DEFECTS AND RECTIFICATION PERIOD IN CONSTRUCTION CONTRACTS: THE CONTRACTOR’S DILEMMA

BY

HARRISON OGALAGU[1]

ABSTRACT

“Defects will occur in buildings. It is one of the great certainties in construction, the equivalent of death and taxes in life more generally”.

Professor Anthony Lavers

The unique and sometimes complex nature of the building and construction sector with different professionals and groups with their different interests pose a sort of different requirements which compete with one another. Virtually all construction contracts contain very detailed specifications, drawings and details relating to contract requirements, and a combination of the complexity of the construction itself and human nature gives ample scope for minor deviations from the contractual specifications. Defects can take place in any part of a construction project and at any stage of the construction. This paper examines defects in building and civil engineering work which occur or become apparent after completion of work (contract) and after expiration of the maintenance period otherwise known as “defects liability period” or what has recently been dubbed “rectification period”.

Ordinarily, issuance of Certificate of Practical Completion brings the contractor’s obligation to an end and only defects due to workmanship and materials not in accordance with the contract are required to be made good at the contractor’s cost. Oftentimes, contractors believe that liability is limited to what is written in the contract. Most contractors also believe that after the defects liability period has expired, liability of maintenance or effecting repairs of any further or subsequent latent defects is borne by the employer or his successor-in-title. In many circles, it has been contended that the issuance of final certificate discharges the contractor of liability for the defective works and the cost of remedying same. The paper is a product of examination of necessary legal literature and judicial authorities on the legal position of construction contract in relation to rights of the parties and whose liabilities are the defects after issuance of final certificates.

INTRODUCTION

Construction contracts can be divided into an initial construction period followed by a post-completion period during which different types of contract impose different requirements. The contractor’s basic obligation is to comply with the terms of the contract. The contract documents consist of plans, specifications and the building code within the required time. In a construction contract therefore, a contractor who undertakes to do work and supply materials impliedly undertakes;

(a)          To do the work undertaken with care and skill or, as sometimes expressed, in a workmanlike manner;

(b)         To use materials of good quality

(c)          That both the workmanship and materials will be reasonably fit for the purpose for which they are required, unless the circumstances of the contract are such as to exclude any such obligation[2].

In the simplest case the contract may contain provisions which apply post-completion, for correction of latent defects which appear during a stipulated period. Alternatively, the contract may require works to be maintained for a stipulated period[3]. The achievement of completion of work is unaffected by the subsequent manifestation of defects that were latent at the date of completion[4], although such defects will entitle the owner to an abatement of, or set-off against, the contract price or any installment payable upon completion[5]. Dealing with construction failures requires various degrees of familiarity with the law, building technology and practice.

RECTIFICATION PERIOD (DEFECTS LIABILITY PERIOD): DEFINITION

There is frequently a clause in building contracts that provides that the contractor shall make good defects, or repair or maintain the works for a certain period after completion. This period is sometimes referred to as the “defects liability period” or “maintenance period[6]. The 2005 Suite of JCT Contracts has now replaced the phrase “defects liability period” with what is now called a “rectification period”. The principle remains the same but the phraseology has been simplified. The Rectification period is akin to a guarantee period and the contractor usually has the obligation, and indeed the right, to remedy defects appearing within this time.

Defect liability period is therefore a period whereby the contractor must repair any defect identified by the supervisory officer after a particular work was duly completed. All expenses to repair the defects shall be borne by the contractor and no additional costs charged to the employer. It is a period usually between 6 and 12 months following practical completion, during which the employer can require the contractor to return to the site to complete any omissions in the works and to make good any defective work or materials. When all omissions and defects have been made good, the contract administrator or Employer’s Agent must issue a certificate or statement of completion of making good defects.

The effect of the “defects liability” provisions is not only to render the contractor liable to correct the defects (such liability existing in any event) but also to afford the contractor a right to receive notice of defects in the stipulated period and to have the opportunity of correcting them at his own expense, as opposed to what may be the greater expense of bringing in other contractors. The underlying consideration for the commencement of the rectification period under the JCT Suite is practical completion. Conversely, defects appearing before the achievement of completion may be regarded as “temporary disconformity” not ordinarily sounding in separate damages[7].

