England and Wales High Court (Technology and Construction Court) Decisions

IN THE HIGH COURT OF JUSTICE
QUEEN'S BENCH DIVISION
TECHNOLOGY AND CONSTRUCTION COURT

		Royal Courts of Justice Strand, London, WC2A 2LL
		5th June 2014

 


Mr Justice Akenhead:

Introduction

1. Preliminary issues have been ordered in relation to the construction of Clause 2.30 of the JCT Intermediate Form of Contract (2005), which provides for defects to be rectified in the "Rectification Period" following practical completion or, if the Employer consents and the Contract Administrator so instructs and such defects are not to be put right, an "appropriate deduction" is to be made. It is these words which fall to be interpreted and there has been no authority on the point as to what the basis of valuation should be.

The Factual Background

2. There has been no witness evidence and I have taken the following from the papers put before the Court. What follows is not intended to bind the trial judge but seems to be broadly unexceptionable. Ms Oksana Mul, the Claimant, ("the Employer") owns and with her family occupies a large country house known as Fairhill, Riding Lane, Hildenborough, Kent (the "Property"). By a contract ("The Contract") made in April 2008, Hutton Construction Ltd ("the Contractor") was engaged by the Employer to carry out various substantial extension and refurbishment works ("the Works") to the Property. The contract sum was £3,134,916.82. The work started on or about 6 May 2008. Practical Completion was certified by the Contract Administrator on 14 May 2010 with the certificate having attached to it a substantial list of works said to have been incomplete or defective. The Claimant paid to the Defendant, subject to retention, the final sum certified by the Contract Administrator ("CA"), being £4,050,000. It seems that substantial further works were done by a number of other contractors engaged by the Employer, for instance in terms of additional joinery. I will use the terms "Works", "Employer" and the "Contractor", as the context makes clear, to describe both the Works to be done under the Contract and the Claimant and the Defendant as well as the Works and the generic parties under a building contract such as was used here.
3. On 25 March 2011, the CA wrote to the Contractor in these terms:

"I refer to our meeting at Fairhill or 22nd March 2011. The purpose of the meeting was an attempt to avoid further correspondence between ourselves arguing our respective positions, and to progress the completion of Fairhill. During the meeting, we both repeated our arguments set out in our previous letters, I can see no purpose or benefit in repeating these here. However, our Client has explained the significant financial consequence of not being able to occupy the property.

Therefore, in an order to mitigate these damages, we are arranging for all outstanding works to be attended to by other contractors. You are aware of this by way of copy correspondence we have sent to you so far in connection with the investigation carried out by Smith & Byford…

Additionally, we have recently carried out an inspection of the property in order to identify the repairs required at the end of the twelve-month rectification period. We confirm a copy of the schedules prepared by HJP and EPP were emailed to you during that meeting. We are also arranging for these works to be carried out by other contractors…"

The schedules contain scores of listed items of allegedly incomplete or defective work, running to some 20 pages' worth.

4. The Contractor responded on 7 April 2011, attaching comments on most if not all the items. It denied any suggestion that it had prevented the Employer taking occupation of the building. It suggested that at least some of the problems were attributable to shrinkage itself attributable to the fact that the property had been without heating for a considerable period of time; it pointed to shrinkage in the joinery items supplied and installed by Employer's own directly employed contractors.
5. There are extensive issues between the parties. The Employer issued proceedings on 17 October 2013 against the Contractor, for damages for defects as well as alleged overpayment. The alleged defects relate to the external render, exterior and internal decoration, internal joinery, hardwood flooring, under floor heating, downlights, electrical and mechanical installation, showers, an extension, the garage block, the orangery roof, insulation, damp proof course, brickwork and blockwork, pool room roof, portico and entrance steps and garage doors. The defects claim comes to over £1m. It seems clear that all or most of the defects claim relates to defects, the remedial works for which either have been or will be carried out by the Employer using other contractors or tradesmen.
6. The Contractor's Defence and Counterclaim is detailed. It pleads (at Paragraph 4) that it at all times remained ready, willing and able to repair all defects as provided by Clause 2.30 of the Contract Conditions and even after the expiry of the Rectification Period. It also pleads that all that the Employer is entitled to is the "appropriate deduction" under Clause 2.30 and that this is to be a "sum calculated by reference to the contract rates/priced schedule of works". In respect of defects notified after the expiry of the Rectification Period, essentially it pleads a failure to mitigate, which, it asserts, would reduce the claim therefore to nil or to what it would have cost it to remedy.
7. It is this which has lead to the Court ordering preliminary issues:

