Defects are one of the most common causes of disputes in the engineering and construction industry.1
A recent survey reported in the New Civil Engineer suggests that up to 30% of work in the UK construction sector involves the correction of defects.2 In this article the author explains how defects are defined and managed and explores liability for uncorrected defects under the NEC4 Engineering and Construction Contract (ECC).
What is a defect?
The ECC defines a defect as:
-
- “a part of the works which is not in accordance with the scope or
- a part of the works designed by the contractor which is not in accordance with the applicable law or the contractor’s design which the project manager has accepted.”3
This contractual definition is limited to defects that arise from the fault of the contractor. A fault in the client’s design which the contractor builds is not a defect and is treated as a client liability (clause 80.1). The first bullet point of 11.2(26) reflects the contractor’s general obligation to provide the works in accordance with the scope (20.1). The second bullet point affirms that the contractor is required to construct the works in accordance with the law e.g. building regulations, and its accepted design. If the contractor wants to change its design then it would need to re-submit the design to the project manager and gain acceptance. Clause 14.1 clarifies the position that the project manager’s acceptance of the contractor’s design does not change the contractor’s liability for its design.
A similar definition exists in the NEC4 Engineering and Construction Subcontract (ECS) with the term ‘scope’ replaced by ‘subcontract scope’. Consequently, a defect in the main contract is not necessarily a defect under the subcontract.
Notifying and correcting defects
The obligation to notify a defect is that of the supervisor and the contractor and is triggered when either becomes aware of a defect (clause 43.2). However, failure by the supervisor to notify the contractor of a defect does not relieve the contractor from its obligation to correct it (clause 44.1). Whilst the obligation to notify a defect ceases after the defects date (typically fifty two weeks after completion) the contractor’s liability for defects does not (see below).
The definition of a defect does not differentiate between incomplete work that and work that does not comply with the scope. In practice, the supervisor will need to apply judgement when deciding to notify a defect for work that is incomplete or non-compliant as opposed that which is ‘work in progress’. Reference to the accepted programme and consultation with the contractor should avoid unnecessary or inappropriate notifications.
The contractor is required to correct a notified defect before the end of its defect correction period (clause 44.2). The defect correction period, stated in contract data, may include different periods for different types of defect or defects in different parts of the works. It is easy for the contractor to be ‘timed out’ on a short defect correction period so contract drafters need to consider these periods carefully.
The point at which the defect correction period commences depends on two factors:
i) when the defect is notified and
ii) when the client allows access for the contractor after take over.
If a defect is notified before completion, its defect correction period begins at completion. If a defect is notified after completion, the period begins when the defect is notified (clause 44.2). However, for a defect in a part of the works that the client has taken over, the start of the defect correction period is delayed until such time the client allows access for the contractor (clause 44.4). It should be noted that the client may exercise its right to take over before completion. Conversely, if the contract data states the client is not required to take over before the completion date, the client is required to take over no later than two weeks after completion.
Payment for correcting a defect
It may come as a surprise to some to find that the ECC allows the contractor to recover its costs for correcting a defect. For a fixed price contract (Option A and B), it is probable that the contractor’s price includes some risk allowance for correcting defects. Any allowance for this is rarely transparent in a fixed price contract and ultimately the client pays the contractor the price agreed for an item irrespective of the presence of a defect and the cost incurred by the contractor.
For the cost reimbursable contracts (Option C, D, E and F), the contractor is entitled to be paid for correcting defects providing it is not deemed to be a disallowed cost (clause 11.2(26). Disallowed cost include the cost of correcting defects after completion and the not complying with a constraint stated in the scope as to how the contractor provides the works. Exceeding the target (Option C and D) may also result in the contractor paying for some or all of its costs incurred in correcting defects.
