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The appropriateness of sums

20 Jun 14 How do you decide what deductions are appropriate for defective work? Sarah E Philips reports

Sarah E Phillips, author of this article, is a solicitor with Thomas Eggar LLP
Sarah E Phillips, author of this article, is a solicitor with Thomas Eggar LLP

The JCT suite of building contracts provides a mechanism for the employer that permits him or her not to have defects that are properly notified to the contractor rectified by the contractor but to bring in other contractors to do this work instead (Clause 2.30 in the Intermediate Building Contract 2011).

This mechanism further permits the employer to make an “appropriate deduction” from the contract sum in relation to the works he has done by others, but what exactly do those words mean? What constitutes an “appropriate deduction”?

This question has exercised construction lawyers since the phrase first appeared but rather surprisingly it had not been specifically considered by the courts until it came before the High Court in Mul v Hutton Construction Limited [2014] EWHC 1797 (TCC).

Mrs Mul employed Hutton Construction to undertake refurbishment works on her family home. The Practical Completion Certificate issued by the contract administrator was accompanied by a list of incomplete or defective works, some of which Mrs Mul employed other contractors to rectify.

Mrs Mul then purported to exercise her right under clause 2.30 (of the 2005 version of the Intermediate Building Contract) to have an appropriate deduction made from the contract sum in respect of defects that had been notified to the contractor and which the contract administrator had instructed the contractor not to make good.

The question that the court was asked to consider was what mechanism should be used to value the appropriate deduction?

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Hutton Construction argued that the appropriate way to value the deduction would be on the basis of the rates or prices in the contract document. Mrs Mul was of the view that the choice of appropriate method of valuation should not be limited in this way, but should be made taking into account all the relevant circumstances.

The court preferred Mrs Mul’s position and concluded that the appropriate deduction under clause 2.30 was to be one that was reasonable in all the circumstances and that it can be calculated by reference to one or more of the following (which is not a definitive list):  

  1. The contract rates or prices;
  2. The cost to the contractor of remedying the defect (including any third party costs);
  3. The reasonable cost to the employer of engaging another contractor to remedy the defect; or
  4. The particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.

At first sight this may seem to be a rather broad and not particularly helpful finding, but the very fact that it does not prescribe a particular approach is important because of what it means. Employers may not be prevented from arguing that the contractor should reimburse them the amount that it costs them to get an alternative contractor to do the work, an amount that will almost certainly be more than it would have cost the contractor to do the work himself.  

The important thing to take from this decision is therefore that you should not assume that if you are not permitted to return to rectify a defect, or that the employer chooses to get the rectification work done by others, your liability for the costs associated with that rectification work will be limited by reference to your contract. Provided you are properly notified by the contract administrator about what the employer intends to do, your exposure could potentially be far greater.

The best option is of course maintaining a functional relationship with the employer so that the issue does not arise in the first place.

About the author: Sarah E Phillips is a solicitor with Thomas Eggar LLP

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