"In respect of a defect arising within the Rectification Period (as defined in Contract Particulars) of the JCT Intermediate Form of Contract ("the Contract"), is an "appropriate deduction" under Clause 2.30 of the Contract calculated by reference to:

a. The Contract rates/priced schedule of works/Specification; or

b. The cost to the Contractor of remedying the defect (including the sums to be paid to third party sub-contractors engaged by the Contractor): or

c. The reasonable cost to the Employer of engaging another contractor to remedy the defect; or

d. The particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works."

The Contract

8. The Contractor's primary obligation is set out in Article 1:

"The Contractor shall carry out and complete the Works in accordance with the Contract Documents"

Those Documents are listed in Article 10.2 as the JCT form, a Schedule of Amendments, the Contract Drawings and the Contract Specification. The Specification was priced by the Contractor and is referred elsewhere as the "Priced Document". Clause 1.3 of the JCT Conditions required these documents to be read as a whole, albeit that the Specification could not override or modify the Agreement or Conditions. Article 15 required the Contractor to provide a Guarantee Bond for 20% of the Contract Sum. The Rectification Period (known in other JCT contracts as the Defects Liability Period) was to be 12 months from practical completion. Clause 1.10 addressed the Final Certificate which was to be "conclusive evidence" (save for fraud) that work and materials which was to meet the approval of the CA was to the CA's reasonable satisfaction.

9. Clause 2.1 partly repeated Article 1 saying that the Contractor "shall carry out and complete the Works in a proper and workmanlike manner and in compliance with the Contract Documents…and the Statutory Requirements". Apart from this, there are a number of clauses which deal with quality, for instance:

"2.1A.1 The Contractor warrants to the Employer that: 2.1A.1.1 all workmanship, manufacture and/or fabrication will be good of up-to-date practice and of a standard appropriate to the Works; 2.1A.1.2 the Works when completed will comply with the Statutory Requirements, the Contract Drawing and Specification."

10. Within Clause 2, which broadly addresses the Contractor's obligations, Clause 2.4 provides for commencement by the Contractor of the Works (on the Date of Possession) and thereafter for it to "regularly and diligently proceed with and complete the same on or before the relevant Completion Date". Clauses 2.19 and 2.20 provide for extensions for various events and Clauses 2.22 and 2.23 for the payment of liquidated damages for culpable delay. A corollary of this is the Contractor's entitlement, subject to various requirements, to loss and expense for delay and disruption caused by specified causes. Clause 2.21 addresses practical completion:

"When in the opinion of the [CA] practical completion of the Works…is achieved and the Contractor has complied sufficiently with clause 3.18.3, then: .1 in the case of the Works, the [CA] shall forthwith issue a certificate to that effect ('the Practical Completion Certificate')…

and practical completion of the Works…shall be deemed for all the purposes of this Contract to have taken place on the date stated in that certificate."

Provision is made by Clause 2.25 for "partial possession" to be taken before Practical Completion where "the Employer wishes to take possession of any part or parts of Works…and the consent of the Contractor has been obtained (which consent shall not be unreasonably delayed or withheld)…" and when that happens to any such "Relevant Part", Clause 2.26 provides that "practical completion of the Relevant Part shall be deemed to have occurred, and the Rectification Period of the Relevant Part shall be deemed to have commenced, on the Relevant Date."

11. There are numerous provisions which enable the CA to require defective work or materials to be dealt with, not least of which are:

"2.9 The…[CA] shall determine the levels required for the execution of the Works and shall provide the Contractor by way of accurately dimensioned drawings with such information as shall enable the Contractor to set out the Works. The Contractor shall be responsible for, and shall at no cost to the Employer amend, any errors arising from his own inaccurate setting out. With the consent of the Employer the [CA] may instruct that such errors shall not be amended and an appropriate deduction shall be made from the contract for those that are not required to be amended.

3.16.1 The [CA] may issue instructions in regard to the removal from the site of any work, materials or goods which are not in accordance with this Contract.

