England and Wales Court of Appeal (Civil Division) Decisions

IN THE SUPREME COURT OF JUDICATURE CCRTF 98/0972/2

(MR RECORDER HALL )

Royal Courts of Justice

The Strand

London WC2

Monday 15th February, 1999

B e f o r e:

LORD JUSTICE EVANS

LORD JUSTICE TUCKEY

MR JUSTICE HIDDEN

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PEARCE & HIGH LIMITED

Respondent

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(1) JOHN P BAXTER

(2) MRS AS BAXTER

Appellants

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(Handed down Transcript of Smith Bernal Reporting Ltd

180 Fleet Street, London EC4A 2HG

Tel: 0171 421 4040

Official Shorthand Writers to the Court)

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MR M DAICHES (Instructed by Messrs Morrison & Masters, Swindon, Wiltshire SN1 5NS) appeared on behalf of the Appellant

MR M GIBSON (Instructed by Messrs James S. Barnett, Hungerford, Berkshire RG17 0JG) appeared on behalf of the Respondent

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J U D G M E N T

(As approved by the Court )

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©Crown Copyright

LORD JUSTICE EVANS:

1. This appeal is from a judgment given by Mr Recorder Hall in the Swindon County Court on 26 June 1998 after hearing argument on a number of preliminary issues previously directed for oral hearing.

2. The issues arise in the context of a dispute between building contractors, plaintiffs in the action, and their employers, Mr and Mrs Baxter, under a contract in the JCT form for Minor Building Works dated 29 April 1995.

3. The contract works consisted of internal and external alterations and extensions at Mr and Mrs Baxter’s home, known as Hills, Great Coxwell, Farringdon, Oxfordshire. They are defendants in the action and the present appellants.

4. The works were to be carried out under the direction of Michael Fowler Architects (“the Architect”). The works were carried out and on 13 November 1995 the Architect issued a Certificate of Practical Completion and a penultimate Certificate (No.5) valuing the works executed to date at £35,442.80 excluding VAT. Of this sum, 97.5 per cent. became due to the employers and after allowing for earlier payments the net sum payable under the certificate was £3,919.23 excluding VAT. The contractors issued proceedings in the Oxford County Court in respect of this and other amounts on 29 January 1996.

5. On 19 November 1997 District Judge Simons directed the determination of four preliminary issues. These all raised questions as to whether the employers could rely in their defence to the claim on alleged defects and omissions in the works which the contractors had carried out.

6. Some of these involved “opening up” the Certificate of Practical Completion and Certificate No.5 , which under the authority of the Court of Appeal’s decision in Northern R.H.A. v. Crouch Construction Ltd [1984] Q.B. 644 the employers were not entitled to do. However, that decision was reversed by the House of Lords in Beaufort Developments v. Gilbert Ash [1998] 2 WLR 860, which was decided before the preliminary issues were determined in the present case. The contractors/plaintiffs then conceded that two of the four issues were no longer relevant. The Recorder therefore was concerned with issues (b) and (d) only. These read :-

"(b) Whether or not the Defendants retain a cause of action in respect of paragraphs 17 and 19 of the Defendant’s Counterclaim by virtue of the fact that notwithstanding the expiry of the defects liability period on 13 May 1996 these allegations were first brought to the Plaintiff’s attention upon service of the Defence and Counterclaim dated 8 October 1996. (“The second issue”)

(d) Upon the assumption that Question (1)(c) above is answered in the affirmative, whether or not the [Plaintiff] is entitled to summary judgment under CCR Order 9 Rule 14 in accordance with its adjourned application dated 24 July 1996. (“The fourth issue”)"

7. As stated in issue (b), the defects liability period was for six months from 13 November 1995, therefore expiring on 13 May 1996. The issue arises because the employers seek to rely on defects which became apparent during or before that period, but they accept for the purposes of the appeal that the alleged defects were not notified to the contractors/plaintiffs until service of the Defence and Counterclaim dated 8 October 1996, long after the period expired.

8. We therefore are not concerned with the reason why no earlier notice was given, nor with the somewhat convoluted procedural history. It seems that a Defence served on 20 February 1996, within the defects liability period, included in paragraph 3 “The defendants reserve the right to raise in issue (sic) either the misperformance or non-performance of works between the parties hereto such that the defendants have suffered .....”, but the Recorder rightly held that this general non-specific complaint was not sufficient to constitute notice of the alleged defects to the contractors.

