ The effect of this approach to economic loss claims was that the loss occurred when it was reasonable to ‘call in an expert’. This marked the point at which the defect would become obvious to a potential buyer and therefore result in depreciation, which is economic loss. The effect of this approach is that the loss and the discovery of the loss coincide. Unfortunately, as the decision in Tesco v. Costain highlights, physical damage to the property under construction (or as constructed) is not actionable damage under the Donoghue principle (see Chapter 6, section 6.1.2). Instead, the actionable damage must arise as economic harm under the Hedley Byrne principle in order to be recoverable in tort. This then begs the question: Is the date of physical damage relevant in economic loss claims? The judge in Tesco v. Costain goes some way to answering this by finding that the reasoning underlying Pirelli ‘has been recognised as being flawed.’ The result was that the court in Tesco v. Costain followed a line of authorities, culminating in Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd (1997), which indicate that it is necessary to determine the moment when the economic loss occurs. In the Tesco v. Costain case an independent professional designer carelessly reported that a building contained adequate fire inhibition features. In fact it did not. The court decided that the building was therefore worth less at completion than it would have been had it contained appropriate fire inhibition features, and that the claimant therefore suffered

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economic loss at completion. However, the court also found that if, but for the careless report, the claimant would have incurred cost to supply the necessary fire inhibition features then that point in time – if earlier than completion – might have been the point of economic harm. 19.2.1.3 Reconciliation of the cases The Tesco v. Costain decision clearly calls into question the applicability of the Pirelli, Ketteman and London decisions. What is clear, however, is that the date of damage may precede completion, with the consequent possibility that time may already by then be running out for the purposes of a claim in tort involving pure economic loss. However, in the subsequent decision of the Court of Appeal in Abbott v. Will Gannon & Smith Ltd (2005) the position was further reviewed in a case where the facts were indistinguishable from Pirelli. In Abbott the court concluded that it was bound by Pirelli and Ketteman, as the facts were indistinguishable. Abbott was considered in Oxford Architects Partnership v. Cheltenham Ladies College (2006), where defects had become apparent before practical completion and were dealt with by instructions given by the architects. Later, a claim was made against the architects in relation to these defects, and the court followed Pirelli and decided that the date of damage was the date when the physical damage occurred. However, the court also found, in the alternative, that if the cause of action accrued when the college suffered economic loss then this occurred, at latest, when the instructions were given to remedy the defects. It is not easy to reconcile these cases, but it is difficult to resist the conclusion that it is when physical harm manifests itself such that, if noticed, it would lead a reasonable purchaser to do something about it that damage occurs. The cause of action is then complete, and time is running against the purchaser for the purposes of commencing proceedings in tort.

19.2.2 The secondary limitation period The date of damage rule may cause injustice if the damage is not discoverable until after the expiry of the limitation period – as when a worker does not manifest the symptoms of inhaling asbestos fibres until 15 to 20 years after inhalation. The 1980 Act made provision for this problem by the creation of a secondary limitation period (see below) for personal injuries claims. Regrettably a similar problem may arise from, say, design defects in a structure, which may not manifest themselves until long after completion. This occurred in Pirelli, where damage to a chimney due to the specification of inappropriate materials was

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• the action is based on fraud by the defendant; or • any fact relevant to the cause of action has been concealed by the defendant; or

• if the action is for relief from the consequences of a mistake.

19.3 Contractual limitation provisions The statutory limitation period under the Limitation Acts may be shortened or extended by agreement. It has already been noted that the JCT and other model conditions sometimes make provision for the final

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certificate to operate as ‘conclusive evidence’ that a specified class of work conforms with the contract (see Chapter 13, section 13.5). Although these provisions do not bar the commencement of proceedings, they render them pointless unless it is possible to have the provision declared void as a result of the Unfair Contract Terms Act 1977 or the Unfair Terms in Consumer Contracts Regulations 1999. Conclusive evidence provisions therefore operate as a form of exclusion or limitation provision, and they effectively shorten the limitation period for the affected class of work. Sometimes, however, contracts will stipulate the duration of the limitation period. This is something that the RIBA conditions do, and this led to a consideration of the implications of the relevant provision in the RIBA CE/95 conditions in the Oxford Architects decision, where it was concluded that the relevant clause could not be interpreted as allowing proceedings up to six years from practical completion of the works in question if the limitation period under the Acts had expired earlier. In this case the architects had argued that time had started to run before practical completion, and when the court agreed that it had, the claimant then argued that the period did not expire until six years after the date of practical completion in order to avoid the action being barred. Although the wording of the CE/95 conditions is slightly different from that of the RIBA CA-S-07-A conditions, it is doubtful that there is any difference of substance.

19.4 Limitation and contribution proceedings Contribution proceedings under the Civil Liability Contribution Act 1978 are barred upon the expiry of two years from the date on which the right to contribution accrued. The right to a contribution accrues on

• the date of judgment or arbitral award in civil/arbitration proceed•

ings against the person seeking the contribution where the contribution is sought in respect of the amount so adjudged or awarded, or on the date of the agreement where a contribution is sought in respect of compensation that the person seeking the contribution has paid or agreed to pay.

19.5 Defective Premises Act Under the Defective Premises Act 1972 the limitation period expires six years after the completion of the dwelling. If, however, a person liable under this Act does work to rectify work already done, then the cause of action in relation to that further work accrues at the time when the further work is finished.

Chapter 20

Dispute Resolution

When defects arise, the person responsible may decline to accept liability or to make adequate recompense. When this occurs a dispute arises. In construction cases disputes can be resolved by litigation, arbitration and/or adjudication, although sometimes it may be possible and desirable to refer the dispute for determination by an expert. The availability of these different forms of legal proceedings depends on the terms of contract, if any, and/or on the category of work. In addition, in some circumstances the parties may be obliged to embark on some form of alternative dispute resolution (ADR) either as a precondition of litigation/arbitration or in addition.

20.1 Litigation Litigation is the common term for legal proceedings before a court of law. Litigation is always available as a means of dispute resolution unless the parties to the dispute have agreed in writing to refer their disputes to arbitration, in which case the court will on the application of the aggrieved party stay the court proceedings to force the reluctant party to comply with the arbitration agreement. In litigation proceedings the State provides a judge and sets the rules (currently the Civil Procedure Rules) under which the proceedings are to be conducted. Litigation in respect of construction claims is usually commenced in the Technology and Construction Court, which has a number of specialist judges who dedicate themselves to construction and similar disputes. For most purposes litigation is commenced by serving a claim form on the defendant. The issues to be tried are set out in pleadings, which are documents that the parties serve on one another. Pleadings usually consist of particulars of claim, a defence and counterclaim (if there is to be a counterclaim), and a reply and defence to counterclaim. Sometimes a further pleading called a rejoinder may be permitted. The pleadings set the agenda for trial, and dictate the scope of evidence that may be adduced at trial. Once the pleadings are complete the parties are then required to give disclosure of documents to each other. This involves the parties serving a list of relevant documents upon one 190

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another. The parties are obliged to disclose all relevant documents including those that prejudice their own case or assist the other party. Each party may then inspect the other party’s documents and take copies. Once the disclosure and inspection stages are complete, statements of witnesses of fact are exchanged. In addition, the court may – and often does in construction cases – give leave to the parties to adduce expert evidence. This is opinion evidence on technical or specialist issues. As such, the evidence of experts is an exception to the general rule that the courts will not admit opinion evidence. Expert opinion evidence is given to assist the court, and experts, although appointed and paid by the respective parties, are obliged to be open and honest with the court, even if in doing so their evidence prejudices their own client. This special duty of experts is set out in a case called the National Insurance Compania Naviera SA v. Prudential Insurance Co Ltd (The Ikarian Reefer) (1993). If leave is given to call experts at the trial to give evidence, then it is usual for them to be required to meet in advance and to identify areas of agreement and disagreement so that they can then prepare a report on the areas of disagreement only. The reports of the experts are then exchanged between the parties. The court will set a timetable at the beginning of the proceedings for all of these steps, and will seek to actively manage the proceedings through until trial. The object of this cards-on-the-table approach to litigation is to ensure that each party has a full opportunity to know in advance and therefore be able to answer the case it will have to deal with at trial, or to compromise the dispute at some earlier stage, if that appears appropriate. At the trial witness statements usually stand as evidence in chief (which then avoids the need for witnesses to be examined in chief, and thus saves time at the trial) so that it is usual, after opening statements have been made, to move immediately to the cross-examination of the factual witnesses and then their re-examination by the party calling them to clarify points arising during cross-examination. The same process is repeated for the experts. Once the evidence is complete there will be closing statements from the advocates about the case the judge has heard. In construction cases the judge may reserve judgment, which simply means that he defers giving judgment for a short period while he formulates his decision and has it written up. The written judgment will explain the basis of the judge’s decision. If a monetary sum is awarded (which is the usual relief claimed in construction cases), the court will usually allow the loser time to pay, although this will usually only be 14 days. If the loser will not pay voluntarily, then the winner may commence enforcement proceedings, which may include arranging for bailiffs to seize the loser’s goods, freezing his bank accounts, diverting money owed by his debtors and securing the judgment sum against fixed assets

