Construction disputes, whether they arise from inadequate welding in offshore installations or bubbling paint, frequently revolve around the question of whether part of the works carried out has a “defect“. We rarely stop to consider when drafting construction contracts how, legally, we can define inadequate or non-conforming work, despite the fact that ambiguity often leads to intractable disputes.
Defects can be said to have:
- Contextual qualities in respect of the contractual requirements, the anticipated performance level, or local law standards of building regulation and safety.
- Relational qualities in respect of who is complaining about the defect, and to whom.
We need to take a step back from the granular detail in order to understand what we are trying to achieve when we contract for defect-free structures. The employer and the ultimate end-user want a safe facility that performs to and aesthetically is in accordance with their expectations. A right to damages if the work is defective is a secondary consideration.
Defining a “defect”
When asked for the common law definition of a defect, most lawyers will cite Lindley LJ’s comment in Yarmouth v France that it is:
“… anything which renders the plant unfit for the use for which it is intended, when used in a reasonable way and with reasonable care.”
However, this observation was made in the context of a duty imposed by statute. It is less helpful when trying to establish a contractual regime for liability.
When construction lawyers discuss defects, a more useful definition can be found in the German Civil Code (Bürgerliches Gesetzbuch or BGB) in section 633, paragraph 2:
“… the work or service is free from defects as to quality if it is of the agreed nature. To the extent that the nature has not been agreed, the work or service is free from defects in quality
1. If it is unsuitable for the use presupposed by the contract, otherwise
2. If it is suitable for customary use and has a nature that is customary with works and services of the same type and that the customer may expect from that type of work.”
The contractual context of the works is put to the fore. This is also the policy of the NEC4 ECC form of contract, which defines a defect at core clause 11.2(6) as:
“… a part of the works which is not in accordance with the Scope or a part of the works designed by the Contractor which is not in accordance with the applicable law or the Contractor’s design which the Project Manager has accepted.”
If a problem arises with the work that falls outside this definition, it will not trigger the provisions in clauses 43 to 46 dealing with searching for, correcting or accepting defects. This unstuck the claimants in Imperial Chemical Industries Ltd v Merit Merrell Technology Ltd, where many of the problems in welding work were undetectable by the agreed testing regime and hence were not “defects” at all.
This should be contrasted with the contractual regime in Fluor Ltd v Shanghai Zhenhua Heavy Industries Ltd, and the obligation on the supplier of steel monopiles of transition pieces, which later transpired to contain cracks in their welding. The defects were only detectable by a certain form of non-destructive testing. This was known about by the defendant’s workmen but not their managers. As Edward-Smith J noted:
“An obligation of good workmanship, or to ensure that the work will be carried out skilfully and carefully is not an obligation simply to take reasonable steps to ensure that such a standard of workmanship is achieved, but actually to achieve it.”
Further, the welding was not “merchantable”, as a reasonable purchaser could not detect the defects. A lawyer drafting a construction contract must ensure that an appropriate contractual standard is imposed.
What standard is required?
One of the less obvious lessons from the litigation in MT Højgaard AS v E.ON Climate and Renewables UK Robin Rigg East Ltd is that it is important to be clear what standard the contractor is expected to achieve so as to avoid unnecessary disputes about contractual terms that appear, at first blush, to be in conflict.
When drafting an agreement from the employer’s perspective, it is important to specify not only performance standards (such as compliance with international standards) but also higher outcome standards (such as service life, or fitness for purpose), so as to apportion the risk of defective work on the contractor. As Stuart-Smith J noted in 125 OBS (Nominees1) v Lend Lease Construction (Europe) Ltd, this is commercial common sense when dealing with prestigious projects. The function of good drafting is to apportion residual risk, not to set up competing terms.
Policing quality control is just as important as teeing up subsequent damages claims. Employers would be wise to recall their powers under the major standard form contracts to inspect the works. NEC4 ECC and PPC2000 go further, requiring at core clause 40 and clause 16.3 respectively a quality management system, while the FAC-1 framework agreement standard form requires its participants to create “improved value” at clause 6.1, part of which is defined as “improved quality”.
Such terms are still fairly novel and it remains to be seen what impact they will have. Enforcing such a system, as well as monitoring the supply chain and the works at the intensity required to ensure that the end product is defect-free, will cost resources that an employer may be reluctant to deploy.
We need to be clear in our drafting to ensure that a complaint of defective work has an obvious remedy and point of liability, subject to questions of proof. However, the best solution may be to take advantage of contractual provisions so as to ensure that the risk of defects arising is minimised.
