How to Get Compensated for Construction Defects
Damages for defective works in construction contracts
In legal disputes arising from breaches of construction contracts, the principle of awarding damages is fundamentally aimed at safeguarding the claimant's "expectation loss." This legal doctrine ensures that the claimant is financially restored to the position they would have occupied had the contractual obligations been duly fulfilled.
There are three ways in which losses caused by defective work can be assessed:
The normal measure: cost of reinstatement (sometimes known as "cost of cure").
The alternative measure: diminution in value.
"Loss of amenity".
The normal measure: cost of reinstatement
Losses caused by defective work are usually assessed by reference to the cost of putting that work right, known as the cost of reinstatement or "cost of cure".
For example, when a commercial building's newly installed roof begins leaking because of poor workmanship, the owner must undertake repairs. The remedial work, involving the replacement of the faulty roof with high-quality materials as initially agreed, costs €50,000. This sum, referred to as the "cost of reinstatement" or "cost of cure," is what the owner seeks to claim from the original contractor as compensation for the breach of contract, aiming to offset the financial loss incurred due to the substandard construction work.
The alternative measure: diminution in value
The courts sometimes refuse to award damages for the cost of reinstatement and instead make an award to reflect the diminution in value of the property in question. This is appropriate where the defect is irreparable, or where the cost of reinstatement is out of all proportion to the benefit gained.
Whether a party intends to effect repairs may be relevant (but not necessarily determinative) of whether cost of reinstatement or diminution in value is the appropriate basis of recovery.
Normally, the claimant's right to recover the diminution of value will be limited to an amount that will not exceed the cost of repair.
"Loss of amenity"
There may be cases where the cost of reinstatement is disproportionate to the benefit to be gained from such works, and the defect in question causes no diminution in value.
In such circumstances, the test of reasonableness plays a central part in determining the basis of recovery, meaning that an entirely innocent claimant, who has not got what it bargained for, is left with no more than modest damages to reflect any loss of amenity suffered.
The most famous example of this principle is Ruxley Electronics v Forsyth, where a swimming pool was constructed to the wrong depth, but remedial works were disproportionately expensive, the pool was still safe for diving and no diminution in value had occurred.
Date of assessment
Contractors and employers sometimes argue over the date when the cost of the remedial works should be assessed. The general rule, both in contract and tort, is that the measure of damages will ordinarily be assessed on the date when the cause of action arises.
Unsurprisingly, the general rule has been subjected to numerous exceptions. In the context of building disputes, the courts have permitted claimants to recover the cost of reinstatement works at the date of trial without necessarily branding them with a failure to mitigate.
A court will look for the first date on which repairs could have been carried out
It is relatively settled law that a court will try to determine the first date on which the claimant, having regard to all the relevant circumstances, could reasonably have carried out the repairs.
Factors that may justify an exception to the general principle
Whether a court considers it justified for a claimant to wait until the result of litigation to carry out repairs and be awarded the costs as at the date of trial (as opposed to an earlier date) will depend on the facts of each particular case. Important factors may include:
The defendant's refusal to admit liability.
The claimant's financial ability to pay for repairs (and sue later for recovery).
Whether the financial burden of carrying out repairs early will be outweighed by the financial gain from being able to let or sell a completed building.
Other considerations
No "new for old" discount
Generally, a defendant receives no discount for the "new for old" replacement of damaged or defective property. As a result, a defendant will bear the full cost of reinstatement and not some proportion to take account of any likely replacement in the future
Cost of repairing to higher standard is borne by the claimant
A claimant will not be entitled to pass on the cost of repairing to a higher specification. Unless repair to a higher standard is necessary, a credit in respect of additional cost is allowed to the defendant.
The claimant must mitigate its loss
When rectifying work following a defect, the innocent party is expected to take reasonable steps to mitigate its loss. Such steps do not have to exceed those that would be expected in the normal course of business, or put the innocent party to expense that it cannot afford. It will be up to the defendant to show that the claimant acted unreasonably. It is important not to overstate this principle.
An employer who engages a third party to remedy a defect instead of allowing the original contractor to return to site and remedy that defect may be criticised for acting unreasonably and failing to mitigate its loss.
Whether the employer has failed to mitigate its loss will depend on the particular facts of the case.
Engaging a third party might not be a failure to mitigate in cases where, for example:
The defects were so enormous that no reasonable employer would allow the contractor to return.
The contractor had behaved fraudulently.
The contractor had made clear that it was unwilling to rectify any defects.
When faced with defective work to commercial property that is intended for letting, it may be wise for an innocent party to get on with remedial works with an alternative contractor in order to allow the premises to be let. If the court considers a claimant's failure to do so was unreasonable, then that claimant will still be able to recover the cost of the repairs, but may be unable to recover lost rent on the property, even if the contractor's or professional consultant's negligence or breach of contract can be established.
If a building contract permits the carrying out of remedial works in more than one way, the cheapest option will be appropriate.
Consequential losses
Losses consequential on a defect (such as damage caused by the defect and/or business interruption) may be recovered in addition to the cost of reinstatement or diminution in value.
Loss of profit
Loss of profit can be a direct loss or a consequential loss, depending on the circumstances.
Management expenses
A claimant may be entitled to claim managerial and supervisory expenses incurred in dealing with remedial measures, subject to satisfying the burden of proof.
A party wishing to recover management expenses must be able to show how much management time was expended, which generally requires detailed records of the time spent.
Discomfort and inconvenience
Awards of damages for "discomfort and inconvenience" or "distress and inconvenience" are not ordinarily allowed in contracts whose purpose is purely commercial.
However, damages have been awarded in a residential context.
Understanding the intricacies of construction disputes and the process of claiming damages requires professional insight. We are here to offer support and guidance through every step of your claim. If you're dealing with defective construction work or have concerns about your contractual rights, we encourage you to get in touch. Let us help you navigate these challenges and work towards a satisfactory resolution. Your trust and satisfaction are paramount to us.
The content of this article is valid as of the date of its first publication. It is intended to provide a general guide to the subject matter and does not constitute legal advice. We recommend that you seek professional advice on your specific matter before acting on any information provided. For further information or advice, please contact Klitos Platis by email at klitos@kleanthousplatis.com.