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Defective Construction Work such as land, or even applying for a bankruptcy order (in the case of an individual) or winding-up order (in the case of a company). In litigation the court has power to award costs. In this respect the general rule is that ‘costs follow the event’, which roughly means that the winner is awarded his costs depending on what constitutes the event. The costs awarded include fees paid to solicitors and barristers, as well as the fees of expert witnesses and other expenditure. If the parties cannot agree on the amount of costs, then the court will determine the amount in accordance with a set of rules that broadly allow reasonable costs so far as they are reasonably incurred. If a party to litigation disagrees with the whole or part of the judgment of the court, then it may appeal to a higher court. In the case of the Technology and Construction Court this means an appeal to the Court of Appeal (with the permission of either court) and from there to the House of Lords (but only with the permission of the House, which is usually granted only for questions of general public importance). Most actions will come to trial within roughly one year of the commencement of the action, although the precise timescale depends on the complexity of the case and the availability of court resources. It is usually necessary, however, to follow the requirements of the Pre-Action Protocol for Construction and Engineering Disputes before litigation begins. The protocol is published by the court in accordance with the CPR, and requires the protagonists to write to one another explaining their respective positions, to meet without prejudice to discuss the dispute, to exchange relevant documents, and to try and settle the whole or parts of the dispute without the need for court action. The object is to encourage pre-action settlement wherever possible, and where it is not possible to narrow the issues in dispute as far as possible. It takes about two months to follow the protocol time table, but it may take longer. If litigation is commenced without first adopting the protocol procedures, the court may stay the proceedings or apply costs sanctions in appropriate cases. The protocol can be ignored if it is intended to commence an application under the CPR for certain types of relief including summary judgment. Applications for summary judgment do not involve the calling of witnesses. In these applications the applicant will contend that ‘the defendant has no real prospect of successfully defending the claim.’ Applications for summary judgment generally succeed only if there is no real dispute about the facts.

20.2 Arbitration Arbitration proceedings are conducted in England and Wales under the auspices of the Arbitration Act 1996. Disputes may be referred to arbitration only if the parties agree in writing that this should happen. In this

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respect it was once common to find an arbitration clause in building and engineering contacts under which the parties agreed to refer all disputes to arbitration. It is now increasingly less common for model conditions to stipulate only arbitration. For example, the JCT conditions tend to give the parties the option of either litigation or arbitration, and leave it to the parties to agree the option that best suits their needs. If a party to an arbitration agreement commences proceedings in court in contravention of an arbitration clause, then the court is obliged to stay the court proceedings as a means of forcing the reluctant party to use the agreed dispute resolution procedure. The simplest way to describe arbitration is to say that, at least in relation to construction disputes, it is usually exactly like litigation before the courts in that it tends to ape the procedures adopted in litigation. The principal difference is that the parties choose and pay their own judge (called an arbitrator), who is obliged to be impartial and to act fairly). Arbitration has the advantage that it is essentially a private process, and it enables the parties to choose a suitable person to act as arbitrator (such as an engineer or architect, if that is considered desirable). For all intents and purposes arbitration is really a privatised form of justice. Arbitration awards can be enforced by being registered with the courts for this purpose, and once registered all of the enforcement processes available to litigants become available. There is a much more limited appeal process available in arbitration, which allows appeals to the court on points of law. The courts nevertheless retain a supervisory role in relation to arbitration, and may remove arbitrators from office for bias or unfairness.

20.3 Adjudication The Housing Grants, Construction and Regeneration Act 1996 makes provision for all disputes arising under construction contracts in relation to construction operations to be referred to adjudication (see Chapter 3, section 3.4.3). The HGCRA requires, among other things, that every construction contract shall:

• enable a party to refer a dispute to adjudication at any time, • enable the appointment of, and reference of the dispute to, an adju•

dicator within 7 days, require the adjudicator to reach his decision within 28 days of referral.

The decision of an adjudicator binds the parties until a court, an arbitrator (where applicable) or the parties decide otherwise. Once an

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20.4 Expert determination Disputes may be referred to an expert for resolution if the contract between the parties so provides, or if they agree to this method of dispute resolution once the dispute has arisen. Where this occurs, the contract (or later agreement) will set the procedure for the process. The decisions of experts, where they have been asked to determine a dispute, are binding on the parties unless the expert answers the wrong question. But merely answering the right question in the wrong way does not render an expert’s decision a nullity (see Jones v. Sherwood Computer Services Ltd (1992) and Nikko Hotels (UK) Ltd v. MEPC Plc (1991)). This particular dispute resolution method is very common in valuation disputes (especially the valuation of business assets), but is also sometimes used for disputes in the construction industry.

20.5 Alternative dispute resolution Sometimes the parties to a dispute will endeavour to resolve it without recourse to formal proceedings. They may volunteer to do so at the time the dispute arises, or they may have agreed to do so in their contract. In the latter instance the contact may prescribe the ADR process to be

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adopted. Sometimes it may involve dispute escalation, where the dispute goes through various levels of the management of the respective disputants until, if they are unable to resolve it internally, a third party is introduced to facilitate resolution of the dispute. Sometimes the dispute may go immediately to third party facilitation. Simply holding a ‘without prejudice’ meeting to discuss the dispute is a form of dispute resolution. So are conciliation, mediation and early neutral evaluation, to name but a few of the ADR techniques available. Mediation seems to be the most popular form of ADR. It involves the parties engaging a third party to facilitate discussions about the dispute and how it may be compromised. Getting the parties to think critically about their position and about possible outcomes seems to be a good way of encouraging settlement. If the parties have agreed to an ADR procedure, the courts have discretion to stay litigation commenced before the procedure has been followed, and they have indicated a willingness to do so (see Cable & Wireless Plc v. IBM United Kingdom Ltd (2002)). Even if contracts make no provision at all for ADR, it has become the usual practice of the TCC to stay proceedings for a short while to enable the parties to embark on an ADR process.

Bibliography

Black’s Law Dictionary, 7th edition. Bryan A Garner. Thomson West, St Paul, MN, 1999. Chitty on Contracts, 29th edition. Hugh Beale. Sweet & Maxwell, London, 2004. Building Defects. Adam Constable and Calum Lamont. RICS Books, Coventry, 2006. The Law of Restitution, 7th edition. Gareth Jones. Sweet & Maxwell, London, 2006. Hudson’s Building and Engineering Contracts, 11th edition. I N Duncan Wallace. Sweet & Maxwell, London, 1995. Keating on Construction Contracts, 8th edition. Stephen Furst and Vivian Ramsey. Sweet & Maxwell, London, 2006. Penguin Dictionary of Building, 4th edition. James MacClean and John Scott. Penguin, Harmondsworth, 1993.

