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Employer’s right to damages during defects notification period

In a recent case the Singapore Court of Appeal upheld a decision that an employer may recover damages for rectifying defects even when it has not given the contractor the opportunity of doing so during the defects notification period.

Construction contracts typically give the contractor the right to correct defects during an agreed defects notification period after practical completion of the works. Yet an employer may prefer to use another contractor to correct defects known to exist at practical completion, particularly if the severity of the defects causes the employer to lose confidence in the contractor.

Yet if the employer uses another contractor to rectify the defects, this takes away the contractor’s ability to make good the defects under the notification provisions. Common law jurisdictions have generally taken the approach that an employer may recover costs of rectification using another contractor, even if it has not followed the defects notification provisions in the contract.

In Sandy Island Pte Ltd v Thio Keng Thay [2020] SGCA 86, the Singapore Court of Appeal has upheld this approach, in the appeal of a High Court decision which took the same view. We previously reported on the High Court decision.

 

Key Facts

The respondent employer purchased a residential property from the appellant contractor, but upon taking possession discovered serious defects. The employer rectified the defects using a second contractor, and sued the contractor for the cost of the rectification works.

The High Court held that the defects notification provisions in the contract did not exclude the employer’s right in common law to damages for costs arising out of defects. However, the employer was only entitled to damages at the value of the costs that the contractor would have incurred in rectifying the defects.

The contractor appealed this decision, arguing that the employer’s breach of the defects rectification provisions extinguished any right that the employer might have had to recover rectification costs as damages. The contractor argued that the employer’s breach of the defects rectification provision was a novus actus interveniens (interruption to the chain of causation) that broke the causal link between the contractor’s defects, and the costs incurred by the employer in rectifying them.

The contractor also argued that to seek damages having refused to allow the contractor to rectify the defects was a breach of the prevention principle (in this context, the principle that the employer cannot claim a strict contractual remedy if it prevents the contractor from doing the works).

 

Decision

The Court of Appeal dismissed the contractor’s arguments, upholding the High Court’s decision and affirming that the employer was entitled to damages for the costs of rectification:

  • The defects notification provision was not a ‘complete code’ that could extinguish the contractor’s common law right to damages for the costs of rectifying defects. There were no clear words excluding common law rights, and it appeared from the wording of the clause that it might not apply to major defects.
  • A defects rectification provision can co-exist with a common law right to damages for the cost of rectification. For example, rectification under a defects rectification provision might fail or be inadequate, and the employer would then incur costs of further rectification which would be recoverable as damages for breach of contract.
  • Absent clear words it would be unreasonable to interpret a contract as preventing an employer from using a replacement contractor, in circumstances where the employer has lost confidence in the original contractor’s ability to repair the defects.
  • There was no condition precedent in the defects notification provision, such that the common law right would only come into being if the employer’s rights under the defects notification provision were exhausted.
  • There was no novus actus interveniens, because the defects themselves were the underlying cause of the rectification costs that the employer incurred. Similarly, because the employer’s breach of the defects notification provision did not cause the rectification costs, the prevention principle did not apply.
  • The employer’s breach of the defects rectification provision did not give rise to an independent action by the contractor. For this reason, the contractor could not counterclaim from the employer the sums otherwise payable as damages to the employer.

 

Comment

The Singapore Court of Appeal made a point that we also made in our earlier commentary on the High Court decision, which is that a defects notification period is intended to benefit both employers and contractors. The employer can reasonably expect that defects will be corrected quickly and efficiently as the contractor is familiar with the works. If the contractor successfully rectifies the defects, it will save money as opposed to being liable to pay for the costs of the employer correcting the defects using another contractor, which is likely to be more expensive than its own costs.

It would be wrong to read the decision as a free ticket for an employer to disregard a defects notification provision. As the Court observed, a contractor who has carried out the initial works will usually be able to rectify defects more quickly and cheaply than a replacement contractor. The Court confirmed that the quantum of the employer’s damages is likely to be affected where it can be shown that the initial contractor would have corrected the defects more cheaply. In some cases, this might lead to a significant reduction in damages.

 

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