9. Thus the appeal is concerned with the construction and effect of clause 2.5 of the JCT form. This reads as follows :-

"Defects liability

2.5 Any defects, excessive shrinkages or other faults which appear within three months (c) SIX .... of the date of practical completion and are due to materials or workmanship not in accordance with the Contract or frost occurring before practical completion shall be made good by the Contractor entirely at his own cost unless the Architect /the Contract Administrator shall otherwise instruct.

The Architect /The Contract Administrator shall certify the date when in his opinion the contractor’s obligations under this clause 2.5 have been discharged."

10. The Recorder upheld a submission by Mr Gibson, counsel for the plaintiffs/contractors, that “if a building owner does not notify defects within the defect liability period then .... the contractor having been denied the opportunity of returning to the building, cannot thereafter be sued in respect of patent defects which are not notified to him” (judgment p.9). The authority relied on was a passage from Lord Diplock’s speech in P & M Kaye Ltd -v - Hosier & Dickinson Ltd 1972 1 W.L.R. 146 at 166 B. The Recorder held clause 2.5 makes it “a condition precedent for the right to recover damages that the building owner has notified the building contractor of patent defects within the six months liability period” (judgment p.12)

11. Mr Daiches, counsel for the employers/defendants, who did not appear before the Recorder, submits that that ruling was wrong. He relies in particular on the judgment of H.H.J. Judge Stannard, Official Referee, in William Tomkinson and Sons Ltd v. The Parochial Church Council of St Michael 1990 C.L.J. 319, which is to the contrary effect. This unfortunately was not referred to by or during the hearing before the Recorder.

12. Before considering these authorities, I shall describe the background against which clause 2.5 operates. The contractor’s obligation is “with due diligence and in a good and workmanlike manner [to] carry out and complete the works in accordance with the Contract Documents using materials and workmanship of the quality and standards therein specified” (clause 1.1). When the Architect issues his certificate of practical completion (clause 2.4), the contractor leaves the site. He has, apart from special arrangement, no more work to do. Clause 2.5 then provides for “defects ...or other faults” which appear during the defects liability period which follows. The only express provisions that these “shall be made good by the Contractor entirely at his own cost unless the Architect shall otherwise instruct.”

14. I can readily agree that this obligation cannot be enforced against the contractor unless he is first given notice of the defect, whether by the employers or by the Architect on their behalf. The giving of notice can therefore be regarded as a condition precedent to the employer’s right to require compliance with the clause, though different considerations might arise if the contractor became aware of the defects from some other source. It seems to me that “defects [etc.] which appear” during the period has to be read objectively, as a description of those defects to which the clause applies. The defect must become apparent, meaning become patent rather than remain latent, during the notice period, regardless of whether any particular person has actual knowledge of it.

15. I can agree also that clause 2.5 can be regarded as giving the contractor a right to make good the defects at his own expense, and a licence to enter the property for that purpose. This is subject, however, to the reservations expressed in Hudson’s Building and Engineering Contracts (11th ed.) para. 5-051, with which we are not concerned in the present case.

16. The Recorder proceeded from his finding that notice should be given, to hold that if no notice is given during the period then the employer loses all right to recover damages for the defects which have become apparent. This view, if it is correct, gives the clause a particular potency. The existence of the defect means that there was a breach of contract by the contractors. That clearly is the effect of the opening words. That breach gave the employers, subject to the contract terms, a right to recover damages, but they would have no right to require the contractors to rectify the defect, apart from the theoretical and speculative possibility that in certain circumstances the Court might order specific performance of the contractor’s obligation which had been broken. Clause 2.5 gives the employers an express right to require the contractor to return, as well as to the contractor himself the right to return and repair the defect himself, if he is willing to do so. There are no words of exclusion, yet the effect of the clause, if the judgment is correct, is that the employer’s right to damages in respect of the cost of repairs is lost for all time. It is unnecessary to cite authority for the proposition that such a right cannot be excluded except by clear, express words or by a clear and strong implication from the express words used.