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Table of Cases

The following abbreviations are used: AC All ER All ER (Comm) App Cas BLR Ch. Div. CILL CLD Con LR Const LJ EGCS EGLR EWCA Civ EWHC EWHC (Ch) EWHC (Comm) EWHC (TCC) Ex HKCFA KB Lloyds Rep QB ScotCS TCLR UKHL WL WLR WR

Law Reports, Appeal Cases All England Law Reports All England Law Reports, Commercial cases Law Reports, Appeal Cases Building Law Reports Law Reports, Chancery Division Construction Industry Law Letter Construction Law Digest Construction Law Reports Construction Law Journal Estates Gazette Case Summaries Estates Gazette Law Reports England and Wales Court of Appeal (Civil Division) England and Wales High Court England and Wales High Court, Chancery Division England and Wales High Court, Commercial Court England and Wales High Court, Technology and Construction Court Law Reports, Exchequer Division Hong Kong Court of Final Appeal Law Reports, King’s Bench Division Lloyd’s Law Reports Law Reports, Queen’s Bench Division Scottish Court of Session Trade and Competition Law Reports United Kingdom House of Lords Westlaw Weekly Law Reports Weekly Reports

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Table of Cases A C Controls Ltd v. British Broadcasting Corporation [2002] EWHC 3132; 89 Con LR 52 ..................................................................... 34 Abbott v. Will Gannon & Smith Ltd [2005] EWCA Civ 198 ............... 187 Acsim (Southern) Ltd v. Danish Contracting and Development Co Ltd (1989) 47 BLR 59 ....................................................................... 103 Admiral Management Services Limited v. Para-Protect Europe Limited [2002] EWHC 233 (Ch) ..................................... 175, 176 Aerospace Publishing Ltd v. Thames Water Utilities Ltd [2007] EWCA Civ 3 ................................................................................ 176 Albezero (The), (Owners of the Cargo Laden on Board the Albacruz v. Owners of the Albezero), [1977] AC 774 ........................ 57 Alexander v. Mercouris [1979] 1 WLR 1270 ............................................ 53 Alfred McAlpine Construction Ltd v. Panatown Ltd [2000] UKHL 43; [2000] LR 331 ......................................................................... 57 Andrews Bros (Bournemouth) Limited v. Singer & Company Limited [1933] All ER Rep 479 .............................................................. 20 Andrews v. Schooling [1991] 3 All ER 723 .............................................. 54 Anglian Building Products Ltd v. W&C French (Construction) Ltd (1972) 16 BLR 1 ............................................................................... 166 Applegate v. Moss [1971] 1 QB 406 ......................................................... 169 Arthur Sanders Ltd, Re (1981) 17 BLR 125 ............................................ 126 Atkins (GW) v. Scott (1991) 7 Const LJ 215 ........................................... 169 Attorney-General v. Guardian Newspapers (No 2) [1990] 1 AC 109 ...................................................................................................... 9 Aurum Investments Limited v. Avonforce Limited (2000) 78 Con LR 115 ................................................................................................ 82 Avraamides v. Colwill [2006] EWCA Civ 1533; [2007] BLR 76 ............ 61 Ballast Wiltshier Plc v. Thomas Barnes & Sons Ltd (1998) WL1751100 .............................................................................................. 125 Barclays Bank Plc v. Fairclough Building Limited (1995) 76 BLR 1 ............................................................................................... 48, 49 Barrett Steel Buildings Ltd v. Amec Construction Ltd (1997) 15-CLD-10-07 .......................................................................................... 165 Batty v. Metropolitan Realisations Ltd (1978) 7 BLR 1 .......................... 54 Bawejem Ltd v. M.C. Fabrications Ltd [1999] 1 All ER (Comm) 377 ............................................................................................................... 59 Baxall Securities Ltd v. Sheard Walshaw Partnership [2002] BLR 100 ............................................................................................2, 3, 4, 5 Bayoumi v. Protim Services Ltd [1996] EGCS 187 ......................... 54, 177 Bella Casa Ltd v. Vinestone Ltd [2006] BLR 72 ..................................... 174 Bellefield Computer Services v. E Turner & Sons Ltd [2000] BLR 97 ................................................................................................ 41, 144 Big Island Contracting (Hong Kong) Ltd v. Skink Ltd (1990) 52 BLR 110 ....................................................................................... 111, 112

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Bim Kemi AB v. Blackburn Chemicals Ltd [2001] All ER (D) 13 ....... 166 Birse Construction Ltd v. Eastern Telegraph Company Ltd [2004] EWHC 2512 (TCC) ..................................................................... 171 BL Holdings Ltd v. Robert J Wood & Partners (1978) 10 BLR 48 and (1979) 12 BLR 1 CA ....................................................... 69 Blyth & Blyth v. Carillion Construction Ltd [2001] ScotCS 221 ........... 60 Board of Governors of the Hospitals for Sick Children (The) v. McLaughlin & Harvey Plc (1987) 19 Con LR 25 ....................... 173, 174 Bolam v. Friern Hospital Management Committee [1957] 1 WLR 582 ...............................................................................135, 136, 137 Bolitho v. City and Hackney Health Authority [1988] AC 232 .......... 137 Bolton v. Mahadeva [1972] 1 WLR 1009 ................................................ 110 Bouygues (UK) Ltd v. Dahl-Jensen (UK) Ltd [2000] BLR 49 .............. 194 Brickfield Properties Ltd v. Newton [1971] 1 WLR 862 ................ 92, 152 Bridge UK.COM Ltd v. Abbey Pynford PLC [2007] EWHC 728 (TCC) ................................................................................... 176 British Steel Corporation v. Cleveland Bridge & Engineering Co Ltd (1981) 24 BLR 94 ................................................................... 33, 34 British Sugar Plc v. NEI Power Projects Ltd (1997) 87 BLR 42 ................................................................................................. 113 British Western House Electric & Manufacturing Co Ltd v. Underground Electric Railways Co of London Ltd [1912] AC 673 .............................................................................................. 167, 170 Britvic Soft Drinks Ltd and Bass Brewers Ltd v. Messer UK Ltd and Terra Nitrogen UK Ltd [2002] 1 Lloyds Rep 20 .................... 84, 85 Brunswick Construction Ltee v. Nowlan (1974) 21 BLR 27 .................. 78 Bryen & Langley Ltd v. Boston [2000] EWCA Civ 973 ......................... 21 Cable & Wireless Plc v. IBM United Kingdom Ltd [2002] EWHC 2059 (Comm) ............................................................................. 195 Cameron (A) Ltd v. John Mowlem Plc (1990) 52 BLR 24 .................... 103 Caparo Industries Plc v. Dickman [1990] 2 AC 605 ......................... 45, 46 Carr v. ICR [1944] 2 All ER 163 ............................................................... 132 Catlin Estates Ltd v. Carter Jonas [2005] EWHC 2315 (TCC) ......... 53, 57 Chesham Properties Ltd v. Bucknall Austin Project Management Services Ltd and others (1996) 82 BLR 92 ......... 157, 162 City Axis Ltd v. Daniel P Jackson (1998) 64 Con LR 84 .............. 119, 122 Clay v. A.J. Crump & Sons Ltd (1963) 4 BLR 80 ..................143, 146, 163 Clayton v. Woodman & Son (Builders) Ltd (1962) 4 BLR 65 ............. 148 Close Invoice Finance Limited v. Belmont Blanching & Dyeing Co Ltd [2003] All ER (D) 304 ............................................................... 110 Compania Financiera Soleada SA v. Hamoor Tanker Corp Inc (The Borag) [1981] 1 All ER 856 .......................................................... 167 Consarc Design Ltd v. Hutch Investments Ltd (2002) 83 Con LR36 ............................................................................................ 150

