Defects and Damages

by | Apr 9, 2025 | Contracts, Quantum

As an industry, should we understand more about what defects are and how to measure their remediation and consequent damages?

Construction projects rarely run perfectly from beginning to end without fault or flaw. They often encounter issues such as delay, disruption, or defects in construction or design. Where defects arise, we also encounter the matter of damages and the correct assessment of damages. At face value, damages may seem like something relatively simple to assess. However, they come with a range of complexities and complications that need careful consideration in their assessment.

What are defects?

Defects are, unfortunately a regular feature of construction projects. When they arise, the law will rightly, step in to put an “injured party” in the position it would have occupied but for the breach. The background to defects stretches back over many years. One of the first cases on the subject being Yarmouth -v- France – (1887) 19 QBD 647.1 In this remarkable case, a horse was determined to be ‘defective plant’ in a claim by an employee against their employer. This was due to the horse’s vicious nature.

There are generally accepted to be two fundamental types of defect. The first is the “patent” defect and the second, the “latent” defect. Patent defects are more easily identifiable.  They can be seen on inspection and are usually rectified early in the life of a project, often before practical completion is given.

A latent defect may be more difficult to identify. As such it may only come to light some time after a building is completed. This is why many standard contracts allow for a ‘defect liability’ period. During this period, the contractor will be held liable for any defects that come to light. It may also be required to rectify them at the contractor’s cost. Alternatively, and where disputes arise, the employer may seek to get the defects rectified by a different contractor. The employer then seeks to recover the costs of rectification from the original contractor.

In the case of construction contracts this is normally a matter of a claim against the contractor. It seeks damages to recover the cost of construction or re-construction of the building project. The big challenge here is identifying the ‘quantum’ or measure of damages correctly due. Which is where a quantum expert may be helpful. A quantum expert will typically be experienced in the field of surveying and measurement of quantities. They will be best placed to identify the correct sum for the award of damages. This will be achieved through a mix of experience, knowledge, and expertise.

This need for quantum assessment is particularly relevant if defects become apparent after the defects liability period. There is generally no right for the contractor to return to the site to undertake remedial work at this point. As a result, the client may employ others to correct the defect and then go on to claim damages from the contractor.

What is, and what isn’t a defect?

There is no common or universal definition of ‘defect’. In broad terms, it is work that does not meet the specification or standard required by a contract. This may be due to faults in the work, materials, or design, or deficiencies in the quality of the work.2

Contracts usually state the requirement for workmanship that would lead to a defect – in UK, JCT states:

“the contractor shall carry out and complete the works in a proper and workmanlike manner, as well as in compliance with the contract documents and various statutory requirements.”

The JBCC note in their practice note that:

“Uncertainty often prevails regarding the assessment of damages in respect of claims that employers have against contractors for defective work. The employer is entitled to have the defective work rectified and/or claim damages in terms of the contract and/or common law. Standard-form contracts generally provide for specific procedures related to defective work claims made during the pre-determined contractual completion stages and after the issuing of the final completion certificate. The success of a defective work claim after the issuing of the final completion certificate is complicated by various factors, inter alia that the contractor may no longer be in business; there is no financial hold on the contractor because of the expiration of the construction guarantee; and the difficulty often to establish whether the defective work is as result of a design or specification shortcoming/oversight, normal wear and tear or caused by the contractor or his subcontractors.

‘The systems, tools and techniques are available for an industry willing to embrace good practice in order to improve industry performance and project outcomes. Vigilance on the part of the principal agent appointed to represent the employer is required to avoid later arguments as built environment professionals often fail to enforce the contractual requirements. In so doing they leave the building owner/employer with no other option but to institute a claim for damages for breach of contract due to delivery of defective work by the contractor.

‘Continuous professional development for professionals practising in the construction industry is therefore vital to understand and correctly apply the provisions contained in the particular contract. This will not only assist in the ability to correctly execute procurement requirements, but also the ability to effectively manage contracts from a supply chain management and built environment perspective.“3

The assessment, management and avoidance of defects is clearly a significant problem for construction. The fact that contract drafting bodies have devoted so much time to tackling issues surrounding defects and damages is significant. It is arguably indicative of the scale of the problem faced by the industry.

The assessment of the quantum for defect claims becomes complicated further when issues such as ‘betterment’ are added. There are also regional and specific issues, one of which in particular we will assess further in this paper.

Betterment

This is a concept that causes some concern and leads to many quite complex arguments in construction disputes. Essentially, where the end user has received the benefit of an improvement to their building or product in the rectification of defects. That user should not be entitled to the full cost of that betterment. Damages won’t be the same as if nothing had happened – there will potentially be deductions from damages where betterment occurs.

In the very simplest of terms – damages = cost of cure + diminution in value – betterment. However, as with many things in law, it isn’t as simple as it might at first seem. The opportunities to claim a reduction in damages as a result of betterment are extremely limited.

