The occurrence of defects is an unfortunate part of construction activities, but with nearly all standard forms of contract containing clauses to deal with them, managing one should it arise can not be too difficult, can it?
Administering contractual provisions works best when all parties accept that a defect has occurred, and that one party has accepted responsibility or taken ownership. However, as is often the case, liability can be difficult to assign entirely to one party. Early identification is always preferable during the works when all resources are available and present and defects can be more easily rectified. In contrast, if a defect is identified outside of the defects liability period, taking corrective action becomes more onerous.
Defects themselves can be classified as works that are not in accordance with the design or specification. For example, the wrong materials have been installed, a design is not working correctly due to being installed in the wrong order, or a building is cracking due to inadequate foundations being constructed.
In a typical design and build arrangement, a client can look to the contractor to resolve workmanship issues and design defects, but if as a client you are operating on a management contractor basis or tendering works on a construct only basis then you will need to consider where responsibility lies.
As a client faced with a defect, it’s important to understand the difference between a latent or patent defect. This is because differing contract provisions may apply in order to get each resolved and therefore understanding the difference will enable you to take the correct course of action.
What is the difference between the two including examples of each?
A patent defect is one that has been identified during the works or during the defect liability period, whereas a latent defect could be concealed and may not be apparent until many years later, for example a building cracking due to inadequate foundation design.
To put some more context on the definition between the two types:
- The definition of latent is “existing but not yet developed or manifest; hidden or concealed” and therefore in terms of construction projects are considered to be those which cannot be found by reasonable inspection.
- Patent is defined as “easily recognisable; obvious” and can be found by reasonable inspection.
Patent defects are more frequently dealt with due to the regular inspections taking place during the construction works. Although there is a general onus on the contractor to identify defects themselves, and correct or ‘snag’ the works as they go, the client is contractually obligated to notify the contractor of a defect and once notified the contractor should correct them within a reasonable timeframe.
If the client believes a defect has occurred, but it is not apparent, they can instruct the contractor to open-up the works and search for one. If it is proven a defect exists the contractor’s obligation to correct it will come into force. If no defect is found, the client will have to compensate the contractor, usually by issuing a variation to cover the costs of opening and making good.
However, if a defect is apparent and the contractor does not take the opportunity to rectify it, as a client you can consider this to be a breach of contract and therefore employ others to rectify the works and the contractor will be liable for the costs incurred by the client. As a client, a note of caution here is that serving notices is important if you want to successfully recover all the costs. If the contractor can argue that you did not give them opportunity to correct the defect or that you did not provide them with the likely costs of bringing a third party in, they may argue they are only liable to pay the costs they would have incurred as if they had carried out the works themselves. Equally, the contractor may have offered to reduce the total price to allow for the costs of not correcting the defect, but this would be on the basis the client agrees to such a solution.
Latent defects are more complicated to resolve as they are not identified during the construction works or during the defect liability period, therefore the building owner is not likely to have a contractual right that obliges the contractor to rectify it. However, there are a number of actions at this point the client can take:
- Seek redress for damages through breach of contract, or for negligence through the Defective Premises Act 1972.
- The Latent Damage Act 1986 provides the claimant with three years, from the date when they knew or should have known or a problem, to issue proceedings.
The time limit that a client can seek redress for breach of contract noted above depends on how the contract agreement was executed i.e. if it was signed under hand the liability period is six years, whereas if it is executed under seal the liability period is twelve years. The applicable law to this is the Limitation Act 1980.
Typical examples of latent defects can include:
- Understrength concrete or insufficient reinforcement being used which has consequently led to movement damage to the structure.
- The millennium footbridge in London, which was closed shortly after opening to the swaying effect of people crossing it. The retrofitting of additional bridge stiffening measures was required to cure the situation at a cost of some £5m to which the designer contributed.
- Inadequate foundations design causing the building to subside.
What is the contractual and legal recourse for correction – does the form of contract differ?
If a defect has been identified during the construction works, it will need to be corrected before a certificate of practical completion is issued. However, typical circumstances may include the contract administrator being asked to certify completion before all defects are fully closed out. This might be as the defects are not restricting the client from operating the building or it may be they are considered relatively small in nature.
In such circumstances, the contract administrator is best placed to resist issuing a certificate of practical completion until all the works are fully complete and defect free. If they intend to issue a certificate with works outstanding, then obtaining the clients agreement to do so beforehand is essential.