200

Table of Cases Co-operative Insurance Society Ltd v. Henry Boot Scotland Ltd [2002] EWHC 1270 (TCC) ....................................................................... 73 Corfield v. Grant (1992) 59 BLR 102 ....................................................... 148 Crestar Ltd v. Carr (1987) 37 BLR 117 .................................................... 131 Crown Estate Commissioners v. John Mowlem & Co Ltd (1994) 70 BLR 1 ............................................................................... 129, 130 Crown House Engineering Limited v. Amec Projects Limited (1989) 48 BLR 32 ........................................................................ 30 Currie v. ICR [1921] 2 KB 331 .................................................................. 132 Customs & Excise v. Barclay’s Bank [2006] UKHL 26; [2007] AC 81 ..................................................................................37, 44, 46 Cutter v. Powell (1795) 6 T.R. 320 ........................................................... 109 D & F Estates Ltd v. The Church Commissioners (1988) 41 BLR 1 ...................................................................................37, 38, 39, 54 Dakin (H) & Co Ltd v. Lee [1916] 1 KB 566 .......................................... 110 Darlington Borough Council v. Wiltshire Northern Ltd (1994) 69 BLR 1 ................................................................................................... 169 Dawnays Ltd v. FG Minter Ltd and Trollope & Colls Ltd (1971) 1 BLR 16 ................................................................................................... 102 Department of Environment v. Thomas Bates & Sons Limited (1990) 50 BLR 61 ....................................................................................... 38 Department of National Heritage v. Steensen Varming Mulcahy (1998) 60 Con LR 33 ............................................................................... 141 Dobson v. Hastings [1992] Ch 39 ................................................................ 9 Dodd Properties (Kent) Ltd v. Canterbury City Council [1980] 1 WLR 433 ............................................................................................... 172 Donoghue v. Stevenson [1932] AC 562 ............. 36, 37, 38, 39, 40, 42, 186 Douglas (RM) Construction Ltd v. Bass Leisure Ltd (1990) 53 BLR 119 ............................................................................................... 103 Drake v. Harbour [2008] EWCA Civ 25 ................................................. 167 Eames London Estates Ltd v. North Hertfordshire DC (1980) 18 BLR 50 ................................................................................................. 143 Earl Terrace Properties Ltd v. Nilsson Design Ltd and Charter Construction Plc [2004] BLR 273 ......................................................... 174 East Ham Corporation v. Bernard Sunley & Sons Ltd [1966] AC 406 ........................................ 150, 168, 169, 170, 171 Edward Lindenberg v. Joe Canning (1992) 62 BLR 147 ........................................................................................... 80, 81 Emson Eastern Ltd (In Receivership) v. E.M.E. Developments Ltd (1991) 55 BLR 114 ........................................................................... 112 Enco Civil Engineering Ltd v. Zeus International Developments Ltd (1991) 56 BLR 43 ............................................................................. 103 Equitable Debenture Assets Corporation Ltd v. Moss (1984) 2 CLJ 131 .................................................................................................... 78

Table of Cases

201

ERDC Group Ltd v. Brunel University [2006] EWHC 687 (TCC) .......................................................................................26, 27, 29 Farr (AE) Ltd v. Ministry of Transport (1965) 5 BLR 97 ..................... 107 Filross Securities Ltd v. Midgeley (1988) 43 EG 134 .............................. 15 Florida Hotels Pty Ltd v. Mayo (1965) 113 CLR 588 ............................ 149 Freeman v. Niroomand (1996) 52 Con LR 116 ...................................... 170 George Fischer Holdings Ltd v. Multi Design Consultants Ltd (1998) 61 Con LR 85 .... 50, 63, 112, 114, 149, 171, 173 George Hawkins v. Chrysler (UK) Ltd and Burne Associates (1986) 38 BLR 36 ............................................................................. 138, 139 Gilbert-Ash (Northern) Ltd v. Modern Engineering (Bristol) Ltd (1973) 1 BLR 75 ....................... 100, 102, 122, 165, 166, 168 Gold v. Haringey Health Authority [1988] QB 481 .............................. 137 Gray v. TP Bennett & Son Ltd (1987) 43 BLR 63 .................................. 149 Great Eastern Hotel Co Ltd v. John Laing Construction Ltd [2005] EWHC 181 (TCC) ............................................................... 158, 160 Greaves (Contractors) v. Baynham Meikle & Partners (1975) 4 BLR 56 ................................................................................................... 138 Guinness Plc v. CMD Property Developments Ltd (1995) 76 BLR 40 ................................................................................................... 97 Hadley v. Baxendale (1854) 9 Ex. 341 ..................................................... 167 Halesowen Presswork v. Westminster Bank [1972] AC 785 ............... 165 Hancock v. B W Brazier (Anerley) Ltd [1966] 2 All ER 1 ............... 17, 54 Harbutt’s Plasticine Ltd v. Wayne Tank & Pump Co Ltd [1970] 1 QB 447 ....................................................................................... 172 Hargreaves (B) Ltd v. Action 2000 Ltd (1992) 62 BLR 72 .................... 166 Hart Investments Ltd v. Fidler [2007] EWHC 1058 (TCC) ......... 146, 163 Hedley Byrne & Co Limited v. Heller & Partners [1964] AC 465 ..................................... 42, 43, 44, 46, 47, 50, 186 Henderson v. Merrett Syndicates Limited [1995] 2 AC 145 .............................................42, 43, 44, 45, 46, 48, 49, 50 Henry Boot Building Limited v. The Croydon Hotel and Leisure Company Ltd (1985) 36 BLR 41 ............................................ 126 Hescorp Italia SpA v. Morrison Construction Ltd and Impreglio UK Ltd (2000) 75 Con LR 51 ............................................... 30 Heywood v. Wellers (a firm) [1976] 1 QB 458 ....................................... 177 Hoenig v. Isaacs [1952] 2 All ER 176 .............................................. 110, 124 Hollebone v. Midhurst & Fernhurst Builders Ltd [1968] 1 Lloyds Rep 38 ...................................................................................... 172 Hutchinson v. Harris (1978) 10 BLR 19 .................................................. 165 ICR v. Maxse [1919] 21 KB 647 ................................................................ 132 Iggleden v. Fairview New Homes (Shooters Hill) Ltd [2007] EWHC 1573 (TCC) ................................................................................. 173

202

Table of Cases IMI Cornelius (UK) Ltd v. Bloor Ltd (1991) 35 Con LR 1 ................... 171 Imperial College of Science and Technology v. Norman & Dawbarn (1986) 2 Const LJ 280 ........................................................... 172 Independent Broadcasting Authority v. EMI Electronics Ltd and BICC Construction Ltd (1980) 14 BLR 1 ........... 17, 18, 90, 91, 138, 143 Invercargill City Council v. Hamlin (1996) AC 624 ............................. 186 Investors Compensation Scheme v. West Bromwich Building Society [1998] 1 WLR 896 ....................................................................... 16 Investors in Industry Commercial Properties Ltd v. The District Council of South Bedfordshire (1985) 32 BLR 1 ............................... 144 Jackson v. Mumford (1902) 51 WR 91 .................................................... 1, 2 Jacobs v. Morton & Partners (1994) 72 BLR 92 ................................. 40, 41 Jarvis Interiors Ltd v. Galliard Homes Limited [2000] BLR 33 ............ 33 Jarvis v. City of Westminster (1970) 7 BLR 64 ............................94, 95, 97 Jarvis v. Swan Tours Ltd [1973] 1 QB 233 .............................................. 176 Jewson Ltd v. Boyhan [2002] EWCA Civ 1030 ....................................... 85 John Mowlem & Co Ltd v. Eagle Star (1995) CILL 1047 ..................... 160 Johnston v. W.H.Brown Construction (Dundee) Ltd [2000] BLR 243 ............................................................................................ 121, 122 Jones v. Sherwood Computers Ltd [1992] 1 WLR 277 ......................... 194 Junior Books Ltd v. The Veitchi Co Ltd [1983] 1 AC 520 ............... 50, 51 Kaye (P&M) Limited v. Hosier & Dickinson Ltd [1972] 1 WLR 146 ...............................................................................94, 95, 96, 97 Kensington and Chelsea and Westminster AHA (The) v. Wettern Composites Ltd (1984) 31 BLR 57 ........................................ 148 Ketteman v. Hansel Properties Ltd and others (1985) 27 BLR 1 (CA) and (1987) 36 BLR 1 (HL) ..........................185, 186, 187 Liesbosch Dredger v. Edison [1933] AC 449 ......................................... 167 Linden Garden Trust Ltd v. Lenesta Sludge Disposals Ltd (1993) 63 BLR 1 ......................................................................................... 59 Lintest Builders Ltd v. Roberts (1978) 10 BLR 120 and (1979) 13 BLR 38 (CA) ................................................................................... 95, 97 Liverpool City Council v. Irwin [1977] AC 239 ................................ 16, 17 Livingstone v. Rawyards Coal Co. (1880) 5 App Cas 25 ..................... 167 London Borough of Barking and Dagenham v. Terrapin Construction Ltd [2000] BLR 479 ........................................................ 130 London Borough of Merton v. Lowe (1981) 18 BLR 130 ............. 155, 156 London Borough of Merton v. Stanley Hugh Leech Limited (1985) 32 BLR 51 ....................................................................................... 17 London Congregational Union Incorporated v. Harriss & Harriss (1986) 35 BLR 58 .......................................................185, 186, 187 Lynch v. Thorne [1956] 1 WLR 303 ........................................................... 16

