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Appropriate Deductions for Third-Party Rectification of Defects

The JCT Intermediate Building Contract 20011 edition ("IC11") provides for an "appropriate deduction" to be made from the Contract Sum where an Employer instructs alternative contractors to remedy faults in works which are not made good by the original Contractor within the rectification period. There is no definition of the term provided within the contract and, until recently, it has not been discussed at length in case law. The case of Mul v Hutton Construction Ltd [2014] EWHC 1797 (TCC) changed this and raised for the first time the issue of what constitutes an appropriate deduction in these circumstances.

Facts

Hutton Construction Ltd ("the Contractor") carried out substantial works to the home of Oksana Mul ("the Employer"), including refurbishment works and an extension at a contract value of just over £3,000,000. On achieving practical completion a long list of defects was attached to the practical completion certificate issued by the Contract Administrator but, as Ms Mul wished to take occupation quickly, the final sum was paid and Hutton Construction moved off site.

Following a series of correspondence with the Contract Administrator, Ms Mul engaged third party contractors to rectify the defective works, a process that cost in excess of £1,000,000. Ms Mul then issued a claim for damages and for overpayment, seeking to recover the full amount of remedying the defects from Hutton Construction.

In defence of Ms Mul's claim, Hutton Construction stated that they remained willing and able to make the repairs themselves, at a lesser cost, throughout the rectification period. They therefore sought a decision by the court that the amount recoverable ought to be limited to the amount attributed to the item of work by the initial contract under the schedule of works.

Decision

The court disagreed with Hutton Construction and held that an appropriate deduction meant "a deduction which is reasonable in all the circumstances", and should be calculated following a broad investigation into the circumstances surrounding the repair of the defect. A number of particular factors to be considered when determining the appropriate deduction were noted by the court, including but not limited to the following:

1. The Contract rates/priced schedule of works/Specification; or

2. The cost to the Contractor of remedying the defect (including the sums to be paid to third party sub-contractors engaged by the Contractor); or

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.

The court also suggested that whether or not the Contractor had been given the opportunity to rectify any faults would have a bearing on the amount of the appropriate deduction. Where an Employer has failed to give the Contractor an opportunity to make good without justifiable excuse then the appropriate deduction should reflect the extent to which the Contractor could have repaired the work more cheaply. This point is made strongly in the judgment, which goes as far as to suggest that a nil evaluation could be appropriate in situations where the Contractor would have been able to repair the defects at no cost by calling on its supply chain.

In summary, if a Contractor is not given an opportunity to make good defects without reasonable justification, Employers will run the risk of having their entitlement to claim severely reduced, and potentially extinguished altogether. Therefore, although the court decided in favour of the Employer, this judgment provides some welcome news for Contractors in that it will require Employers to give very careful thought before instructing third parties to repair any defective work.