The construction defects in contemplation may arise from improper soil analysis/preparation, site selection and planning, architectural design, civil and structural engineering, negligent construction or defective building materials[8]. Summerlin and Ogborn acknowledge that construction defects can be the result of design error by the architect, a manufacturing flaw, defective materials, improper use or installation of materials, lack of adherence to the blueprint by the contractor, or any combination thereof[9]. Defect in this context connotes a failure of the completed project to satisfy the express or implied quality or quantity obligations of the construction contract[10]. Four categories of typical defects can be identified as design deficiencies, material deficiencies, construction deficiencies and subsurface/geotechnical problems.

LIABILITY FOR DEFECTS

Liability in this context connotes duty owed another in contract or by operation of common law of tort. The failure to perform these duties or responsibilities constitute a breach, therefore the person will be answerable or accountable to the other party who may have suffered as a result of his/her wrongful act. In Greaves & Co. v. Bayham Meike[11], Lord Denning M.R. in his clinical finesse held thus:

“Apply this to the employment of a professional man. The law does not usually imply a warranty that he will achieve the desired result, but only a term that he will use reasonable care and skill. The surgeon does not warrant that he will cure the patient. Nor does the solicitor warrant that he will win case”

In the words of Oliver J. in Midland Bank v. Hett, Stubs & Kemp[12], the learned jurist opined that the obligation to exercise reasonable skill and care is not the only contractual term which ought to be considered in a professional negligence action, there are implied terms that he will draw up the option agreement and effects registration.

Specifically, in Schmauch v. Johnston[13] it was laid down that a builder, in execution of his duty, should do so in a good and workmanlike manner. In engineering and construction contracts, there are statutory parameters which cut across all the activities of a contractor/builder and which may be used to determine the standard of his product. These parameters may be summed up as implied warranties of fitness and habitability and usually form the basis of building regulations, codes, and byelaws. The parameters include structural and dimensional stability, durability, freedom from damp, adequate drainage, service installations such as electrical, mechanical, sanitary fitments and waste disposal installations[14].

It is significant to underscore that absence of privity of contract does not often discharge the liability of a party in building and construction contracts. Put differently, the liability of a party for defects in the construction work is not limited between the parties inter se. Third parties who have acquired interest in the construction work and indeed others who are privies in estate can claim damages or indemnification for breach. The builder’s position becomes precarious because his liability is not only contractual. Other parties having to do with the building (trespassers, licencees, visitors, etc.) may institute an action against him based on torts except where the builder (contractor) can successfully establish prima facie the elements of contributory negligence, or plead an ” Act of God” or take refuge under the statutes of limitation.

In Linden Gardens Trust Ltd v. Lenesta Sludge disposals Ltd[15], the House of Lords held that the recovery of damages for breach on a contract was not depended or conditional on the plaintiff having a proprietary interest in the subject matter of the contract at the date of the breach. The Court further held that the present owner could recover damages for defective work even though the owner suffered no actual damage as the building had been sold for full value before the damage was discovered. In Barnes v. Mac Brown & Co.[16], the plaintiff in 1971 bought a home built in 1967 from the original owners. On moving in, large cracks among other defects were observed around the basement walls. The plaintiff’s suit against the builders for breach of an implied warranty of habitability which was earlier dismissed by a lower court was upheld on appeal notwithstanding the absence of privity between the builder and the subsequent vendee.

Similarly, the Supreme Court of Queensland in Director of War Service Home v. Harris[17] held with a finality that “if the owner subsequently sold the building, or gave it away, to a third person, that would not affect his accrued right against the builder for damages.” In this case the defective works carried out by the defendant for the plaintiff were not discovered until after the houses were sold. By the verdict of the learned judge, Sir Harry Gibbs and concurred by Stable and Hart JJ, the owner is entitled to recover damages for the cost of rectification of the defective works. The builder would however be relieved of liability if the vendor makes himself the principal contractor behind the construction and disposition of the property as in the case of Le Blanc v. Ellerbee Builders Inc.[18]

During the defects liability period, which commences on the completion of the works, standard forms of contract generally give the contractor a licence to return to the site for the purpose of remedying defects. In effect, such condition of contract confers upon the contractor a right to repair or make good its defective works, which can (usually) be carried out more cheaply and oftentimes more efficiently than by some outside contractor brought in by the employer[19]. Engineering and Construction contracts envisage that defects might occur during the defects liability period, and such defects shall not be considered as a breach of contract. Upon the receipt of notice the contractor is obliged to return to the site to make good the defects. However, if the contractor fails to rectify the defects upon receipt of notice, he is clearly in breach of contract and the employer reserves the right to seek remedy in form of damages to recover the cost of remedying the defect. Thus, a cause of action for failure to comply with defects liability obligations normally arises at such later date after practical completion as the contract prescribes for carrying out those obligations.