Table of Cases

203

Mac-Jordan Construction Ltd v. Brookmount Erostin Ltd (1991) 56 BLR 1 ....................................................................................... 126 Macob Civil Engineering Ltd v. Morrison Construction Ltd [1999] BLR 93 .......................................................................................... 194 Maersk Oil UK Ltd v. Dresser-Rand (UK) Ltd [2007] EWHC 752 (TCC) ........................................................................... 122, 175 Mariner International Hotels Ltd v. Atlas Ltd [2007] HKCFA 5 ................................................................................................. 112 McGiffin v. Palmers Shipbuilding and Iron Co Ltd (1882) 10 QBD 5 ...................................................................................................... 1 McGlinn v. Waltham Contractors Ltd [2007] EWHC 149 (TCC) ...............................ix, 98, 148, 149, 150, 168, 169, 174 Mellowes Archital Ltd v. Bell Projects Ltd (1997) 87 BLR 26 ............. 164 Melville Dundas Ltd (in receivership) v. George Wimpey UK Ltd [2007] UKHL 18 .............................................................................. 104 Midland Bank Trust Company Ltd v. Hett Stubbs & Kemp (a firm) [1979] Ch 384 ............................................................................ 136 Midland Bank v. Cox McQueen (a firm) [1999] EWCA Civ 656 ....... 139 Miliangos v. George Frank (Textiles) Ltd [1976] AC 433 .................... 171 Mirant Asia-Pacific Construction (Hong Kong) Ltd v. Ove Arup & Partners International Ltd [2007] EWHC 918 (TCC) ............... 47, 49 Mirza v. Bhandal (1999) Independent 14 June 1999; Lawtel 28/81999; Westlaw 477412 (Unreported) ....................................... 53, 54 Mondel v. Steel (1841) 1 BLR 106 ............................................................ 164 Moresk Cleaners Ltd v. Hicks (1966) 4 BLR 5 ............................... 143, 144 Morris v. C.W. Martin & Sons Ltd [1966] 1 QB 716 ......................... 86, 87 Murphy v. Brentwood District Council (1990) 50 BLR 1 .................39, 40, 41, 47, 48, 170, 171, 184, 186 Myers (GH) & Co. v. Brent Cross Service Co. [1934] 1 KB 46 .............. 20 National Insurance Compania Naviera SA v. Prudential Assurance Co Ltd (The Ikarian Reefer) [1993] 2 Lloyd’s Rep 68 ...................... 191 NEI Thompson Ltd v. Wimpey Construction UK Ltd (1987) 39 BLR 65 ................................................................................................. 102 Nene Housing Society Ltd v. National Westminster Bank Ltd (1980) 16 BLR 22 ...................................................................95, 96, 97 Nevill (Sunblest) Ltd (HD) v. William Press & Son Ltd (1981) 20 BLR 78 .....................................................................111, 112, 113 New Islington and Hackney Housing Association v. Pollard Thomas & Edwards Ltd (2000) ............................................... 152 Nikko Hotels (UK) Ltd v. MEPC Plc [1991] 2 EGLR 103 .................... 194 Nitrigin Eireann Teoranta v. Inco Alloys Ltd [1992] 1 WLR 498 .....................................................................................5, 40, 185 Nottingham Community Housing Association v. Powerminster Ltd [2000] BLR 309 ................................................................................... 54

204

Table of Cases New Islington and Hackney Housing Association v. Pollard Thomas & Edwards Ltd [2001] BLR 74 .....................................152, 153, 154, 155, 156, 157, 183, 185, 186 Nykredit Mortgage Bank Plc v. Edward Erdman Group Ltd [1997] 1 WLR 1627 ................................................................................. 186 Nye Saunders & Partners (a firm) v. Bristow (1987) 37 BLR 92 ......................................................................................... 136, 137 Oldschool v. Gleeson (Construction) Ltd (1976) 4 BLR 103 ........ 146, 163 Oval (717) Ltd v. Aegon Insurance Co (UK) Ltd (1997) 54 Con LR 74; 85 BLR 97 .................................................................. 97, 98 Oxford Architects Partnership v. Cheltenham Ladies College [2006] EWHC 3156 (TCC) .............................................. 187, 189 Oxford University Press v. John Stedman Design Group (1990) 34 Con LR 1 .....................................................................79, 81, 178 Pagnan & Fratelli v. Corlisa Industrial Agropacuarica [1970] 1 WLR 1306 ............................................................................................... 98 Parente v. Bayville Marine Inc [1975] 1 Lloyds Rep 333 ......................... 6 Parker v. South Eastern Railway (1877) 2 CPD 416 ............................... 21 Payne v. John Setchell Ltd [2002] BLR 489 ..................................41, 47, 49 Payzu v. Saunders [1919] 2 KB 581 ......................................................... 119 Pearce and High Ltd v. Baxter [1999] BLR 101 ............................. 121, 122 Pearson Education Ltd v. Charter Partnership [2007] EWCA Civ 130; [2007] BLR 324 ........................................................... 4, 5 Percy Trentham Ltd (G) v. Archital Luxfer Ltd (1992) 63 BLR 44 ............................................................................................. 33, 34 Perry v. Sydney Phillips & Son (a firm) (1982) 22 BLR 120 ................ 177 Pillings (CM) & Co Ltd v. Kent Investments Ltd (1985) 30 BLR 80 ................................................................................................. 103 Pinnock Bros v. Lewis & Peet Ltd [1923] 1 KB 690 .................................. 6 Pirelli General Cable Works Ltd v. Oscar Faber & Partners (1983) 21 BLR 99 .....................................................185, 186, 187 Plant Construction Plc v. Clive Adams and JMH Construction Services Ltd [2000] BLR 137 (CA) and 205 (TCC) ............16, 80, 81, 82 Pozzolanic Lytag Ltd v. Bryan Hobson Associates [1999] BLR 267 .................................................................................................... 159 Pratt v. George J Hill Associates (a firm) (1987) 38 BLR 25 ................ 146 Prudent Tankers Ltd SA v. The Dominion Insurance Co Ltd (The Caribbean Sea) [1980] 1 Lloyds Rep 338 ....................................... 3 Radford v. De Froberville (1977) 7 BLR 35 .................................... 168, 169 Rae v. Broad (2000) 18-CLD-03-20 ........................................................... 151 Randall v. Newsom (1877) 2 QB 102 ................................................... 18, 82 Richards Roberts Holdings Ltd v. Douglas Smith Stimson Partnership (1988) 46 BLR 50 ....................................................... 145, 172