17. Mr Gibson submits for the contractors that if clause 2.5 does not have this effect, then it adds nothing to the parties’ existing rights. I cannot agree. It gives both parties the express rights referred to above, both of which are likely to be a great practical value to the party concerned, without impinging on the employer’s common law right to recover damages for the contractor’s previous breach.

18. There remains, however, the assessment of damages which the employer is entitled to recover. If the contractor does repair the defects, then no loss will be suffered, apart possibly from consequential losses which, both parties agree, are not barred by clause 2.5. If he does not, then the measure of loss will be the cost to the employer of having the defect repaired, unless in special circumstances the diminution in value of the property in question is appropriate. The cost of employing a third party repairer is likely to be higher than the cost to the contractor of doing the work himself would have been. So the right to return in order to repair the defect is valuable to him. The question arises whether, if he is denied that right, the employer is entitled to employ another party and to recover the full cost of doing so as damages for the contractor’s original breach.

19. In my judgment, the contractor is not liable for the full cost of repairs in those circumstances. The employer cannot recover more than the amount which it would have cost the contractor himself to remedy the defects. Thus, the employer’s failure to comply with clause 2.5, whether by refusing to allow the contractor to carry out the repairs or by failing to give notice of the defects, limits the amount of damages which he is entitled to recover. This result is achieved as a matter of legal analysis by permitting the contractor to set off against the employer’s damages claim the amount by which he, the contractor, has been disadvantaged by not being able or permitted to carry out the repairs himself, or more simply, by reference to the employer’s duty to mitigate his loss (see below).

20. I therefore agree with the judgment of H.H. Judge Stannard in William Tomkinson v. St Michael’s P.C.C. (above). He held as follows :-

"Where [the defects] are not remedied by the contractor within the construction period, there is nothing in the wording of clause 2.5 to suggest that it is intended to exclude the employer’s ordinary right to damages for breach of contract, including the right to recover the cost of remedying defective workmanship. ´It requires very clear words to debar a building owner from exercising his ordinary rights of suing if the work done is not in accordance with the contract’ - per Edmund Davies L.J. in Billyack v. Leyland Construction Company Limited [1968] 1 All E.R. 783 at p.787 E-F. ´In construing such a contract, one starts with the presumption that neither party intends to abandon any remedies for its breach arising by operation of law, and clear express words must be used in order to rebut this presumption’ - per Lord Diplock in Gibert-Ash (Northern) Limited v. Modern Engineering (Bristol) Limited [1974] A.C. 689 at p.717H. In my judgment clause 2.5 is not such a provision exempting the contractor from liability, except in so far as it is part of an overall contractual scheme which, in the specific situation postulated by Lord Diplock, leads to the construction that nominal damages are irrecoverable. Otherwise the true function of clause 2.5 is in my judgment firstly to confer a remedy for defective works on the employer, i.e. the right to require the contractor to make them good. Such a provision is generally to be regarded as providing an additional remedy for the employer, and not as releasing the contractor from his ordinary liability to pay damages for defective works : Hancock v. B.W. Brazier (Anerley) Limited [1966] 2 All E.R. 901 per Lord Denning M.R. at p.904F-I Adams v. Richardson and Starling Limited (1969) 2 All E.R. 1221. Secondly, clause 2.5 confers on the contractor a licence to return to the site after practical completion for the purpose of remedying defects : H.W. Nevill (Sunblest) Limited v. William Press and Son Limited (1981) 20 Build. L.R. 78 at p.87. Thirdly, clause 2.5 is concerned with the mitigation of loss, in that it confers on the contractor a right to reduce the cost of remedial works by undertaking them himself. Effect is given to this last aspect of the clause if the damages recoverable by the employer for his outlay in correcting defects in the works are limited to such sum as represents the cost which the contractor would have I incurred if he had been called on to remedy the defects." (p.326)

My only comments are (1) the question whether nominal damages are excluded does not arise in the present case, and (2) the reference to “mitigation” is apt because the employer, as the injured party, is nevertheless under a duty to mitigate the loss for which he is entitled to recover damages.

