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What is an “appropriate deduction” where the contractor has failed to remedy defects?

30 July 2014

It is common for building contracts to include obligations on contractors to rectify defects arising during the defects liability period at no cost to the employer. This is usually linked to the release of the remaining half of the contractor's retention. 

Under the JCT forms of contract, the employer may instead make an "appropriate deduction" from the contract sum. In the recent case of Oksana Mul v Hutton Construction Limited, the court considered, for the first time, what is meant by such an "appropriate deduction". 

Ms Mul appointed Hutton to refurbish her country house. Practical completion was certified; however a number of defects were identified during the defects liability period. The contractor failed to carry out the work and the employer instructed third parties to remedy the defects.

Ms Mul subsequently brought a claim for damages of over £1m against the contractor. In its defence, the contractor argued that the employer could only recover an "appropriate deduction" calculated by reference to the contract rates and never by reference to the cost to the employer of rectifying these defects.

The court disagreed with the contractor and decided that an "appropriate deduction" will be what is reasonable in all the circumstances. This may include consideration of:

  • the contract rates
  • the cost to the contractor of remedying the defect
  • the reasonable cost of the employer using a third party to remedy the defects, or
  • the particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.

An appropriate deduction would therefore not necessarily solely be based on the contract rates.

The court noted that the employer is still under a duty to mitigate, which would normally involve inviting the original contractor back to remedy the defects. This pointed to an appropriate deduction being the cost to the contractor of remedying the defect.

However, this would not always be the case and the court gave examples of when it would instead be appropriate to instruct third parties.

These included where there was fraudulent behaviour on the part of the original contractor or where there were numerous defects so that it would be unreasonable to expect the employer to invite the original contractor back.

In such circumstances, the appropriate deduction would be the reasonable cost of the employer using a third party to remedy the defects.

Steven Carey, Partner in our Construction, Engineering & Projects team, commented:

"Employers should exercise caution before electing to use third party contractors to remedy defects. Unless doing so would be reasonable in the circumstances (which the court indicated may be limited), an employer may find that it is unable to pass the full cost of using the third party contractors on to the original contractor."

This article was written by Christopher Busaileh. 

For more information please contact Christopher on +44 (0)20 7427 4546 or christopher.busaileh@crsblaw.com.