Table of Cases

205

Riverstone Meat Pty Ltd v. Lancashire Shipping Company Ltd [1961] AC 807 .............................................................................................. 3 Rice (T/A The Garden Guardian) v. Great Yarmouth Borough Council [2003] TCLR 1 .................................................. 181, 182 Riyad Bank v. United Bank of Kuwait [2006] EWCA Civ 780 ....... 46, 50 Roadrunner Properties Ltd v. Dean [2003] EWHC Civ 1816 ............. 167 Robinson v. Harman (1848) 1 Exch 850 .................................................. 167 Rotherham MBC v. Frank Haslam Milan & Co Ltd & M.J. Gleeson (Northern) Ltd (1996) 78 BLR 1 CA ....................3, 88, 90 Rumbelows Ltd v. A.M.K (a firm) and Firesnow Sprinkler Installations Ltd (1980) 19 BLR 25 ................................................... 75, 87 Rupert Morgan Building Services (LLC) Ltd v. Jervis [2004] BLR 18 ...................................................................................................... 105 Ruxley Electronics and Construction Ltd v. Forsyth (1995) 73 BLR 1 .............................................................. 1, 2, 167, 170, 171 R+V Versicherung AG v. Risk Insurance and Reinsurance Solutions SA [2006] EWHC 42 (Comm) ............................................. 176 S.L. Timber Systems Ltd v. Carillion Construction Ltd [2001] BLR 516 .................................................................................................... 104 Saif Ali v. Sydney Mitchell & Co [1980] AC 198 .................................. 136 Saint Martin’s Property Corporation Ltd v. Sir Robert McAlpine & Sons Ltd (1993) 63 BLR 1 ................................................. 57 Sanderson v. National Coal Board [1961] 2 QB 244 ................................. 3 Sanjay Lacchani v. Destination Canada (UK) Limited (1996) 13 Const LJ 279 .............................................................................25, 26, 30 Samuel Payne v. John Setchell Ltd [2002] BLR 489 .............................. 153 Sempra Metals Ltd v. HM Commissioners of Inland Revenue [2007] UKHL 34 ........................................................................................ 25 Serck Controls Limited v. Drake and Skull Engineering Limited (2000) 73 Con LR 100 ......................................................................... 26, 28 Shanklin Pier Ltd v. Detel Products Ltd [1951] 2 KB 854 ...................... 63 Shepherd Homes Ltd v. Encia Remediation Ltd [2007] EWHC 1710 (TCC) ................................................................................... 21 Simaan General Contracting Co v. Pilkington Glass Ltd [1988] QB 758 ........................................................................................................ 50 Skandia Property UK Ltd v. Thames Water Utilities Ltd [1999] BLR 338 .................................................................................................... 174 Smith v. Drumm (1996) [1996] EGCS 192 ................................................ 54 Southampton Container Terminals Ltd v. Hansa Schiffahrts GmbH (The Maersk Colombo) [2001] EWCA Civ 717; [2001] 2 Lloyds Rep 275 .................................................................................... 173 South Australian Asset Management Corporation v. York Montague Limited [1997] AC 191 ......................................................... 43 Stent Foundations Ltd v. Tarmac Construction (Contracts) Ltd (1999) 17-CLD-04-17 ................................................................................ 33

206

Table of Cases Stewart Gill v. Horatio Myer [1992] 2 All ER 257 ................................ 165 Storey v. Charles Church Developments Ltd (1997) 13 Const LJ 206 ......................................................................................... 47 Sumpter v. Hedges [1898] 1 QB 673 ........................................................ 109 Surrey Heath Borough Council v. Lovell Construction Ltd (1988) 42 BLR 30 .............................................................95, 96, 97, 98 Sutcliffe v. Chippendale & Edmondson (A Firm) (1971) 18 BLR 149 ...............................................................................146, 148, 149 Sutcliffe v. Thackrah (1974) 4 BLR 16 .....................................151, 161, 162 Sutherland Shire Council v. Heyman (1985) Const. LJ 161 ............ 45, 46 Tai Hing Cotton Mill Ltd v. Liu Chong Hing Bank Ltd [1986] 1 AC 80 ...................................................................................................... 79 Tate v. Latham & Son [1897] 1 QB 502 ....................................................... 1 Tate & Lyle Distribution Ltd v. Greater London Council [1982] 1 WLR 149 ........................................................................... 175, 176 Taylor (Wholesale) Ltd (CR) v. Hepworths Ltd [1977] 1 WLR 659 ............................................................................................... 168 Tesco Stores Ltd v. Costain Construction Ltd [2003] EWHC 1487 (TCC) .................................................. 33, 34, 47, 48, 49, 186 Tesco Stores Ltd v. Norman Hitchcox Partnership (1997) 56 Con LR 42 ........................................................................... 40, 41 Thomas v. T.A. Phillips (Builders) Ltd and Taff Ely Borough Council (1985) 9 Con LR 72 .................................................................. 171 Thompson v. Clive Alexander & Partners (1992) 59 BLR 77 ................ 54 Tomlinson v. Wilson (2007) (11 May 2007) (Unreported) WL 1623166 ............................................................................................. 181 Townsend v. Stone Toms & Partners (1984) 27 BLR 26 .............. 147, 151 Townsends (Builders) Ltd v. Cinema News and Property Management Ltd (1958) 20 BLR 118 ..................................................... 69 Tunnel Refineries v. Bryan Donkin Ltd [1998] CILL 1392 .................... 41 Turiff Construction Ltd v. Regalia Knitting Mills Ltd (1971) 9 BLR 20 ............................................................................................... 32, 33 University Court of the University of Glasgow (The) v. William Whitfield and John Laing (Construction) Limited (1988) 42 BLR 66 .................................................. 78, 79, 81, 155, 156, 178 Uratemp Ventures Ltd v. Collins [2001] UKHL 43 ................................ 53 Victoria University of Manchester v. Wilson (1984) 1 Const. LJ 162 .......................................................................................... 78 Vitol SA v. Norelf Ltd (The Santa Clara) [1996] AC 800 ..................... 181 Walton-on-the-Naze Urban District Council and Moran, Re (1905) Hudson, Building Contracts (4th ed.), Vol 2, p. 376 .......... 107

Table of Cases

207

Warner v. Basildon Development Corporation (1990) 6 Const LJ 49 ....................................................................................... 39, 41 Wates Construction (London) Ltd v. Franthom Investments Ltd (1991) 53 BLR 23 ............................................................................. 126 Watkin Jones & Son Ltd v. Lidl UK GmbH (2001) 86 Con LR 55 ........................................................................................................ 104 Watts v. Morrow ((1991) 54 BLR 86 ........................................................ 177 Wessex Regional Health Authority v. HLM Designs Ltd (1995) 71 BLR 32 ................................................................................................. 151 Westminster Corporation v. J Jarvis & Sons Ltd (1970) 7 BLR 64 ................................................................................................... 111 Whitehouse v. Jordan [1981] 1 WLR 246 ................................................ 136 William Tomkinson & Sons Ltd v. The Parochial Church Council of St Michael and Others (1990) 6 CLJ 319 ..............................................................................96, 97, 120, 121 Williams v. Fitzmaurice (1858) 3 H&N 844 ........................................... 107 Williams (J.D.) & Co Ltd v. Michael Hyde & Associates [2001] BLR 99 .................................................................................. 136, 137 Wimpey Construction UK Ltd v. Poole (1984) 27 BLR 58 .................. 136 Yandle & Sons v. Sutton, Young and Sutton [1922] 2 Ch 199 ................ 3 Yarmouth v. France (1897) 19 QBD 647 ..................................................... 1 Young & Marten v. McManus Childs Ltd (1968) 9 BLR 77 ...................................................................................17, 75, 76, 86

Table of Statutes

Arbitration Act 1996 .................................................................................. 192 Architects Act 1997 .................................................................................... 132 Building Act 1984 .......................................................... 10, 11, 12, 28, 66, 67 Civil Liability (Contribution) Act 1978 .....................................36, 177, 189 Contracts (Rights of Third Parties) Act 1999 ............ 9, 10, 56, 61, 62, 135 Defective Premises Act 1972 ........ 10, 12, 21, 28, 29, 52, 53, 54, 55, 58, 61, 92, 140, 141, 177, 189 Disability Discrimination Act 1995 ........................................................... 66 Disability Discrimination Act 2005 ........................................................... 66 Employers’ Liability Act 1880 ...................................................................... 1 European Communities Act 1972 ....................................................9, 10, 11 Health and Safety at Work Etc Act 1974 .................................................. 69 Housing Act 1985 ........................................................................................ 53 Housing Act 1988 ......................................................................................... 53 Housing Grants, Construction and Regeneration Act 1996 ................................. 12, 16, 19, 20, 101, 103, 106, 114, 166, 193 Human Rights Act 1998 .......................................................................... 9, 10 Insolvency Act 1986 ................................................................................... 166 Interpretation Act 1978 ................................................................................ ix Latent Damage Act 1986 ................................................................... 184, 188 Law of Property Act 1925 ........................................................................... 58 Law of Property (Miscellaneous Provisions) Act 1989 .......................... 15 Law Reform (Contributory Negligence) Act 1945 ................................ 178 Limitation Act 1980 ...........................................................183, 184, 187, 188 Sale and Supply of Goods Act 1994 ..............................................17, 18, 84 Sale of Goods Act 1893 ......................................................................... 17, 83 Sale of Goods Act 1979 .............................................. 10, 17, 83, 84, 85, 164 Supply of Goods and Services Act 1982 .......... 10, 16, 17, 18, 20, 28, 34, 75, 82, 83, 84, 85, 88, 133, 135, 180 Supreme Court Act 1981 ........................................................................... 176 Third Parties (Rights against Insurers) Act 1930 .................................... 60 Town and Country Planning Act 1990 ..................................................... 19 Trades Descriptions Act 1968 .................................................................. 132 Unfair Contract Terms Act 1977 ................................... 10, 20, 21, 165, 189