3.16.2 If any work is not carried out in a proper and workmanlike manner the [CA] may issue such instructions to the Contractor as are in consequence reasonably necessary and the Contractor shall comply with them at no cost to the Employer."

12. The interim and final payment provisions are contained in Clause 4, with Interim Certificates and valuations occurring every 4 weeks up to Practical Completion. Interim Certificates were by Clause 4.7 to be for the "work properly executed by the Contractor" together with both on and off-site materials and goods, plus various additional amounts for instance for loss and expense due under Clause 4.17. An interim payment was to be made within 14 days of practical completion of "the total value of the "Works" plus the various additional amounts. Both before and after practical completion, these were to be by Clause 4.7.3 subject to deductions inter alia under Clauses 2.9 (see above) and 3.9 (see below). Final certification was addressed in Clauses 4.13 and 4.14, with the Final Certificate to be issued after a final accounting process over some 6-7 months. Clause 4.13.2 provided:

"4.13.2 The Contract Sum shall be adjusted: .1 for any amounts agreed by the Employer and the Contractor in respect of Variations and for all Valuations, as referred to in clause 5.2; .2 for amounts referred to in clause 4.7.2 and the deductions referred to in clause 4.7.3, each as finally ascertained; .3 by deduction of all Provisional Sums and the value of any works for which an Approximate Quantity is included in the Contract Documents; and .4 by the amount of any deduction under clause 2.30."

13. Clause 3.9 follows Clause 3.8 which requires the Contractor to comply forthwith with all instructions issued by the CA. Clause 3.9 states:

"3.9 If within 7 days after receipt of a written notice from the Architect/Contract Administrator requiring compliance with an instruction the Contractor does not comply, the Employer may employ and pay other persons to execute any work whatsoever which may be necessary to give effect to that instruction. The Contractor shall be liable for all additional costs incurred by the Employer in connection with such employment and an appropriate deduction shall be made from the Contract Sum."

14. Variations are dealt with in Clause 5 and the CA can issues instructions requiring changes to the Works, including omissions as well as for "the removal from the site of any work executed or materials or goods brought thereon by the Contractor for the purposes of the Works other than work materials or goods which are not in accordance with this Contract" (Clause 5.1.1.3). Clause 5.3 lays down the basis on which variations are to be valued. This is by reference to "the rates and prices set out in the Priced Document" (see Clauses 5.3.1.1 and 5.3.1.2) or in certain circumstances at "Fair rates or prices" (Clause 5.3.1.3).
15. One then comes to Clause 2.30 about which these preliminary issues revolve:

"2.30 Any defects, shrinkages or other faults in the Works or a Section which appear and are notified by the …Contract Administrator to the Contractor not later than 14 days after the expiry of the Rectification Period, and which are due to materials or workmanship not in accordance with this Contract, shall at no cost to the Employer be made good by the Contractor unless the…Contract Administrator with the consent of the Employer shall otherwise instruct. If he does so otherwise instruct, an appropriate deduction shall be made from the Contract Sum in respect of the defects, shrinkages or other faults not made good."

