14/08/2015
It should come as no surprise that defective building work is one of the most commonly disputed areas in construction law, costing developers large chunks of their profit, not to mention peace of mind.
To protect margins, developers (as employers of the contractors assigned to complete the building and/or engineering work) need to be clear about their legal rights when it comes to rectifying or recovering money for defective building work. As usual, in the case of developers, the starting point is always the construction contract.
The Construction Contract and Building Defects
The scope of defects in construction and engineering work can vary widely, and defects may not become apparent until months, or even years after the building project ends. It is, therefore, imperative that developers obtain experienced legal advice when drafting and negotiating a JCT Standard Building Contract (SBC) (or an equivalent).
Under the SBC regime, if defects occur at the time of work, the contractor is obliged to fix them at no extra cost and the contractor will be liable if remedying the defects cause delays in the completion of the project. The contractor must also carry out work with care and skill and use quality materials. The standards and types of the materials used should be outlined in the contract itself to avoid disputes.
Practical Completion
Most building contracts specify a time when the works are to be completed. The expression 'practical completion' is generally understood to mean that the contractor has completed the works in accordance with the contract and can hand them over to the employer. Definitions of practical completion range from 'nearly but not quite complete' to 'complete for practical purposes' but there is no formal definition accepted by the industry as a whole. Most of the standard form contracts do not define practical completion.
Once the contractor is satisfied that the works have reached practical completion, the employer's representative and the contractor will inspect the project. If it is agreed that practical completion has been achieved, a practical completion certificate/statement will be issued. This can happen despite minor defects (not affecting the employer's ability to use the works) remaining in the works which the contractor will rectify (a process known as snagging).
Rectification Period
Under the construction contract, there will be a period of six to twelve months after the contract has been completed which is known as the Rectification Period.
During the rectification period, the employer can issue instructions requiring defects which arise to be rectified by the contractor. When the rectification period ends the employer will commonly prepare a schedule of defects and then when the contractor has made good those defects to the employer's satisfaction, a certificate of making good will be issued.
A good solicitor will know to take care when drafting the definition of ‘defect’ in relation to the rectification period and ensure the wording allows no room for a costly dispute to arise.
Under the Defective Premises Act 1972, a contractor taking on work on a dwelling premises owes a duty of care to ensure that the work is done in a workmanlike or, as the case may be, professional manner, with proper materials so that the dwelling is fit for human habitation. 'Fit for habitation' does not impose a separate obligation, but is the standard by which 'workmanlike manner' and 'proper materials' are to be judged.
The duties owed under the Defective Premises Act 1972 extend to Property Developers, and it cannot be excluded or restricted in any way.
The Extent of Damages that Can be Claimed for Defective Building Work
The payment of damages in relation to a breach of contract is designed to put the innocent party back in the financial position he or she would have been if the contract had been properly performed. For example, in the case of Newton Abbott Development Co. Ltd v Stockman Brothers (1931) 47 T.L.R. 616 it was held that a property development company was entitled to recover the reduction in the value of houses that it had sold in their defective state.
When it comes to the evaluating the extent of damages that can be granted to remedy a particular defect the House of Lords developed the following principles in the case of Ruxley Electronics and Construction Ltd v Forsyth [1995] UKHL 8:
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The Court focused on reasonableness. In circumstances where the cost of rebuilding is out of proportion to the benefit that will be obtained, the cost of rebuilding will not be awarded as damages.
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If the cost of rebuilding cannot be awarded as damages, the correct measure of damages is the difference in value between what was contracted for and what was delivered (even if the difference in value is nil).
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Damages are not limited to the diminution of value or reinstatement. Inconvenience resulting from not being received what was contracted for may also be claimed.
Date of Assessment for Occurring Loss Caused by Building Defect
The date legally used for assessment of the loss was the date when the defect was noticed. However, when considering the cost of repair the date of assessment is usually taken as when it is reasonable in the circumstances to undertake the work.
A party seeking to bring an action for breach of contract in relation to defective works has six years to do so if the contract is executed under hand (signed by a single, authorised representative) or twelve years if the contract is executed by deed. Those periods run from the date of the breach of contract. In the case of patent defects this should be obvious, as it is the date when the defective work is carried out, but for latent defects the date of cause in action is usually taken as being the date on which practical completion is certified or given.
Latent Defects Insurance and NHBC Warranties
In order to increase the saleability of the residential dwellings contained in your development, it is worthwhile purchasing an NHBC warranty and insurance policy such as Buildmark. Buyers who purchase a new home will be unable to secure a mortgage without this kind of cover.
Under such a warranty you are responsible to rectify damage caused by your failure to build to NHBC Standards which is first reported to you within your liability period (usually the first 2 years following completion). You must do this within a reasonable time and at your own expense.
Latent defects are defects that only come to light after the project ends. In order to protect your interests as a building owner, it is important to arrange Latent Defects Insurance to cover you for defects which fall outside existing warranties.
Latent Defects Insurance provides ‘no fault’ cover, meaning you do not have to prove negligence on behalf of the subcontractor in order to make a claim.
The policy starts at practical completion and may be enforced for a period of 12 years thereafter. Typically the policy covers structural damage and the resultant damage arising, threat of structural damage, waterproofing and defective design. However, it is possible to obtain an extension to the cover for mechanical and electrical installations.
In Summary
Defective building work in relation to construction contracts is complex, and very few major development projects are completed without some issue arising. The most important thing developers, as employers of the contractors assigned to carry out the work, can do to protect their best interests and their bottom line is:
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make the construction contract is watertight in relation to the definition of the term ‘defect’ and the time limits in which they can claim a remedy.
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take out appropriate warranties and Latent Protection Insurance to ensure the saleability of the properties and long-term protection of residence and yourself
To talk to us further about any points raised in this article, please phone Charlotte Waters on 0207 993 6960.