Mul v Hutton Construction Ltd

Under a building contract, an “appropriate deduction” for defects which the contractor is not to remedy is not necessarily confined to the contract rates or priced specification. The phrase requires a reasonable deduction in all the circumstances. Relevant considerations may include the contract rates, the contractor’s own remedial cost, the reasonable cost of engaging another contractor, and the factual and expert evidence concerning the defect and proposed works. The employer’s ordinary damages rights are not excluded unless the contract uses clear words or the exclusion follows by necessary implication. Those rights remain subject to mitigation. If the employer unreasonably denies the contractor a fair opportunity to remedy culpable defects, recovery may be limited to what the contractor would have spent on the remedial work.

The claimant employer engaged the defendant contractor to carry out substantial extension and refurbishment works under the JCT Intermediate Form of Contract (2005). The contract included a 12-month Rectification Period and clause 2.30, under which notified defects were to be remedied by the contractor unless the employer consented to an instruction that they should not be made good, in which event an “appropriate deduction” was to be made from the Contract Sum.

The employer claimed more than £1 million for defects, many of which had been or would be remedied by other contractors. The court was asked to determine the proper basis for calculating the deduction, including whether it was confined to the priced document, the contractor’s cost, the employer’s reasonable cost, or the particular circumstances and expert evidence.

1. Preliminary issues determined in favour of the employer. The court held that the employer’s right to damages for culpable defects arose at practical completion, subject to mitigation. Clause 2.30 did not contain clear words excluding or limiting that ordinary right.

2. The contract had to be construed as a whole, consistently with clause 1.3 and the contractual allocation of rights concerning defective work, variations, certification and deductions. The phrase “appropriate deduction” was relatively neutral and did not prescribe a single valuation method.

3. An appropriate deduction meant a deduction reasonable in all the circumstances. It could be calculated by reference to:

   • the contract rates, priced schedule of works or Specification;
   • the cost to the contractor of remedying the defect, including payments to subcontractors;
   • the reasonable cost to the employer of employing another contractor; and
   • the particular factual circumstances and expert evidence concerning the defect and remedial works.

4. The court applied the principles in William Tomkinson & Sons Ltd v The Parochial Church Council of St Michael & Others, Pearce & High Ltd v Baxter and Woodlands Oak Ltd v Conwell. An employer who unreasonably fails to give the contractor a fair opportunity to remedy defects may fail to mitigate and be limited to the contractor’s remedial cost. Whether mitigation has failed depends on the facts; exceptional circumstances may justify refusing the contractor access.

5. The court noted a possible unresolved issue concerning whether practical completion had properly occurred, because the certificate was accompanied by a substantial list of incomplete or defective work. That issue had not been argued and was not determined.

6. The claimant had won the preliminary issues. The costs of and occasioned by the preliminary-issues hearing were ordered to be the claimant’s costs in the case on the standard basis.