We don’t give much thought to the correction of defects, at least not until it goes wrong. Contract provisions are generally along the following lines:
• During a period following physical completion (a “Defects Correction Period” or similar term), the contractor must correct defects which are notified by the owner;
• If the contractor fails to do this, the owner can correct them at the contractor’s expense.
These provisions look simple and sensible – in part because they follow the same “general law” principles that apply to any situation where goods or services are defective; that is, the party in breach is given a chance to correct the breach and if he fails, then the innocent party can (among other remedies) fix the defect and claim the cost.
In reality, this similarity to “general law” is superficial and it causes confusion. Construction contracts usually set two distinct obligations in relation to the works: to complete the works to specification and to correct any defects in the completed works. So, the correction of defects is not simply dealing with a failure to build to specification – it is a separate obligation, defined by the contract, with specified consequences for failure. Unfortunately, the contracts often do not adequately define that obligation or those consequences – and they commonly fail to make clear the extent to which the above “general law” position is excluded by the contract. This leads to ambiguity and dispute.
Consider this: a contract simply requires the contractor to rectify any defect that is identified within the defects notification period. It does not expressly require the owner to notify all defects for rectification. Does the contractor still have a right (as well as an obligation) to correct defects? And if that right exists, what happens if the owner unilaterally corrects the defects by other means? Can the owner then still recover the cost of doing this – either from the express right in the defects correction provision, or as a remedy for the original breach of the obligation to build to specification?
This situation was explored recently by the Singapore High Court in Thio Keng Thay Versus Sandy Island Pte, which concerned a contract for sale of a new house. It included a conventional defects correction process requiring the seller to correct any defect within one month of notification, failing which (after giving a notice of intention to do so) the buyer could step in and correct the defects by other means, at the seller’s expense.
The buyer notified significant defects. He asked for method statements to show how the seller proposed to address the rectifications – all of which the buyer rejected before engaging others to rectify the defects and claiming the full cost of doing so. The seller, of course, argued that the buyer was in breach of the contract in failing to give them the opportunity to correct the defects and that the cost arising should be borne wholly by the buyer.
The court found that there was a seller’s right to rectify defects and that it had been improperly circumvented by the buyer in unreasonably failing to allow access for inspections and in rejecting method statements, before stepping in to rectify the defects by other means.
As a result, the buyer had no right to recover his full cost of rectification under the defects correction procedure which he had breached – but the court found that he still had a “common law” right to recover damages for the original seller breach – the defects. That meant only awarding the buyer a sum equivalent to the amount it would have cost the seller to rectify the defects – which was, of course, less than the buyer actually incurred.
So, the seller and the buyer each paid for the cost arising from their respective breaches of the contract. That seems correct but, to arrive at this decision, the court had to rely on at least two rights which were not expressed in the contract, and had to consider the concept of reasonableness. Disputes like this can, however, be avoided with provisions to clarify:
• Whether the owner has an obligation or just an option to notify newly-found defects for contractor rectification;
• Whether any such obligation is subject to consideration of the contractor’s track record in relation to defects previously notified;
• The procedure for submission of (and objective criteria for approval of) proposals for rectification;
• In what circumstances the owner can step in and rectify notified defects, due to the contractor’s failure to follow the process; and
• Whether this process constitutes the owner’s exclusive remedies arising from the existence of defects.
Although defects are a fact of life, we can avoid unnecessary fights about them.
* Stuart Jordan is a partner in the Global Projects group of Baker Botts, a leading international law firm. Jordan’s practice focuses on the oil, gas, power, transport, petrochemical, nuclear and construction industries. He has extensive experience in the Middle East, Russia and the UK.