21. The passage from Lord Diplock’s speech in P & M. Kaye Ltd v. Hosier and Dickinson (above) upon which the contractors rely was considered in detail by Judge Stannard, who referred also to the then current edition of Hudson(see now 11th ed. at para. 5-053). I should set out the relevant part of Lord Diplock’s speech in full :-

" At common law a party to a contract is entitled to recover from the other party consequential damage of this kind resulting from that other party’s breach of the contract, unless by the terms of the contract itself he has agreed that such damage shall not be recoverable. In the absence of express words in the contract a court should hesitate to hold that a party had surrendered any of his common law rights to damages for its breach, though it is not impossible for this to be a necessary implication from other provisions of the contract.

I can read no such necessary implication into condition 15 or any other condition of the R.I.B.A. contract. Condition 15 imposes upon the contractor a liability to mitigate the damage caused by his breach by making good the defects of construction at his own expense. It confers upon him a corresponding right to do so. It is a necessary implication from this that the employer cannot, as he otherwise could, recover as damages from the contractor the difference between the value of the works if they had been constructed in conformity with the contractor and their value in their defective condition, without first giving to the contractor the opportunity of making good the defects. The obverse of this coin is that the contractor is under an obligation to remedy the defects in accordance with the architect’s instructions. If he does not do so, the employer can recover as damages the cost of remedying the defects, even though this cost is greater than the diminution in value of the works as a result of the unremedied defects.

But there are no express words in condition 15 which deal with consequential damage at all, notwithstanding that the condition is dealing with breaches of contract, viz., “materials or workmanship not in accordance with this contract,” discovered in circumstances in which it could be foreseen they would be likely to cause some consequential damage beyond that which is capable of mitigation by remedying the defects. I can see nothing in the provisions of condition 15 to which I have referred to give rise to any necessary implication that the employer was surrendering his right at common law to recover damages for any consequential loss sustained by him as a result of latent detects discovered during the defects liability period." ([1972] 1 WLR at 166 B-G).

22. This passage is concerned primarily with the employer’s right to recover consequential damages for the contractor’s breach of contract in failing to carry out the works with appropriate materials and workmanship. Lord Diplock held that the right is not excluded by condition 15 of the R.I.B.A. contract, which the parties agree is not materially different from clause 2.5 in the JCT form. They also agree that the employer’s right to recover damages for consequential loss is not excluded by the clause.

23. The question is whether the second paragraph which I have quoted from Lord Diplock’s speech was to the effect that the employer’s failure to give notice of defects in accordance with the clause, thereby depriving the contractor of the right to repair the defect, bars the employer’s right to recover direct as distinct from consequential damages in respect of the breach.

24. In my judgment, Lord Diplock was concerned with the measure of damages which the employer is entitled to recover, rather than with the right to recover damages in respect of the contractor’s original breach. The latter remains as regards consequential damages, and so it is not altogether excluded. As regards damages for loss directly caused, different measures are possible, including diminution in value of the property by reason of the defect, or the cost of repairs by a third party, and on the construction of clause 2.5 which I favour, the lower amount which represents the cost of repairs to the contractor if he had remedied the defects himself. Lord Diplock, in my respectful judgment, recognised that the measure of damages may be affected by the clause, but he nowhere stated that the right to recover direct damages was altogether excluded. Had he done so, it would have been inconsistent with his express reminder that only an express term or a necessary implication from the contractual provisions could be effective to do so.

25. For these reasons, in my judgment, the Recorder was wrong to hold that clause 2.5 debars the appellants/defendants from recovering damages in respect of defects which became apparent during the defects liability period. The second issue (b) in my judgment should be answered in their favour.

26. It follows from this, in my judgment, that the fourth issue (d) should be answered in their favour also. Mr Daiches developed an alternative submission which sought, as I understood it, to distinguish between abatement of the contract price by reason of set-off at common law and the consequences of equitable set-off as recognised in Hanak v. Green [1958] 2 Q.B.9. It would be surprising if the erstwhile distinction between law and equity had this lingering effect in a commercial situation as commonplace as this, but in the circumstances I need say no more about it.

27. I would allow the appeal and answer the second issue (b) in the affirmative, and the fourth issue (d) “No”.

LORD JUSTICE TUCKEY: I agree.

MR JUSTICE HIDDEN: I also agree.

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