Discussion

16. Essentially, the argument proceeds on what now seems to be a hypothetical and disputed assumption, which is that the CA's letter dated 25 March 2011 was an instruction of the CA as referred to in Clause 2.30 whereby the defects was not to be made good under the Contract. There remains a pleaded issue as to whether the CA did "otherwise instruct" and as to whether the Employer did consent. It is unclear whether this was pointed out to the Court (Coulson J) when the preliminary issues were discussed and ordered; the trial of such issues was opposed by the Employer.
17. Essentially, the Employer through her Counsel, Mr Oliver, argued that, when Clause 2.30 is engaged, "appropriate deduction" is not limited to or confined by a valuation based on or by reference to the Contract rates or prices in the Priced Document; he argues that the "appropriate deduction" is to be what is appropriate in all the circumstances and it could be, for any particular defect or all defects, any one of the alternatives listed in the defined preliminary issues. The Contractor, through its Counsel, Ms Laney, argued that Clause 2.30 envisaged that valuing any defective work, which by reason of any Clause 2.30 CA instruction was not to be made good by the Contractor, the valuation of the "appropriate deduction" would invariably be by reference to the rates or prices in the Priced Document; at least in part this is said to be because the Contractor is being denied its contractual right to carry out the requisite remedial work and because there are other mechanisms (e.g. Clause 3.9) whereby a different basis of evaluation can be effected where the Contractor fails to comply with an instruction requiring it to put right a defect for which it is responsible.
18. There is no doubt that one has to have regard to the whole Contract in seeking to determine what the meaning is on any given topic. This is not only correct on authority (such as Investors Compensation Scheme Ltd v West Bromwich Building Society [1998] 1 WLR 896 but also the Contract itself directs this by way of Clause 1.3 of the Contract Conditions.
19. There are some authorities broadly on the topic of the basis of evaluation of the putting right of defects by the Employer on somewhat different forms of building contract. It is accepted that there is no authority as to what "appropriate deduction" means in the Contract here. In William Tomkinson & Sons Ltd v. The Parochial Church Council of St Michael & Others [1990] CLJ 319, HHJ Stannard, sitting as an Official Referee, addressed the meaning of Clause 2.5 of the JCT Standard Form of Agreement for Minor Works (1980 Edition): which provided:

"Any defects, excessive shrinkages or other faults which appear within three months of the date of the 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/Supervising Officer shall otherwise instruct."

20. This case related to a contract for works to a church and a preliminary issue was tried as to whether this clause afforded the contractor a defence to the church's claim for the cost of remedying defects having regard to the circumstances that those defects were remedied by other contractors on the instructions of the church prior to the date of practical completion. This was not a case about rights and liabilities arising during the defects liability or rectification period. The judge said:

"…it does not follow that where workmanship falls short of the standard required by the contract it and the employer remedies it prior to practical completion, there is no breach of contract, or the employer is not entitled to recover as damages his outlay in remedying the defective works…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 rights 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 ER 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 Gilbert-Ash (Northern) Limited v Modern Engineering (Bristol) Limited [1974] A.C. 901. In my judgment Clause 2.5 is not such a revision 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 [in Kaye v Hosier and Dickinson Ltd], leads to the construction and normal damages are irrecoverable. Otherwise the true function of clause 2.5 is in my judgment firstly to confirm 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 (Anerly) Ltd [1966] 2 All E.R. 1221 per Lord Denning M.R. at p.904F-I…Secondly, clause 2.5 is on the contractor a licence to return to the site after practical completion for the purpose of remedying defects: H.W. Neville (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 upon the contractor a right to reduce the costs of remedial works by undertaking them himself. Effect is given to this last aspect of the Clause if the damages recoverable by the employer in his outlay of cost in correcting defects in the works are limited to such sum as represents the costs which the contractor would have incurred if he had been called on to remedy the defects."

Much of the judgment in this case was concerned with an issue (which was then to some extent an academic one in construction law circles) as to whether, before practical completion, a defect in the work was at that stage a breach of contract or a "temporary disconformity" falling short of an actionable breach, this issue having been raised by Lord Diplock in P&M Kaye Ltd v Hosier and Dickinson Ltd [1972] 1 All ER 121.

21. The same contract and much the same point was considered by the Court of Appeal in Pearce & High Ltd v Baxter (1999) 66 Con LR 111, albeit that the Court had to consider the same issue in relation to defects arising or appearing in the post practical completion period. Evans LJ approved the dictum of HHJ Stannard quoted above and said:

"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 [are] that these "shall be made good by the Contractor entirely at his own cost unless the Architect shall otherwise instruct." 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. 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.

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. (page 114) 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. 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. 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)".

22. In Woodlands Oak Ltd v Conwell [2011] BLR 365, the Court of Appeal considered a simple contract which did not have a defects liability clause. May LJ said at Paragraph 20 in relation to a finding by the first instance judge that where "the Employer fails to give the contractor an opportunity to rectify defects in the work, that amounts to a failure to mitigate the losses":

"I am in no doubt that the last proposition misstates the law. What it should have said was "where the employer fails to give the contractor an opportunity to rectify defects in the work that may amount to a failure to mitigate the losses".

