REUTERS | Eduardo Munoz

“Appropriate deduction” – it’s not money for nothing

It’s not often that we get a TCC judgment dealing with the interpretation of everyone’s favourite suite of domestic contracts, the JCT. Therefore, if you are a bit of a saddo like me, you will have read Akenhead J’s judgment in Oksana Mul v Hutton Construction Ltd with interest. In this case Akenhead J decided as a preliminary issue the meaning of an “appropriate deduction” under clause 2.30 of the Intermediate Form of Contract, 2005 edition (IC05), which is something I’ve had to deal with in a few adjudications over the years.

Oksana Mul v Hutton

I don’t want to dwell too much on how Akenhead J arrived at his conclusion, rather I want to talk about the practical consequences for those dealing with defects after practical completion under JCT contracts. However, a whistle-stop summary is as follows.

Clause 2.30 of the IC05 states:

“Any defects, shrinkages or other faults in the Works or a Section which appear and are notified by the Architect/Contract Administrator to the Contractor not later than 14 days after the expiry of the Rectification Period, and which are due to materials or workmanship not in accordance with this Contract, shall at no cost to the Employer be made good by the Contractor unless the Architect/Contract Administrator with the consent of the Employer shall otherwise instruct. If he does so otherwise instruct, an appropriate deduction shall be made from the Contract Sum in respect of the defects, shrinkages or other faults not made good.” (Emphasis added.)

In Oksana Mul, the employer argued that, where the contract administrator otherwise instructs, an “appropriate deduction” shall be what is appropriate in all the circumstances, whereas the contractor argued that it should be by reference to the rates and prices in the priced documents.

Akenhead J said that, if the contractor had no right to return to site to make good the defects after practical completion, then the employer’s sole remedy would lie in damages and the usual rules of “causation, remoteness, foreseeability and, of course mitigation of damages” would apply. Akenhead J also said that it will often be the case that an employer will have failed to mitigate its loss by not giving a contractor the opportunity to remedy defects, but that will not always be the case.

Akenhead J said that clause 2.30 of the IC05 does not exclude an employer’s right to damages, and that this would be “sufficient to decide the preliminary issue broadly in favour of the employer”. Even if he was wrong on this point, Akenhead J went into some detail to explain why “appropriate deduction” means what is appropriate in all the circumstances, and that it can be calculated by reference to one or more of the following:

  • The contract rates, priced schedule of works or specification.
  • The cost to the contractor of remedying the defect (including the sums to be paid to third party sub-contractors the contractor engages).
  • The reasonable cost to the employer of engaging another contractor to remedy the defect.
  • The particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.

The practical consequences of Oksana Mul v Hutton

In my experience of administering contracts and adjudicating disputes concerning defects post practical completion, the reason employers issue “otherwise” instructions under clause 2.30 of a JCT contract is because they simply don’t want the contractor to return to site, normally because disputes have arisen.

However, before issuing “otherwise” instructions, contract administrators and those that advise them should take care to ensure that, by employing others to remedy defects, the employer will not be found to have failed to mitigate its loss. If so, the maximum “appropriate deduction” in the circumstances might be the cost of the contractor remedying the defects. In this situation, the worst case scenario for the employer is that this cost is nil because the contractor could have got its sub-contractors to do the work for them at no cost to the contractor. (In Woodlands Oak Ltd v Conwell and another, the Court of Appeal confirmed that this could be the outcome of not allowing a contractor to remedy defects.)

Akenhead J gave some examples of when an employer might be found not to have failed to mitigate despite employing other contractors to remedy defects. My advice would be for contract administrators to heed these examples and to ask themselves the following questions before issuing an “otherwise” instruction:

  • Is the scale of the defects such that no reasonable employer could be expected to have the contractor back on site?
  • Has there been any fraudulent behaviour on the contractor’s part relating to the works?
  • Has the contractor made it clear that it is not prepared to return to site to put right the defects?

Other questions that I can think of include:

  • Has the contractor made a number of previous failed attempts to remedy the defects, and no reasonable employer could be expected to allow the contractor a further chance?
  • Has the contractor offered to undertake remedial works, but not those required by the contract administrator? Whether an employer acts reasonably by employing others to undertake the remedial works in this situation will obviously depend on factors such as whether the contractor’s remedial solution is reasonable, whether the contract administrator’s required rectification works are necessary and so on. It might be sensible to obtain expert evidence in such circumstances (and see Coulson J’s judgment in Iggleden and another v Fairview New Homes (Shooters Hill) Ltd, which, while not precisely on point, covers similar matters).
  • Has the contractor unreasonably delayed in carrying out the remedial works?

Obviously every case is different, but if the contract administrator issues an “otherwise instruction” despite not being able to answer “yes” to any of the above (or similar) questions, it’s likely that the employer might not have mitigated its loss. In such circumstances, the employer may not be entitled to simply deduct the cost of employing another contractor to remedy defects. If the employer hasn’t had the defects remedied by others (and doesn’t intend to), that could amount to “Get[ting] your money for nothin’ get your chicks for free“.

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