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Regulations, Directives, Reports, Rules of Court, Treaties

Regulations Building Regulations 2000 .................................................. 10, 28, 66, 67, 68 Building Regulations (Amendment) Regulations 1994........................... 85 Construction Contracts (England and Wales) Exclusion Order 1998 .................................................................................................. 19 Construction (Design and Management) Regulations 2007....................................... 69, 116, 132, 160, 161, 162, 163 Construction Products Regulations 1991 ......................................11, 66, 68 The Scheme for Construction Contracts (England and Wales) Regulations 1998................................................................................ 19, 104 Unfair Terms in Consumer Contracts Regulations 1999 ................ 20, 189 Workplace (Health, Safety and Welfare) Regulations 1982 .......66, 68, 70

Directives Construction Products Directive 89/106/EEC................................... 11, 68 Workplace Directive 89/654/EEC ............................................................. 69

Reports Law Commission Report on Sale and Supply of Goods (CM137; May 1987) ................................................................................... 83

Rules of court Civil Procedure Rules .................................................................165, 190, 192 Insolvency Rules 1986 ................................................................................ 166 Pre-Action Protocol for the Construction and Engineering Disputes .................................................................................................... 192 Rules of the Supreme Court ................................................................ 30, 165

Treaties European Convention for the Protection of Human Rights and Fundamental Freedoms........................................................................ 9, 10 Defective Construction Work: and the Project Team. Kevin Barrett. © 2008 K. J. Barrett, ISBN: 978-0-632-05929-4

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Index

abandonment of work 32, 93, 98, 118 amenity, loss of 170 approved document 66 architects and engineers certification 150, 151 defects investigations 155, 156 design 143–5 design review after practical completion 153–5 implementation to practical completion 152, 153 up to implementation 152 generally 4, 19, 21, 113, 123, 129, 132, 136, 142, 157–9 honest reporting 156, 157 periodic inspection 147–50 role and tasks 142 selection of builder and others 146 supervision 146–8 termination of performance 157 Architects Registration Board 132 ‘as built’ information 116, 117 Association of British Insurers (ABI) 127 bills of quantities 107 builder buildability, durability and maintenance 73, 74, 84, 140 care and skill 75, 79–82 completion common law 95, 109, 118 effect of practical completion 114 generally 2, 6, 29, 77, 100, 124 model conditions 115, 116 practical completion 110–13, 115, 119–21, 125, 129, 152–4 provision of information 116, 117 snagging 2, 113, 114, 119, 120 substantial completion 109, 110 defects liability compensation instead of repair 121, 122

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defects arising 120 duration 119 generally 114, 115, 124 instructions 122, 123 making good 118, 124 design 90–2 duty to warn 53, 77–82, 145, 146, 163 express terms see contract final certificate conclusive evidence rule 124, 127–9, 189 defects affected 129, 130 ICE conditions 130 JCT conditions 127–30 MF/1 conditions 131 qualifications to conclusivity rule 128 fitness for purpose 88–90 history of quality warranty 83, 84 implied duty to warn 78, 79 implied terms see contract inspection of materials 76 interim payment 100–5 contractual position 100 effect of HGCRA 103–5 interim valuations, certificates and payments 101–3 materials 82–89 opening up the work 98–100 ordinary competence 80 see also reasonable skill and care retention bonds 127 money 93, 115, 119, 124–7 satisfactory quality 72, 83–7 scope of satisfactory quality warranty 84, 85 scope of work to be completed contingently necessary work 106, 108 indispensably necessary work 106–8 selection and satisfactory quality 85–7 specified standards 76

Index temporary disconformities 93–8 case reconciliation 97 theory 94 theory confined 94–7 workmanship 2, 17, 28, 72, 75–82, 120, 149 burden of proof 110 causation 4, 5, 81, 167 CDM coordinator 116, 132, 158, 163 CDM regulations 116, 132, 159, 161, 163 certificates 100, 101, 103, 104, 110, 112, 113–7, 120, 124, 126, 131, 150, 151 client 7, 142, 148 common law 8, 10, 11, 12, 16, 56, 75, 77, 82, 86, 88, 90, 92, 94, 101, 102, 108–11, 118, 119, 178 compensation abatement 102, 104, 118, 164–6 betterment 172 consequential loss 174–6 contribution 36, 78, 177, 178, 189 contributory negligence 178 cost of reinstatement 168, 169, 171 damages 167–72 date of assessment 171, 172 diminution in value 169–71 distress and inconvenience 176, 177 generally 6, 11, 12, 16, 21, 22, 34, 56, 75, 93, 97, 106, 109, 119–21, 123, 124, 127, 131, 151, 183 mitigation 119, 121, 122, 173, 174 set-off 19, 30, 61, 102–4, 164–6 completion 2, 6, 29, 77, 100, 106–20, 124 see also builder complex structures exception 40 test 42 theory 38 construction contracts 19, 103, 104, 114 construction operations 19, 103 construction products 11, 66 consultants 6, 13, 22, 36, 37, 46, 49, 132–5, 137, 139, 142, 147, 152, 154, 158, 159 consumers 20, 180 contract administration 129, 142, 147 bare 34 breach 21, 93, 94, 97, 118, 122, 123, 138, 180 codification of implied terms 10, 83

211

common law terms 16 consideration 14, 15 construction of 16, 97, 107, 110, 122 exclusion of implied terms 82, 85–7, 92 express terms 14, 15, 73, 75, 96 formation 14, 32 function 13 generally 6, 8–14, 24, 65, 109, 110, 118, 135 implied terms 14–17, 34, 73, 75, 77, 78, 82, 83, 88, 89, 92, 95, 96, 98, 99, 133, 135, 143 limitation provisions see limitation simple 14, 128, 183 specialities 14, 15, 128, 183 ‘subject to contract’ 33 contractor’s design portion 116, 120 criminal offence 66, 132 damage to the works 118 damages see compensation deeds see contract–specialties defective premises application 52–4 exclusion 55 fitness for habitation 54 generally 21, 28, 29, 61, 92, 140, 141, 177, 189 NHBC scheme 55 defects appearing 120 correction certificate 124 cost of repair 38, 47, 92, 99, 119, 121, 124, 165, 168, 169 cost of staff 175, 176 dangerous 5, 79, 145, 163 definition 1, 2, 100 design 1, 5, 90–2, 130, 143–5 disconformity 2 discovery 5, 120, 121 discretion 124, 125, 147 distress and inconvenience 176 domestic premises 10, 53, 92, 103, 141 fitness for purpose 1, 18, 28, 92 honest reporting 156, 157 incomplete work 2, 3 investigation 155–7 knowledge 81 latent 1, 2, 3, 5, 6, 31, 85, 111, 118, 119, 128, 131, 151, 184, 188