Certifying completion with defects
Completion may be deemed to have been achieved even when there is a defect. Clause 11.2(2) treats the works as complete providing a notified defect does not prevent the client from using the works or others from doing their work. This approach seems to reflect the position taken by the law in that the works would, for all practical purposes, be considered complete if they are capable of their intended use (Westminster Corp. v Jarvis) 4 , and the defect is not ‘more than trifling’ (Mears v Costplan). 5
Accepting a defect
The ECC provides a mechanism for accepting a defect. The process may be initiated by the contractor or the project manager by way of a proposal to change the scope so the defect does not have to be corrected (clause 45.1). The proposal is followed by the contractor’s quotation submitted to the project manager for acceptance, providing both the contractor and project manager are willing to accept the defect. The contractor’s quotation must represent a reduction in prices or an earlier completion date or both. A defect which is not in accordance with the applicable law should not be accepted.
Accepting a defect provides compensation for the client but the contract does not treat it as a compensation event. This means the rules of defined cost do not apply, nor is the project manager entitled to carry out its own assessment. It could be said that accepting a defect is a negotiated agreement. If the contractor’s quotation is not accepted, the defect remains uncorrected. Once accepted the matter is no longer treated as a defect. It is recommended the project manager consults with the client and the supervisor before embarking on any agreements.
Remedies for uncorrected defects
The contractual remedy for an uncorrected defect depends on whether or not the client allows access for the contractor to correct the defect. Clause 46.1 explains that if the client has given access and the contractor fails to correct the defect within its defect correction period, then the contractor becomes liable for the amount assessed by the project manager for the client to have the defect corrected by others.
If the client does not provide access, the contractor is still liable for the cost of correcting the defect. However, the project manager’s assessment must be based on what it would have cost the contractor to correct the defect (clause 46.2). Clause 44.4 appears to represent an expectation that the client will provide access for the contractor to correct a defect but does not go as far as stating an express obligation to do so. Common law informs that if a contractor is not afforded the opportunity to correct a defect, the contractor’s liability to the client for the uncorrected defect is limited to that of the contractor’s rectification costs (Pearce & High v Baxter).6 Clause 46.2 is therefore generally considered to be consistent with UK common law.
Liability for patent and latent defects?
The terms ‘patent defect’ and ‘latent defect’ are often talked about but are not terms used in NEC contracts. A patent defect is one that can be seen or is apparent upon inspection by a person with relevant experience or expertise (AMEC v Morgan Sindall).7 A test or inspection required by the scope or applicable law (clause 41.1) which showed a defect would be classed as a patent defect. A latent defect is one that exists but is hidden to the extent that it would not be discoverable from an inspection that the defendant might reasonably anticipate the article would be subjected to (Baxall v Sheard).8
Whether a defect is classed as patent or latent could be significant in determining when the applicable statutory limitation period begins. If secondary option X18 is included in the ECC, the statutory limitation period in connection with the contractor’s liability for a defect may be reduced by stating the ‘end of liability date’ in the contract data. X18.6 states, ‘The contractor is not liable to the client for a matter unless details of the matter are notified to the contractor before the end of the liability date’. However, it should be noted that the use of X18 does not necessarily preclude the client from bringing a claim against the contractor after the end of the liability date. 9
Conclusions and recommendations
Defects are an inevitable part of construction projects. The ECC provides a framework of rules for notifying, correcting and dealing with uncorrected defects. Clear and concise drafting of the scope, appropriate selection of subcontractors and following the contract will reduce the risk of disputes and costs to both parties.
1 2022 Construction Adjudication in the United Kingdom: Tracing trends and guiding reform, Nazzani R & Kalisz A, October 2022, Centre of Construction Law & Dispute Resolution, Kings College London.
2 New Civil Engineer newsletter 13 September 2022
3 ECC clause 11.2(26).
4 Westminster Corporation v J Jarvis & Sons Ltd [1970] 1 WLR 637
5 Mears Ltd v Costplan Services (South East) Ltd [2019] EWCA Civ 502, [80], per Coulson LJ.
6 Pearce & High Ltd v Baxter [1999] BLR 101
7 AMEC Foster Wheeler Group Ltd v Morgan Sindall Professional Services Ltd [2016] EWHC 902 (TCC),[50
8 Baxall Securities Ltd v Sheard Walshaw Partnership [2002] BLR 100, 108[46].
9 Limitation Act 1980
David Hunter
Daniel Contract Management Services Ltd
May 2023
This article was first published in the NEC User Group newsletter Issue No. 125 May 2023