At Paragraph 24, he addressed another finding that in "the circumstances, the [Employers] are not entitled to recover more than the amount it would have cost for the [Contractor] to rectify the defects":

"This is said to indicate an error of law; an error of law to the effect that the Recorder was wrongly translating a contract where there was an express defects liability clause, as there was in Pearce and High, to a contract where there was no such express clause, and that he was making the decision he did on a misunderstanding as to the law. In my judgment that is not a sustainable submission. The sentence which I have read in subparagraph 5 of paragraph 42 is not saying "I am applying Pearce and High to the facts of this case"; it is simply indicating that the consequences of not giving the contractor an opportunity to rectify defects, when for one reason or another he should have been given that opportunity, would be that the defendants are not entitled to recover more than the amount it would have cost the claimant to rectify the defects. That is a proposition which applies just as much to a contract with an express defects liability clause as it does to considerations, which I am satisfied the Recorder was undertaking, of whether or not the Conwells had failed to mitigate their loss."

23. Bringing all this together in the context of this case and of the Contract, the Rectification Period begins on Practical Completion (see Clause 2.30 and the Contract Particulars). By that stage, the Works are (or at least are certified to be) practically complete. The Contractor is no longer, as of right, entitled to be on site; liquidated damages, if any, will have stopped running. If there are defects in the Works at that stage, for which the Contractor is and remains culpable, it is in breach of contract at that stage for failing to complete the Works in accordance with the Contract; that would sound in a right on the part of the Employer to damages for breach of contract. Often, but not invariably, this right to damages for culpable defects will be measureable by reference to the cost of putting right those defects. What triggers the Contractor's obligation to make good defects under the Contract is the appearance and then notification to the Contractor of such defects by the CA within or up to 14 days after the end of the Rectification Period. That obligation must carry with it the concomitant right on the part of the Contractor to do such making good and, by way probably of an implied obligation on the part of the Employer to co-operate reasonably, the Employer must facilitate this making good process, most commonly by way of providing access to the Property (in this case).
24. The current case is distinguishable from the above three authorities by reason of Clause 2.30 and its talk of an "appropriate deduction being made" where the Employer consents and the CA instructs that the making good is not to be done by the Contractor. This instruction may arise for several reasons. It may be as here (allegedly) that the Employer wants to arrange for the requisite remedial works to be done by others; that may be for convenience because, say, it is easier and more convenient for the Employer or it may be because the Employer has justifiably or not become fed up with the Contractor and wants no more to do with it.
25. It is helpful to consider what would happen if there was no Rectification Period or contractual arrangement for the Contractor to come back and remedy culpable defects, as in the Woodlands Oak case. The usual rules about damages would apply such as causation, remoteness, foreseeability and, of course mitigation of damage. It will often be the case that the Employer can be said to have failed to mitigate his or her damage if he or she fails to give the contractor to opportunity to put right the breaches of contract, namely the culpable defects in question. However, it is not invariably the case that the Employer would have failed to mitigate damage in failing to give the Contractor this opportunity; examples might be where there were such whole scale defects that no reasonable employer could be expected to have that Contractor back on site, where there had been fraudulent behaviour on the part of the Contractor relating to the Works or where the Contractor had made it clear that it was not prepared to return to put right alleged defects; it all depends on the facts and the circumstances. Assuming that remedial works were the proper basis of an award of damages, the appropriate damages would be related to the reasonable cost to the Employer of the remedial works and employing other parties to do them, unless he or she had failed to mitigate by not offering the opportunity to the Contractor to put right the defects in question; in this latter case, the Employer would be limited to what it would have cost the Contractor to put them right (this cost often being significantly less than that of bringing in new contractors or tradesmen to do so).
26. In my judgment, the Employer's right to damages for defects, which were the contractual fault of the Contractor, was, so to speak, in place as at Practical Completion (subject to what I say below as to whether contractual Practical Completion had occurred) and therefore for such defects the Contractor was in breach for failing to complete in accordance with the Contract. The Employer, whether or not she actually knew about such defects as at that date, was entitled to damages, although that right was subject to a duty to mitigate. The wording of Clause 2.30 does not explicitly exclude or limit her right to damages and, as the Court in William Tomkinson and Pearce & High noted and indorsed respectively, the "very clear words" or "clear express words" called for by Edmund Davies LJ and Lord Diplock respectively are not present. That would be sufficient to decide the preliminary issues broadly in favour of the Employer.
27. If I was wrong about this, one then needs to go on to construe Clause 2.30 further. The use of the term "appropriate deduction" in Clause 2.30 is a relatively neutral term. What may be appropriate in one set of circumstances may be inappropriate in another. In my judgment, what "appropriate deduction" means is a deduction which is appropriate in all the circumstances. My reasons are as follows:

(a) There are any number of permutations which might foreseeably arise in or just after the Rectification Period from a cooperative Contractor ready and willing to remedy any defects which are its responsibility to the opposite, from an Employer who does not want such defects put right at all and is prepared to live with them to an Employer who is either willing or opposed to the Contractor coming back to remedy them for good or bad reason or some permutation in between for different defects. It could therefore be said that there is a sensible commercial reason why such a neutral term is used.

(b) It would have been very easy to spell out what the deduction would be if it was not to be an appropriate one in all the prevailing circumstances. Thus, if the deduction was always and only to be calculated by reference to the prices and rates in the Priced Document (the Specification), it would have been sensible and easy to say so. If it was always going to be appropriate to calculate the deduction in this way, there was no obvious point in using a term like "appropriate".

(c) When one comes to consider defects which do not appear or which are not notified up to 14 days after the expiry of the Rectification Period, it is noteworthy that there is no explicit obligation on the part of the CA to notify defects to the Contractor. It is only if they appear and are notified by the CA to the Contractor during this period that the Contractor is required to make them good unless otherwise instructed. One thus has the commercially odd state of affairs (if Ms Laney is right) that, by the CA not notifying defects which have latterly appeared, the Employer can, subject of course to his or her duty to mitigate, retain the right to damages. Any other construction would involve a contractual obligation (not expressed) on the part of the Employer through the CA to notify such defects to the Contractor and that seems somewhat far-fetched.

(d) Similar considerations apply where there are culpable defects but they do not appear and the CA does not find out about them until 15 days or more after the expiry of the Rectification Period. Clause 2.30 does not apply as such, although it may be a matter of chance that the defects have remained uncovered. It is again a somewhat commercially odd state of affairs (if Ms Laney is right) that the "appropriate deduction" mechanism machinery applies in one case with the suggested restricted interpretation but not in the other.

(e) Although I have not been shown the Priced Document in this case, I can safely make four assumptions about it, namely that every single item of work is priced, some items are not individually priced, items of work are compendiously priced to a greater or lesser extent or something in between. Those prices may be high containing high levels of profit or low containing accidentally or otherwise no profit or a loss. I pressed Ms Laney about what the "appropriate deduction" would be if the individual price for what turns out to be a piece of defective work was highly profitable but the maximum remedial cost (whoever carried the work out) for that work was less and she felt constrained to concede (properly on her hypothesis) that the price in the Priced Document would then be the maximum. One can think of many different scenarios, such as the plastering of a wall which is slightly out of true because its is 1mm thicker at the bottom than the top; it is a defect but the Contract price may be £100 for that plaster work but it would only take a worker 2 hours (at £20 per hour) to rub down with an electric sander to achieve the requisite trueness; the appropriate deduction would, on Ms Laney's concession, be £40 albeit that the Contract price was £60 more. On that basis, the cost of the remedial work would be appropriate. This would then involve qualifying the Contractor's primary case that the deduction would be calculated by reference to the prices and rates in the Priced Document.

(f) One needs to bear in mind that, following Practical Completion on a residential housing project like that in this case, the Employer will move in and/or often, as apparently here, have further work done by other contractors. This is often finishing work with for instance floor coverings or bookcases placed on or over work done by the Contractor. To do any remedial work, the Contractor under Clause 2.30, if told to do the remedial work, would have temporarily to remove or protect this other later work (or arrange for it to be done) and that will cost time and money. It is commercially odd again, if the Contractor is told under Clause 2.30 not to do such remedial work, that the "appropriate deduction" does not then take this removal and protection into account, because there will be no rate or price in the Priced Document for such removal or protection work. This points in part to the commercial unreality or unlikelihood of the Contractor's interpretation because the "appropriate deduction" will be inappropriately low because it will not take into account such further work.