The liability of the contractor/builder is not limited to defects that occur during the defects liability period and before the issuance of Certificate of Practical Completion. Notwithstanding the issuance of a certificate of practical completion, the subsisting contractual relationship inures beyond the 6 to 12 months’ defects liability period. In the eyes of the law, it stretches through the life of the builder or the period in which any composite element or component erected by him would reasonably be expected to last, whichever is shorter.

In United Kingdom where the standard of Engineering and Construction contracts are modeled, for instance, in the absence of words to the contrary, the contractor’s liability for not completing the works in accordance with the contract continues until barred by the Limitation Act 1980 and thus extends for the period of 6 years for a simple contract, and 12 years for a deed, from the date when the cause of action against him arose[20].

The liability of the contractor/builder also extends beyond the defects liability period especially where there is an expressed or implied warranty as to fitness for purpose, a builder will be held liable for structural defects created even by a nominated sub-contractor. The general position of law is that an employer under a construction contract does not impliedly warrant the feasibility of the design set out in the contract documents. Similarly, an architect or engineer does not warrant to the contractor or builder the practicability of the plans, drawings and specifications prepared by him, or of the temporary means of construction indicated in the specification. It is therefore the duty of the contractor to investigate these matters for himself, and it has been held that any usage or custom for him to rely on the drawings or specifications will not assist him. Traditionally, when an employer engages a contractor to construct a building on the basis that the building will be constructed in accordance with an architect’s (or other design professional’s) design supplied by the employer, then the contractor whilst accepting to carry out the works in accordance with the design documents, makes no promise that the building will fulfill its intended purpose, save in those rare instances where such can be objectively shown to have been the case.

Nonetheless, some limited design responsibility may be placed on a contractor outside the total package deal such as design and build contracts. In some instances and by virtue of design documents failing to specify all materials, a choice of materials is left to the skill and judgment of the contractor and this is a rich vein for disputes affecting liability for defects. In Overcast v. Baldwin[21], the plaintiff recovered from the general contractor the cost of hiring a third party to underpin the foundation and fix the seriously cracked walls initially erected by a subcontractor.

It is in the interest of a contractor to take care to prudently consider the implications of the design, even where he thinks he owes no responsibility whatsoever to. In some jurisdictions a contractor is under a duty to warn the employer of any problems with the design. The Supreme Court of Canada in Brunswick Construction v. Nowlan[22] held that a contractor executing a work in accordance with plans of the employer’s architect is under a duty to warn the employer of obvious design defects. The situation in England is slightly different. The case of Aurum Investments Limited v. Avonforce Limited (in liquidation)[23], has resolved the spate of conflicting authorities[24] on the duty to warn. In Aurum’s case where an underpinning subcontractor was held not to be liable under the duty to warn principle when part of the excavation work collapsed. Mr. Justice Dyson opined that;

“the law is moving with caution in this area … a court should not hold a contractor to be under a duty to warn his client unless it is reasonable to do so(Underlining for emphasis)

The law is settled on preponderance of authorities that in a “design and build” contract the contractor, in the absence of an express contractual rebuttal, will be under an obligation to ensure that the finished product will be reasonably “fit for its intended purpose” Where the contract is not a design and build but it is reasonable to deduce into the contract implication for fitness for intended purpose, a prudent contractor is advised to alert the employer to any obvious design defects that he may come across. This is because at Common Law, the fitness for purpose duty is stricter than the ordinary responsibility of an architect or other consultant carrying out design where the implied obligation is one of reasonable competence to “exercise due care, skill and diligence. Thus, in Greaves v Baynham Meikle[25], the illustrious Lord Denning had this to say of the fitness for purpose obligation;

“Now, as between the building owners and the Contractors, it is plain that the owners made known to the Contractors the purpose for which the building was required, so as to show that they relied on the Contractor’s skill and judgment. It was, therefore, the duty of the Contractors to see that the finished work was reasonably fit for the purpose for which they knew it was required. It was not merely an obligation to use reasonable care, the Contractors were obliged to ensure that the finished work was reasonably fit for the purpose”

The contractor/builder’s liability is strict particularly where the defect in question is latent, except a plaintiff acquiesces beyond the prescriptive date after discovery. Thus, in Austen v. Keck[26], an architect, joined with the vendors, were sued in respect of a ceiling that collapsed 12 years after construction. The action was dismissed at first instance on the ground of having exceeded the 5-year prescription of the statute of limitation. On appeal, the decision was reversed because the statute could only run from when the plaintiff had knowledge or could have known of the defect. In deserving circumstances punitive damages may also be awarded against a builder, who fraudulently conceals the existence of structural defects well known to him before handing over[27].

