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Defective construction work - who pays the bill?

Is an owner required to permit a contractor to fix itsdefective work, or can the owner arrange to have the remedial work performed byanother contractor and send the first contractor the bill? A recent Court ofAppeal case looks at the difficult issue of mitigation of loss in the contextof defective works.

Just about every construction contract provides for howdefects are to be managed. A typical scheme under a contract involves thecontractor being required to correct defects as and when notified of them, upuntil the end of a defects liability period (or a period of a similar name).After that the contractor is not obliged to correct any further defects thatbecome apparent, nor is it entitled to correct any further defects. The ownercan usually sue the contractor for damages, for the cost of repairing thedefects. However, damages are subject to a number of constraints, includingthat the owner must act reasonably to mitigate its loss. Damages are notrecoverable to the extent that the owner has unreasonably failed to mitigateits loss.

A relatively common argument that contractors (andsubcontractors) make in defects cases, where the defects have been rectified bythe owner (who sues the contractor for the cost of repair), is that the ownerfailed to mitigate its loss by not giving the contractor the chance to fix (atno cost to the owner) its defective works. If an owner spends £100,000 onengaging a second contractor to repair a defect for which the first contractorwas responsible, and the first contractor was willing to correct the defect atno cost to the owner, and at a cost of £20,000 to the first contractor, shouldthe owner be able to recover the £100K that it spent in having the defectrepaired? Or should it have gone back to the first contractor and given it thechance to repair the defect, meaning – if the first contractor accepted theinvitation and undertook the repairs satisfactorily – that the owner would nothave been out of pocket, and the first contractor would have borne an expenseof only £20K instead of £100K? Can the owner who carries out the work through asecond contractor recover £0, £20K, £100K, or some other amount?

The law does not offer any fixed rules or even clearguidance on mitigation, and when an owner will be taken not to have mitigatedits loss. Everything is fact and context dependent, however the followingpoints may be noted:

When a failure to mitigate is raised as a defence against anowner claiming damages for defective works, the question will be whether theowner acted reasonably by arranging for another contractor to perform theworks, instead of asking the original contractor to come back and fix itsdefective work.

The reasonableness of the owner’s conduct depends upon anumber of matters, including the difference in cost between the owner arrangingfor the defects to be repaired by a new contractor as opposed to the cost tothe original contractor in undertaking the repairs.

The fact that the contractor could have undertaken therepair work (or claims it could have) more cheaply than the owner does notnecessarily indicate a failure by the owner to mitigate its loss. What needs tobe shown is that there was something unreasonable about the owner’s conductwhich meant it spent significantly more money than it needed to on the repairs.

There is usually no legal requirement on an owner to invitethe contractor to repair its defective works. But a failure to do so can (andoften does) lead to a mitigation of loss issue, exposing the owner to the riskthat it will not be able to recover from the original contractor all of theamount it spent on correcting the defect. If it is found that the owner failedto mitigate its loss, it will often only be entitled to recover thehypothetical cost to the original contractor of performing the necessaryrepairs or re-supply.

A significant factor that goes to the reasonableness of theowner’s conduct is whether the owner has (justifiably) lost confidence in theoriginal contractor, and its ability to effect satisfactory repair work. Ifthere are reasonable doubts as to the contractor’s competence, the owner may bejustified in arranging for another contractor to effect the repairs, and itsdamages will not be reduced on the basis of any failure to mitigate its loss.As HHJ Coulson QC (as he then was) held in Iggleden v Fairview New Homes(Shooters Hill) Ltd:

‘It would take a relatively extreme set of facts to persuademe that it was appropriate to deny a homeowner financial compensation foradmitted defects, and leave him with no option but to employ the self-samecontractor to carry out the necessary rectification works’.

Iggleden concerned defective works performed in constructinga new home, but the same principle applies to commercial properties andfacilities.

This brings us to the Court of Appeal’s decision last yearin Woodlands Oak Ltd v Conwell. The facts were straightforward. Owners engageda contractor to perform certain work under a simple contract that did notinclude a defects liability provision. The work was performed defectively,leading to snags. The owners undertook the snagging works at their own cost,and sought to recover the cost from the contractor as damages. The claim fordamages was rejected on the basis that the owners had failed to mitigate theirloss because they did not invite the contractor to correct the defects. Thecontractor established to the trial judge’s satisfaction that it was willing toundertake the repair work, and that it would have come at no cost to either theowner or the contractor, because the contractor would have arranged for itssubcontractor (who was presumably responsible for the snagging items) to repairthem at no cost.

The result of this case may seem a little extreme, as thecontractor was able to escape liability for its defective works simply byvirtue of the fact that the owner carried out the repair work itself, and ifthe contractor had arranged for the work to be done it would have been at zerocost to it. Furthermore, it is not readily apparent as to how the owners couldbe said to have acted unreasonably, in failing to mitigate their loss. They mayrightly have lost confi dence in their contractor, which is why they did notoffer it the chance of fixing the snagging items. Nor was it suggested or heldthat the repair of the defects by the owners was itself unreasonable to do, orthat the amount they spent on repairing the defects was unreasonably large.

If anything, Woodlands Oak v Conwell highlights the perilsthat owners face in trying to recover damages for defective works withouthaving offered their contractor a chance to repair its defective works. Therisk is that if (unbeknownst to the owner) the contractor can repair the workat minimal or no cost, the owner will be unable to recover any damages shouldit arrange for another contractor to undertake the repairs. To play it safe,the approach that owners should take is to give their contractors a secondchance, unless it is clear that the contractor will not rectify the defectssatisfactorily.

References: Iggleden v Fairview New Homes (Shooters Hill)Ltd [2007] EWHC 1573 (TCC); Woodlands Oak Ltd v Conwell [2011] EWCA Civ 254.

This article first appeared in Law-Now, CMS CameronMcKenna's free online information service, and has been reproduced with theirpermission. For more information about Law-Now, click here.

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