(g) Reliance is placed by Ms Laney on the fact that under Clause 2.30 the "otherwise" instruction can only be given with the consent of the Employer. I do not consider that this adds very much. The CA is retained by the Employer in any event and as agent can only do what its client authorises it to do, although by signing the Contract the Employer is effectively authorising the CA to do what the Contract says it can and should do. The consent does make it clear to the Employer and to the Contractor that the Contractor is being discharged from complying with Clause 2.30 but that only absolves the Contractor from any charge that it was in breach of Clause 2.30. The wording is simply not clear either expressly or by necessary inference that the Employer is abandoning any other entitlement to damages or other relief. Clause 2.31("The…CA shall, when in his opinion the Contractor's obligations under Clause 2.30 have been discharged, issue a certificate to that effect") does not really add anything to this aspect of the debate.

(h) It is suggested by Ms Laney that Clause 3.9 provides one, and in effect possibly the only, route for the Employer to secure that the cost of employing others to carry out remedial works relating to culpable defects is recoverable. There would have to be an instruction to the Contractor to put right some defective work and a failure to comply with that instruction followed by a Clause 3.9 written notice requiring compliance and then a non-compliance with that notice, before this entitlement arose. Again, this is not expressed to be the only remedy. This is not what is sometimes called a "four corners" contract in which the contract spells out that the only remedies available are those expressly spelt out within the terms of the contract itself. Ms Laney relied on an Australian decision in the New South Wales Supreme Court, Bitannia Pty Ltd and another v Parkline Constructions Pty Ltd and another [2009] NSWSC 1302; I do not see that this helps very much as it was on another form of contract (for instance with different practical completion and early occupation arrangements) and the first instance judge seems to have found that the contract there provided in effect a code or was in effect a four corners type of contract.

(i) Reliance is also placed by Ms Laney on the accounting provisions whereby express provision for allowance to be made within the interim and final certification process for deductions under Clause 2.30 to be made. That does not help because it does not explain how the deductions are to be calculated; they are still to be "appropriate deductions". In relation to interim payments, Clause 4.8 which deals with payment expressly envisages that the Employer can seek to withhold or deduct from the amount due:

"4.8.3 Not later than 5 days before the final date for payment the Employer may give a written notice to the Contractor which shall specify any amount proposed to be withheld and/or deducted from the amount due…"

This is written into the Contract to reflect the provisions of the Sections 110 and 11 of the Housing Grants, Construction and Regeneration Act 1996 before it was amended by the Local Democracy Economic Development and Construction Act 2009. This clearly envisages deductions or withholdings (or set-offs) for heads of cross claim other than only deductions expressly specified in the Contract. There is in Clause 4.14.3 a comparable provision for the Final Certificate process. There is nothing in any of the accounting provisions which suggests that the only deductions can be those spelt out in the Contract. This supports the view that the Employer's rights to claim and set off for damages are retained. Concomitantly, the Contractor's rights to claim damages for breach of contract are not excluded and it would be surprising if that was the case and, in the absence of clear wording, the Employer's rights to claim for breach were excluded.

(j) Ms Laney goes on to argue that in effect what a Clause 2.30 "otherwise" instruction is or equates to is a variation instruction omitting the remaining work and there the variation valuation rules point towards using the rates and prices in the Priced Document as the primary basis for that. This runs contrary to the fact that Clause 5.1.3 excludes from the definition of variation work instructions involving "the removal from the site of…work materials or goods which are not in accordance with this Contract". It is true that an omission of work can be valued as a variation and the Contract rates and prices will often need to be used to achieve the requisite value to be deducted. That does not help the Contractor's argument because at most it amounts to an obvious assertion that the rates and prices may often be capable of being used to value at least the item of defective work.

(k) A pointer against Ms Laney's arguments lies in the terms of Clause 4.7.1.1 which requires the CA to certify only work "properly executed"; it follows that, if the CA is doing its job properly or is at least able to ascertain the presence of defects, it should certify up to Practical Completion at least, amounts which already contain some deduction or reduction in respect of the known defects. Although the post Practical Completion interim certificate is for "the total value of the Works" (which is slightly different terminology), that total value must, in my judgment, take into account known defects in the works because the true "total value" should not assume that all the work is perfect even if there are known defects.