Some key cases where betterment has arisen include:

  • Harbutts Plasticine v Wayne Tank and Pump4 – In this case, it was determined that you cannot claim a reduction due to betterment if that betterment is a result of external factors having changed. This applies even if the client gets a better factory as a result.
  • The Baltic Surveyor5 – set out rules for betterment claims – they need to be exceptional. Betterment needs to be providing no financial benefit to the claimant, or where there is no way of determining value, need to try and put a value on it as best as possible.

Having said that, there have been cases that have been successful in claiming betterment, particularly where a quantum expert has been employed to separate different elements of quantum in the claim. The use of a quantum expert for assessment in cases of betterment has been well exercised. For example, in J Sainsbury v Broadway Malyan, Ernest Green Partnership Ltd.6

The court accepted the opinion of the quantum expert. The expert asserted that had the accommodation size been reduced (reflecting the original building size), then the cost of reconstruction could have been reduced by £150,000.

In British Westinghouse Electric & Manufacturing Co Ltd v Underground Electric Railways Co of London Ltd7 – betterment allowed for improved performance of replacement generating equipment on the basis that the original contract would never have achieved the efficiency of the replacement kit.

To add to (or arguably reduce) the complexity of betterment claims, The Bacon Woodrow formula8 suggests that a fairer result can be obtained by allowing for interest saved on capital investment over time on the new asset. The formula is expressed as follows.9

UK – Grenfell – Implications worldwide?

In the UK, an additional complication has entered the fray. The disaster at the Grenfell tower led to a raft of changes in the law in the UK. The resultant claims for defective cladding and its remediation has been unprecedented.

A government report last year stated that, “Overall, 1,603 buildings (42%) have either started or completed remediation works. Of these, 777 buildings (20%) have completed remediation works. The total number of buildings reported to have started or completed remediation works has doubled since the end of December 2022,”10

Assessing the cost and allocating liability on this has been a phenomenal task. The new law includes an opportunity for an ‘interested party’ to seek a contribution order in law. This contribution towards remediation comes from other parties involved in the development of properties. These parties are affected by the remediation requirements. In Triathlon Homes v Stratford Village Development Partnership,11 the court held that the property owner (Triathlon) was entitled to recover costs from the developer (SVDP). The amount awarded was £18 million.

Whilst these issues are specific to one particular jurisdiction, the authors are aware that other regions are now looking to the English courts and legal system to identify what areas may be useful for their own planning and safety management. It seems likely that similar legislation may follow, particularly in areas with a common law foundation for their legal system.

Conclusions

Much like the Facebook status of many a teenager – when it comes to the assessment of damages, it’s complicated. There are a number of different factors to consider – changing costs of materials, currencies, labour rates etc will all have an impact on the assessment of damages. Issues and doctrines such as betterment make it even more complex, and the implications of the UK’s approach to Grenfell and subsequent legislation may mean there’s yet more to come as other jurisdictions watch to see what the UK do and potentially follow suit. It will be interesting to see what happens in the coming years, but a certainty is perhaps that nothing is certain in the world of construction and law.

Should you need support with dispute resolution please contact us

  1. https://www.isurv.com/directory_record/3712/yarmouth_v_france and detailed at https://www.fenwickelliott.com/research-insight/articles-papers/construction-law-terms-a-z/defect (retrieved 08/10/2024) ↩︎
  2. https://www.lexisnexis.co.uk/legal/construction-law/issues-construction-contracts/ Lexis Nexis (retrieved 07/10/2024) ↩︎
  3. https://www.jbcc.co.za/advisory_notes/JBCC%20ADVISORY%20NOTE%2021.0_Defects%20before%20and%20after%20Final%20Completion%20Ed%206.2.pdf (retrieved 07/10/2024) ↩︎
  4. Harbutt’s “Plasticine” Ltd v Wayne Tank and Pump Co Ltd [1970] 1 QB 447, [1970] 1 All ER 225, [1970] 2 WLR 198, [1970] 1 Lloyds Rep 15 ↩︎
  5. VOADEN v. CHAMPION (THE “BALTIC SURVEYOR” AND “TIMBUKTU”), [2001] 1 Lloyd’s Rep. 739 ↩︎
  6. J Sainsbury v Broadway Malyan, Ernest Green Ltd, [1998] EWHC Technology 302 ↩︎
  7. British Westinghouse Electric Co Ltd v Underground Electric Railways Co of London Ltd [1912] AC 673 ↩︎
  8. https://www.hauc-uk.org.uk/resources/diversionary-works-calculator  (retrieved 07/10/2024) ↩︎
  9. https://www.fticonsulting.com/uk/insights/articles/construction-damages-rectification-defects-issues-betterment (retrieved 08/10/2024) ↩︎
  10. https://www.thefpa.co.uk/news/data-shows-two-thirds-of-buildings-with-cladding-defects-still-to-begin-remediation , retrieved 08/10/2024 ↩︎
  11. https://www.judiciary.uk/judgments/triathlon-homes-llp-v-stratford-village-development-partnership-and-others/ (Retrieved 8th Oct 2024) ↩︎