212

Index

letter of intent 34–5 materials see materials minor 83, 109–16, 118–20, 124 mitigation 173 no contract 29, 34, 35 offer to remedy 122 patent 1–6, 76, 109, 112, 118–21, 124 reasonable examination 5 rectification 92, 93, 118, 121, 124 restitution 25 review 152, 155 schedule 123 snagging 2 temporary disconformity 2 undertaking to remedy 120 unremedied 96, 99, 123, 171 ‘usual standards’ 27 value 110, 123, 151 workmanship 2, 5 definitions 1–3, 6, 7, 36, 66, 93–7, 111–13, 132, 133 description 18, 20, 82–4, 108 design brief 140, 142, 143 builder’s obligations 73, 74, 90–2 defect 1, 3 delegation 143, 144 design and build 133, 134, 138 design and workmanship 2, 130 divergence 71, 72 economic loss 42, 43 error of judgement 136 fitness for purpose 18, 137 see also contract– implied terms and fit for purpose good practice 136 no contract 29 quantity surveyor 161 review 183 specialist element of the work 145 developers 10 dispute resolution adjudication 19, 102, 103, 128, 193, 194 alternative dispute resolution 194, 195 arbitration 128, 190, 192, 193 courts 8, 11, 30, 128, 165 expert determination 194 expert witness 136, 186, 191 litigation 98, 190–2 dwelling 10, 53, 92, 103, 141

economic harm 30, 37, 42, 44–6, 75, 133, 140, 167, 184, 186, 187 assumption of responsibility 44, 46, 51 builders 47–9 concurrent duty 43, 48, 135, 140, 178 incrementalism 45, 46 professional consultants 49 proximity, foreseeability and fairness 4, 45, 46, 51 tests 44–6 third parties 43, 49–51 which test? 46 effective notice 104 engineer 80, 90, 115, 117, 123, 131–3, 139, 157 see also architects and engineers engineer’s representative 158, 163 European Union 9, 10 exclusion clause 21, 121 failure to complete 29 final account 124, 130 final certificate 94, 114, 118, 124, 151, 157 see also builder final date for payment 103, 104 fit for habitation 17, 54, 78, 92, 141 see also defective premises fit for purpose 1, 17, 18, 28, 72, 74, 77, 82, 83, 85, 88—90 see also builder good and workmanlike manner 17 see also builder–care and skill and ordinary competence good practice 136, 141, 148 ground conditions 143 health and safety file 116, 117 Housing Grants, Construction and Regeneration 12, 19, 101, 103–5 injunction 11, 126, 179 insolvency 93, 105, 125, 162, 166 inspection 4, 76, 99, 147–50 instructions 71, 91, 93, 97–9, 122, 123, 129, 146, 153 insurance 115, 118, 137, 157, 159, 171, 178 interest 176 JCT 102, 130, 158 JCT code of practice 99 JCT conditions see model conditions

Index Law Commission 83 letters of intent 32–5 limitation accrual of cause of action 183 contract 183, 184 contractual limitation provisions 188, 189 contribution proceedings 189 defective premises 189 fraud, concealment and mistake 149, 189 generally 5, 15, 35, 36, 38, 86, 115, 128 tort economic damage 186 generally 184 physical damage 185, 186 primary period 184 reconciliation of cases 187 secondary period 187, 188 liquidated damages 21, 93, 115, 175 materials description 82 fitness for purpose 82 generic products 83 implied terms see contract merchantability 17, 83, 84, 86 not in accordance with contract 120 proprietary products 86, 149 reasonable examination 3, 4 sample 18, 20, 82, 83, 129 satisfactory quality 82 see also builder second hand 83 substitution 83 method of measurement 107, 161 mistake 31, 188 model conditions ACE conditions 135 generally 7, 15, 20, 22, 34, 78, 83, 98, 99, 100, 102, 108, 110, 113, 114, 119, 135, 150, 151, 166, 181, 188 ICE conditions 23, 71, 76, 92, 99, 100, 113, 115, 117, 119, 120, 123–5, 127, 130, 158, 163, 168 JCT 1980 conditions 126, 129, 151 JCT bond conditions 127 JCT C/CMA conditions 159 JCT conditions 92, 99, 100, 110–12, 117, 123, 127, 128, 151, 153, 193 JCT DB conditions 21, 91, 99, 110, 117, 123, 127, 159, 184 JCT Major Projects conditions 111, 115, 116

213 JCT Minor Works conditions 121, 131 JCT Prime Cost conditions 103 JCT SBC conditions 21, 23, 62, 71, 76, 83, 91, 99, 100, 108, 111, 113, 116, 120, 122–4, 126–9, 150, 163, 182 JCT SBCSub/C conditions 101, 111 JCT Scottish Building Contract conditions 122 MF/1 conditions 21, 76, 92, 99, 100, 113, 115, 117, 119, 120, 123, 127, 131, 151 NEC3 conditions 71, 76, 99, 100, 113, 115, 119, 123, 159, 182 RIBA conditions 23, 135, 146, 147, 152, 153, 189 RIBA CE/95 conditions 189 RIBA Schedule 152, 159 warranties 64

net contribution clause 177 no contract 9, 14, 24, 36, 38 novation 59, 134 occupiers 56 operating and maintenance information 116, 117 owner 6, 13, 52 parasitic damage 121, 167, 174–76 payers notice 103, 104 payment 6, 74, 78, 93, 102, 109, 110, 107, 118, 130, 150, 162 payment on account 19, 99, 100, 101, 103, 114, 115, 125, 148, 150, 151, 161 persons and property 9, 31, 133, 140, 167, 184–6 possession 106 price 84, 87, 100, 107, 114, 118, 119, 123, 142, 164 private finance initiative 19 professional team see also consultants buildability, durability and maintenance 140, 141 clerk of works 148, 158, 163 competence 122, 123 duties concurrent fitness for purpose 137–40 reasonable care and skill 135–7 professional body 132, 133 programmer 132

214

Index

project manager 132, 157–60 quantity surveyor 43, 132, 151, 158–62 structure 6, 133–5 quality 2, 18, 20, 85, 93, 129, 142, 148 quantum meruit 25 reasonable skill and care 17, 91, 92, 133, 135, 137, 140–50, 159, 162 see also builder reinstatement, cost of 168, 169 reliance 78, 88–90 replacement builder 93, 98, 99, 121 residential occupier 19, 103 restitution 9, 12, 13, 24–31, 35 risk allocation 22 safety 81, 82, 84, 85, 116, 143, 153 sale of goods 10, 17, 19, 164 scope of work 32, 106, 142, 144, 145 selection 85, 89, 90, 146 services 18, 28, 42, 47–9 site investigation 143 specialist sub-contractor 48, 82, 143, 145, 146 specific performance 11, 178 specification 1, 2, 27, 72, 75, 77, 89, 90, 92, 106, 107, 161 standards see contract–express and implied terms and standard of finish and statutory standards standard of finish 26, 129, 141, 148, 149 statute 10 statutory implied terms 16–19, 34, 75, 77, 82–4, 87, 88, 133, 135, 180 statutory requirements 115 Building Act 10, 28, 66, 67 Building regulations 28, 66, 67 CDM regulations 69, 70 construction products 66, 68 relationship with contractual obligations 70–2 workplace safety 68 statutory standards 10, 12, 27, 28, 66–72, 141 substantial completion 109, 110, 112–15, 117, 120, 125 substantial performance 100, 109 substitution of materials 83

summary judgment 165, 192, 194 supervision 77, 142, 146–8, 152 supply of goods and services 17 suspension of work 19 sub-contractors 102, 103 taking over work 115, 120 temporary finality 101 temporary work 79, 92 termination breach of condition 180 express termination provisions 181, 182 generally 6, 98, 99, 157 repudiation 98, 180, 181 testing 6, 99 third parties agency 58 assignment 58 collateral contracts 13, 62, 63, 64, 134 exception 57 generally 5, 13, 36, 38, 49, 56–62, 135 novation 59 statutory rights 60–2 tort 64 tort complex structures see complex structures negligence generally 5, 9, 12, 13, 19, 29, 30, 35–7, 43, 52, 64, 78, 112, 114, 133, 135, 140, 143, 153, 157, 176–8, 184 persons and property 37 pure economic loss 37, 38 see also economic harm town and country planning 19 trust fund 125 unfair contractual terms 20, 21, 165, 189 unforeseen conditions 108, 153 value of work done 95, 99, 100, 103, 104, 109, 125, 130, 148, 150, 160, 164 variations 71, 92, 99, 108, 153 warranties 74, 75, 108 see also contract– implied terms and third parties– collateral warranties withholding payment 19