REUTERS | Paulo Whitaker

Defects and exclusive remedies clauses

Many people worry about making errors because they think are not clever enough to realise that what they are doing is wrong or incorrect. In fact, the majority of errors are simple ones.

Sometimes, when negotiations have lead to a workable “deal”, the parties postpone the task of finalising that deal and formalising the contract documents indefinitely, because their attention switches to taking the project forward. Similarly, it is easy to miss sending contractual notices because your attention is focused on solving the problem in hand.

No waiver

Many of us will therefore have been relieved to read the judgment in Mayhaven Healthcare v David Bothma. In Mayhaven, the contractor argued that the fact that it had not been asked to remedy a defect amounted to a waiver by the contract administrator. However, Ramsey J held that:

“Under the terms of the JCT Intermediate Form of Contract 1998 Edition, a contractor is not excused from compliance with his contractual obligation to carry out the works in accordance with the Contract Drawings by reason of the Contract Administrator’s failure to require the Contractor to remedy defective works.”

The position will be the same under many standard form contracts.  But there is an important exception.

The exception: exclusive remedy clause

Sometimes, employers use exclusive remedies clauses; mainly to define (in a limiting way) the contractor’s opportunities to claim. The case most often cited on the point is Strachan & Henshaw Limited v Stein Industrie (UK) Limited and GEC Alsthom Limited, where the court said:

“…in a complex contract of this sort there would be a danger of claims being made on the basis of alleged implied terms or of alleged misrepresentation as well as damages claims for breaches of alleged contractual obligations incidental to the main contractual obligations under the Contract. The parties could not possibly foresee and provide for all the various claims that might be made in connection with or arising under the Contract. So the commercial sense in providing expressly for the claims they intended to be allowed and in simply excluding all possible claims other than those for which specific provision was made seems to me clear enough.”

But, as they say, what’s sauce for the goose is sauce for the gander. Contractors can also rely on exclusive remedies clauses to restrict their liability for defects.

Contractors can rely on exclusive remedies clauses

Clause 44.2 of the IChemE Red Book (specifically, in this example, the third edition of the Red Book) is an exclusive remedies clause. Separately, clause 36.7 provides that the purchaser must have actually carried out remedial works and incurred the costs in doing so before he has any remedy against the contractor.

The purchaser’s entitlement under clause 36.7 is conditional upon the defect having actually been made good: a partial remedy, even where there is a genuine intention to remedy the whole defect, will not be sufficient (see Yorkshire Water Services v Taylor Woodrow and “Liability for defects” in this PLC note). Together, clauses 44.2 and 36.7 limit the employer’s possible legal remedies for defects.

Luckily the JCT contract (not only the Intermediate form, but also the Standard Building Contract and Design and Build Contract, 1998 and 2005 editions) does not have an exclusive remedies provision.

But watch out for those that do.

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