Once practical completion is certified, managing defects under the contract will be through the defect liability period. However, following on from the point above, this should not be considered as an opportunity to correct outstanding defects that were apparent at practical completion. It should be operated such that a contractor can be instructed to return to site and correct new defects that appear during the defect correction period. This period is typically twelve months long but for certain items of plant installed can be longer i.e. escalators for a new office may be two years.
If a defect has occurred under a JCT Standard Building Contract, then by reference to Clause 2.38 the Contract Administrator can serve a notice to the Contractor as an instruction, which should specify the defect. Following the issue of such an instruction, the Contractor, ‘within a reasonable time’, makes good the defect at no cost to the client. Once the Contractor has made good the defect the Contractor Administrator issues a certificate of making good.
If you contrast the JCT approach, whereby the onus is on the Contract Administrator to notify the Contractor of defects and the Contractor corrects them in ‘reasonable time’, to the NEC 4 Engineering and Construction Contract which, under clause 44.1 states the “Contactor corrects a Defect whether or not the Supervisor has notified it”, this implies the Contractor is not relinquished of his responsibility to correct a defect even though not instructed to do so by the Supervisor. Also, they are to correct defects within the defect correction period as stated in Contract Data Part One, which is usually set to a specified period of within two to four weeks but could be shorter.
In terms of the costs incurred in making good defects, then under most forms of contract the client should be placed into a position as if the works had been carried out correctly. This may involve using the Disallowed Cost provision under NEC ECC clause 11.2 (26) or by reference to Clause 2.38 of the JCT SBC.
However, once the defects liability period has expired, the client does not have the power to instruct the contractor to return to site and rectify defects that were not notified during the defect liability period and such defects are by default treated as latent defects.
It should also be considered by property developers that in circumstances whereby buildings are sold on to new owners, following which it becomes apparent that damage to the structure is attributed to a defect, the buildings new owner might seek a claim for ‘pure economic loss’ as the building will have diminished in value. However, in such a circumstance, whilst the new building owner may not have a direct link to pursue the Contractor for pure economic losses, they may, dependent on timing, be able to pursue them to rectify the latent defect. Ensuring that consideration is given by potential new owners as to the contractual protection they have is important here before acquiring property.
What can you do as a client to insure against such issues?
There are some options available to clients such as collateral warranties which extend the contracting parties’ obligations to a third party. This is useful if, for example, you are a property developer and the third party wishing to purchase the development can be provided with a collateral warranty, they have a direct link to the contractor in the case of a latent defect arising.
Other such options available are building warranties which are insurance policies for structural damage and defects to roofs, walls and foundations. Dependent on the wording of the individual policy, this could differ, but they are transferrable between building owners.
Also, Latent Defect Insurance, which is a form taken out to provide cover for inherent defects in the design, workmanship or materials that become apparent after practical completion and outside of the defect liability period. They can be used to offset the cost of repairs or damage due to the defect. Note that latent defect insurance does not cover for pure economic loss or defects to non-structural parts.
Interesting legal cases
In the case of Baxall Securities Ltd vs Sheard Walshaw Partnership (2002) the architect was appointed by a developer. The architect specified the roof drainage system and subsequently inspected and approved the works had been constructed in accordance with the design.
However, the drainage proved to have insufficient capacity and overflows were missing, which lead to a flood with the building occupier suffering direct losses from damaged stock. As the building occupier was a tenant, they had no direct contractual link to the architect against which to make a claim. The Contractor was outside of the defect liability period, the subcontractor who installed the roof drainage was insolvent, so the collateral warranty was in effect void. The occupier sought to make a claim against the architect for duty of care as they had designed it and assured the construction works.
The judge originally agreed with the occupier on the basis the architect had under designed the drainage system and the occupier could not have known this from a reasonable inspection before occupying the building. However, the court of appeal found the cause of the flooding to be the lack of overflows which was a patent defect and should have been picked up by the new building occupiers’ surveyors.
This follows an earlier ruling in the case of Sanderson vs the National Coal Board (1961) which stated “A patent defect is not latent when there is no-one to observe it. The natural meaning of the word ‘patent’ is objective, not subjective. It means ‘observable’ and not ‘observed’.” Hence the decision that the lack of overflows was a patent defect: despite it not being observed, it was observable.
It is in the interests of all parties to rectify a patent defect as quickly as possible, and contracts are drafted in such a way to support this with tight timescales for defects correction periods. However, for latent defects it is rarely as straightforward with only certain losses recovered but other indirect losses not being covered in the event a defect does occur.
In the case of latent defects, ensuring that you have, where possible, a direct link back to those responsible for the design and construction of the building is advantageous for a timely resolution should issues occur.