Lord Diplock in P&M Kaye Ltd v. Hosier & Dickson Ltd[28], held inter alia;

Condition 15 imposes upon the contractor a liability to mitigate the damage caused by his breach by making good the defects of construction at his own expense. It confers upon him the corresponding right to do so. It’s a necessary implication from this that the employer cannot, as he otherwise could, recover from the contractor the difference between the value of the works if they had been constructed in conformity with the contract and their value in their defective conditions, without first giving the contractor the opportunity of making good the defects.”

 

There was a lingering controversy among contractors and industry players as to whether a contactor should be liable to third party or only to the client. This controversy has been substantially laid to rest by Lord Wilberforce when in the case of Anns v. Merton London Borough Council[29], the Law Lord held that the contractor owed a duty of care to subsequent purchaser to ensure that the building was safe for occupation and use, and the owed duty of care could result in liability for damage to the building itself.

LIABILITY OF CONTRACTOR AFTER FINAL CERTIFICATE

Final certificate is usually due about a year after Practical Completion. The contention among scholars in this regard is how final indeed is the final certificate in construction projects with respect to defects on the works and after the expiration of the defects liability period. In England, for instance, there has been some controversy as to whether the Final Certificate is conclusive as to quality matters. Abundant judicial authorities are of the common view that issuance of the final certificate relieves the contractor from any obligation from the employer and transfers all other responsibilities to the employer to make good any ‘discoverable’ defects on the works. In Shen Yuan Pai v. Dato Wee Hood Teck & Ors[30], the court held that as the architect in this case had issued his final certificate, thereby showing his satisfaction with the works carried out by the plaintiff, the plaintiff was entitled to the amount claimed.

There is thus a growing assumption in the industry that contractors take relieve from a final certificate and assume that no new or further claims can be made against them for defective or incomplete works under the final certificate, other than latent defects, if latent defects are discovered during defects liability period. Outside the defects liability period, the issuance of final certificate prevents the employer from bringing claims for defects in the works from a breach of contract and/or tort irrespective of whether those defects may be said to be latent or patent[31].

Johnson I Ikpo[32] is however is of the view that notwithstanding the issuance of final certificate, the subsisting contractual relationship inures beyond the 3 to 6 months’ defects liability period. He further opined that in the eyes of the law, it stretches through the life of the builder or the period in which any composite element or component erected by him would reasonably be expected to last, whichever is shorter.

The binding effect of the Final Certificate is capable of substantially affecting the rights of the employer in relation to certain defects. In reality though, the effect of the Final Certificate is to rule out any action with respect to ongoing patent defects. Understandably, it is impossible for an architect or project consultant to know with any certainty whether there are any latent (or hidden) defects in the contractor’s work. Therefore an employer will ordinarily expect to have the benefit of the usual limitation period (between 6 and 12 years), so that if any latent defects appear during that limitation period, then he is able to sue the contractor, whether a Final Certificate has been issued or not.

In the same token, it should be noted that if defective work or workmanship or design has been knowingly covered up or concealed so as to constitute fraud, the commencement of the limitation period may be delayed. The decided period may be delayed until discovery actually occurs; or at least the defect could have been discovered with reasonable diligence, whichever is earlier. The case of Robinson v. PE Jones (Contractors) Limited[33]  provides a reminder to contractors and consultants that their liability for defects will normally extend beyond any contractual defects liability periods to include a liability for breach of duty of care not to cause economic loss to its client where a special relationship exists between the contracting parties. Cause of action for breach of the tortious duty of care is not circumscribed by specific provisions in the contract in relation to defects liability period. The contractor in this case was only able to plead a limitation defence in respect of the negligence action as it was able to locate a copy of the contract and rely on its specific provisions. This case certainly confirms that it is possible to include contractual provisions which expressly exclude a concurrent tortious liability and expressly disavow any ‘assumption of responsibility’. Builders should be advised to ensure that such provisions are included in their contracts.