28. Of course, there can be no doubt here that, if the Employer acted unreasonably in not giving the Contractor a fair opportunity to put right the defects for which it was culpably responsible, she will probably have failed to mitigate her loss. If there has here been an "otherwise" instruction under Clause 2.30 at all (and this is clearly contested), I do not see a peculiar difficulty in the CA doing the independent exercise of valuing the "appropriate deduction " under Clause 2.30 by reference to fairly well known rules about mitigation of damage. The William Tomkinson, Pearce & High and Woodlands Oak cases point to the Employer being limited to what it would have cost the Contractor to effect the requisite remedial works for defects which it was, unreasonably on the Employer's part, not given the opportunity to put right.
29. One of the problems here is that the practical completion said to have been certified was apparently not of a type expressly envisaged by the Contract Conditions. The CA can certify the Works overall as practically complete when they are so complete (see Clause 2.21) or with the Contractor's consent the Employer can assume "partial possession" of parts. The Court is informed that Practical Completion was purportedly certified by the Contract Administrator on 14 May 2010 with the certificate having attached to it a substantial list of works said to have been incomplete or defective; this is said to have arisen due to the Employer's need or desire to move in. I have heard no argument as to whether there was effective Practical Completion or a proper certificate to that effect. Practical Completion occurs when the Works are complete for all practical purposes, albeit that 100% completion of every item of work is not required. This is or may be a problem because Clause 2.30 arises during and by reference to the Rectification Period which is 12 months "from the date of practical completion of the Works" (see the Contract Particulars). It might be that some sort of estoppel arises such as if both parties accepted that, whatever the stage of completion was, the certified date, albeit arguably not the date of contractual completion, was to be treated as if it was Practical Completion. The problem is or may arise if Clause 2.30 can be initiated only during the Rectification Period which arguably can not run until Practical Completion has properly occurred; it is also arguable that the Rectification Period runs from the certified date, even of it was wrong and unjustified under the Contract. These possible lacunae may reduce the efficacy and utility of findings on these preliminary issues.

Decision

30. It follows from the above that an "appropriate deduction" under Clause 2.30 of the Contract means a deduction which is reasonable in all the circumstances and can be calculated by reference to one or more of the following, amongst possibly other factors:

a. The Contract rates/priced schedule of works/Specification; or

b. The cost to the Contractor of remedying the defect (including the sums to be paid to third party sub-contractors engaged by the Contractor): or

c. The reasonable cost to the Employer of engaging another contractor to remedy the defect; or

d. The particular factual circumstances and/or expert evidence relating to each defect and/or the proposed remedial works.

31. Counsel has submitted costs submissions in writing, which I have considered. There can be no dispute that the Claimant has "won" on the preliminary issues. However, Ms Laney argues for the Defendant that there should be no order as to costs broadly because, when Mr Justice Coulson decided that there should be these preliminary issues he was not told that there was a real and apparently live issue that there might have been no Clause 2.30 instruction at all and, if he had been told, he would have decided not to order preliminary issues. There is some confusion as to what happened before Mr Justice Coulson, although it is not in dispute that Mr Oliver for the Claimant was initially opposed to the idea and that he never mentioned the issue about whether the letter of 25 March 2011 was a Clause 2.30 instruction. Ms Laney says that after Mr Justice Coulson gave Counsel time to consider the matter Mr Oliver came back and was then in favour of a preliminary issue. I can not resolve that issue between what Counsel said. It is however clear that Mr Justice Coulson was not told that there was any real issue about the alleged Clause 2.30 instruction; it is obliquely challenged in the Reply by way of a general traversal but at paragraph 5 (f) an alternative plea is made that the reasonable costs of her employing others for the remedial work can be recovered "under clause 2.30 or otherwise". Certainly, if one looks at the 25 March 2011 letter, one can say it is highly arguable at least that it is not a Clause 2.30 instruction. I consider therefore that there would have been a real chance that Mr Justice Coulson might not have ordered preliminary issues on the Clause 2.30 issue, if he had been fully apprised of this difference between the parties.
32. That said, the issue would still have had to be argued and it is of general importance given that it relates to a standard form. The fairest order that I should make at this stage is that the costs of and occasioned by the preliminary issues hearing should be the Claimant's costs in the case on a standard basis such that if she succeeds in these proceedings and secures an order for costs, these cost will follow in her favour.