Construction Snapshot: what are 'appropriate deductions' for remedying defects?

The most commonly used standard form build contracts entitle Employers to make “appropriate deductions” from the Contract Sum where a Contractor is instructed not to remedy defects identified in the rectification period. However what is “appropriate” by way of deduction is often disputed by the parties. Assistance has now been provided by the courts

The SBCC and JCT standard form contracts provide that the Employer is entitled to make an “appropriate deduction” from the Contract Sum in the event that the Contractor is instructed not to remedy faults identified within the rectification period. There is, however, no definition to be found within the contracts of what is meant by the expression “appropriate deduction”.

So what does the term actually mean? A recent English case, likely to be highly persuasive in Scotland, has provided some guidance.

Mul v Hutton Construction Limited [2014] EWHC 1797

Hutton Construction Limited (the Contractor) were employed to carry out substantial extension and refurbishment works for Mul (the Employer) at a country house. The building contract between the parties was the JCT IC05 which includes the relevant clause allowing an “appropriate deduction” where the Employer instructs the Contractor not to remedy defects.

A list of incomplete and defective works was issued with the practical completion certificate. Hutton did not return to site to remedy the defective works on the list.  Mul engaged new contractors to remedy these faults and claimed the costs incurred as damages .

Reasonable in all the circumstances

The Court found in favour of the Employer, holding that the “appropriate deduction” referred to within the building contract meant “a deduction which is reasonable in all the circumstances”.

The Court described an “appropriate deduction” as a neutral term the precise effect of which was intended to change depending on the circumstances. Had the building contract intended a precise effect (so that for example an “appropriate deduction” be a sum calculated by reference to the Contract Price/priced schedule), it would have expressly provided so.

The Court identified relevant factors for determining what is reasonable as including:

• the contract rates/priced schedule of works;
• the cost which would be incurred by the Contractor for remedying the defects;
• the reasonable cost to the Employer of engaging another contractor to remedy the defects; and
• the particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works

Mitigation by the Employer

The Court noted that whether or not the Contractor had been given an opportunity to rectify the defects would have an impact on the amount of the deduction which was appropriate.

Accordingly, where no opportunity is afforded to the Contractor to make good the defects and no justifiable excuse is given by the Employer for their failure to allow the Contractor to do so, the appropriate deduction should be restricted to the extent the Contractor could have repaired the works more cheaply. A nil evaluation may be appropriate in situations where the Contractor would have been able to repair the defects at no cost by calling on its supply chain.

The Court did recognise, however, that it may be reasonable to refuse the Contractor an opportunity to remedy defects where:

• the defects are so excessive that no reasonable Employer would allow the Contractor to return; or
• the Contractor behaved fraudulently; or
• the Contractor had made it clear that it was unwilling to remedy the defects.

Although the Court determined this case in the Employer’s favour, there is a clear reminder to Employers of the duty to mitigate their losses. Employers may well be in breach of this duty if, without good reason, they instruct third party contractors to remedy defects and do not afford the original Contractor an opportunity to do so.

Practice Points Arising

• Parties may consider introducing precise wording in their contracts to be applied to determine an “appropriate deduction” so that this is not a neutral term with changing effect dependent on interpretation of all of the particular circumstances.
• As a rule, where defects arise the original contractor should be afforded an opportunity to carry out necessary remedial works.
• Before engaging an alternative contractor an instruction should be given to the original contractor that it is not to carry out the remedial works.
• An alternative contractor should only be employed where there is good reason to justify the exclusion of the original contractor otherwise it may be argued that the appropriate deduction should not be the actual cost to the employer but the mitigated cost which could have been achieved by the original contractor.