CONCLUSION

Prior to the commencement of any construction project, it is worth thinking about how defects and completion issues should be addressed at procurement stage. Whether something is defective will often depend not so much on whether it is completed competently from a workmanship perspective but on the precise standard and specification to be met. Similarly, if specific tests are to be passed these will need to be provided for contractually, and consideration given to whether general or liquidated damages should apply in the event of failure. The precise standard and level of completion required for Practical Completion is something which can often cause arguments, so careful consideration should be given to whether the completion requirements are clear and what risks they may hold.

Clearly, early consideration should be given to the contractual procedures and relevant notices. Even if the defects liability period has ended the contractor will in the vast majority of cases remain liable in damages. An employer who discovers latent defects after the expiry of the defects liability period would still be well advised to notify the contractor of the same. The employer will still have a claim in damages against the contractor if the defects are a result of the contractor’s breach of contract and/or negligence and the employer suffers loss as a result (assuming the claim is not time-barred of course). Nevertheless, if an employer wishes to enter into a ‘full and final settlement’ with a contractor, it should ensure that that its right to claim in respect of latent defects is preserved.

An end user of a construction project who did not employ the contractor or design team should be careful to consider whether he has the benefit of any assignment of the relevant building contract or professional appointments, or alternatively whether he has collateral warranties or third party rights. An assignee of any construction project should, as a matter of necessity prior to the assignment, conduct a structural integrity test[34] on the project before closing the deal just to determine the ‘margin between safety and disaster’. The consequences of structural integrity failure can be tragic in terms of loss of life and financially crippling due to loss of value.


[1] LL.B; B.L; Senior Associate, Tope Adebayo LLP (www.topeadebayollp.com)

[2] Ayodeji S. Ojo: Defect Liability: Employer’s right and Contractor’s Liabilities examined.

[3] Chitty on Contracts Vol. II 29th Edition

[4] Jarvis v. Westminster C.C. (1969) 1 W.L.R. 1448

[5] Gilbert-Ash v. Modern Engineering (1974) A.C. 689, HL

[6] Keating on Construction Contracts 2006, 8th edition.

[7] This is based on the (dissenting) judgment of Lord Diplock in P & M Kaye v. Hosier & Dickinson (1972) 1 W.L.R. 146, but see further Lintest v. Roberts (1980) 13 B.L.R. 38, where defects prior to completion were held to give rise to a vested right of correction.

[8] Frankel E. R. (2005). Insurance Coverage for Construction Defect Claims.

[9] Summerlin & Ogborn (2006). Construction Defects. Construction Law Attorneys, Thomson Business.

[10] Cama J. (2004). Who Pays to Fix Building Defects

[11] (1975) 1 WLR 1095

[12] (1979) Ch. 384

[13] P. 2d 119 (1976)

[14] Johnson I Ikpo (2005). The Builder’s Liability Beyond the Defects Liability

[15] (1993) 3 All E.R. 417

[16] 342 N. E. 2d 619 (1976)

[17] (1968) Qd R 275

[18] 317 So. 2d I (Ct. App., 1975)

[19] Harbans Singh (2003). Engineering and Construction Contracts Management – Post Commencement Practice.

[20] Keating on Contract, op cit.

[21] 544 P. 2d 464 (1976)

[22] (1974) 21 BLR 27

[23] (2001) CILL 1729

[24] See Victoria University of Manchester v. Hugh Wilson and Lewis Womersley and Pochin (Contractors) Limited (1984) CILL 126 and University of Glasgow v. W. Whitfield and John Laing Construction Limited (1988) 42 BLR 66

[25] [1975] 3 All ER 99

[26] 349 N.E. 2d 20-65 (1975/76)

[27] Mitchell Homes Inc. v. Tens, 319 So. 2d 258 (1975)

[28] (1972) 1 W.L.R. 146 at p.166

[29] (1978) AC 728

[30] (1976) 1 MLJ 16

[31] Ayodeji S. Ojo Op. Cit.

[32] Op.cit.

[33] (2011) EWCA Civ 9

[34] Structural Integrity test is conducted to determine the reliability and safe design of all engineered structures  and is vitally important to prevent catastrophic failure and ensure continuous profitable operation.

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