Birse Construction Ltd v Eastern Telegraph Company Ltd

In a construction contract, the ordinary measure of damages for defective work is the reasonable cost of reinstatement. It is unavailable where that measure is out of proportion to the claimant’s real loss. A claimant who sells defective property without suffering a reduction in price, or who has no genuine intention to remedy defects, may have avoided the loss and recover only nominal damages.

Contractual retention remains security for the contractor’s performance. A certificate condition may cease to be enforceable where the employer prevents the contractor from completing the work required to obtain it. The retention may then be subject to abatement, set-off or counterclaim for proven loss.

Eastern Telegraph Company Ltd occupied a specialist training college constructed by Birse Construction Ltd under a JCT building contract. The works were affected by numerous alleged defects. A March 1994 settlement agreement varied the contract, provided for completion of snagging works, and regulated payment of retained sums.

Birse claimed the unpaid retention and other sums. Eastern Telegraph defended that claim and counterclaimed for the cost of remedial works and alleged unremedied defects. The principal issues concerned the construction of the settlement agreement, the effect of the certificate requirements, liability for particular defects, and the proper measure of damages where defects remained unrepaired and the college was intended for sale.

1. Settlement agreement. The March 1994 agreement created a pragmatic code for the listed snagging defects. Birse agreed to remedy them whether or not it would otherwise have been liable under the building contract. Clause 3.3 entitled Eastern Telegraph to recover only the excess costs actually incurred after it exercised the right under clause 3.2. It did not permit recovery merely of estimated costs.
2. Retention. Payment of retention under clause 4 was conditional on the relevant certificate of making good defects. The condition was not a forfeiture provision. Eastern Telegraph’s instruction AI 80 prevented Birse from completing the works and obtaining the certificate. Eastern Telegraph could not rely on the continuing absence of the certificate, but remained entitled to abatement, set-off or counterclaim for any proved breach.
3. Unremedied defects. Following Ruxley Electronics v Forsyth [1996] AC 344, the cost of reinstatement is the normal measure, subject to reasonableness and proportionality. Eastern Telegraph had no genuine intention to remedy the outstanding defects and had pursued a sale without evidence of a price reduction attributable to them. The claimed reinstatement costs were out of all proportion to the real loss. Only nominal damages were recoverable for qualifying unremedied defects.
4. Workmanship and causation. A contractor undertaking specialist work must provide workmanship and managerial expertise commensurate with the specified materials and result. Birse was liable for defects caused by inadequate workmanship, including the Blanc de Bierges paving and certain other identified items. It was not liable where the remedial work was caused by MJP’s defective design or where breach or causation was not proved.
5. Architect’s certification. The contractual standard was MJP’s reasonable satisfaction. The court would not substitute its own aesthetic judgment for that of the architect or reopen a certificate unless the architect’s opinion was unreasonable or improper. Eastern Telegraph could not rely on the certificate condition as a defence after preventing further performance. The proceedings were subsequently settled after circulation of the draft judgment, so no further assessment hearing was required.