Scottish Court of Session Decisions

[1] The parties to this case entered into a contract for the building of an office block for the pursuer and reclaimer by the defenders and respondents. The contract was in the form of a Scottish Building Contract with Contractor's Design (January 1993 revision), incorporating the conditions of the Standard Form of Building Contract with Contractor's Design (1981 edition). The date of practical completion was 18 April 1994 when the reclaimer took possession of the office block. Thereafter there was a defects liability period of 12 months, expiring on 18 April 1995. After taking possession of the subjects the reclaimer was concerned that the external building envelope was defective due to the existence of certain leaks. He thereafter instructed a firm of architects to investigate and report on the condition of the building. After extensive investigations the architect reported that there were a number of defects in the building. The architect's report was submitted to the respondents as being a schedule of defects. The respondents, although not admitting that they were liable to remedy these defects, nevertheless undertook to do so and in fact remedied the defects to the satisfaction of the reclaimer. In the present action the reclaimer sought damages under three heads. In the first place he sought damages in respect of the cost of the architect's investigations and report amounting to £22,567. Secondly, he claimed £2,878 as being fees incurred to his solicitors to advise on the contractual aspects of the defects. Thirdly, he claimed damages of £52,982 in respect of management costs. At a debate on the commercial roll the Lord Ordinary dismissed the action. The reclaimer now seeks to appeal against the Lord Ordinary's decisions only in respect of one matter, namely the claim for costs incurred to the architects amounting to £22,567.

[2] Clause 16.2 of the Standard Contract provides

Counsel for the reclaimer argued that if defects became apparent during the course of the defects liability period due to failure of the contractor to comply with his obligations under the contract, it followed that the contractor was in breach of the contract. Under clause 16.2 the first step to be taken and the first consequence of the breach of contract is that a schedule of defects has to be prepared. Accordingly, the preparation of a schedule of defects is something which arises naturally out of the breach of contract and, in any event, must have been within the contemplation of both parties. Under the well-known rules in Hadley v. Baxendale (1854) 9 Exch 341 the cost of the preparation of such a schedule would constitute consequential loss. The only question in this case, therefore, is whether there is any special reason why the rules in Hadley should not apply. Counsel referred to P. & M. Kaye Limited v. Hosier & Dickinson [1972] 1 W.L.R. 146. Lord Diplock pointed out the distinction between the construction period and the defects liability period. During the construction period the employer may given an instruction regarding some disconformity with the terms of the contract. Provided that defect is remedied within the time required for the completion of the contract, there is in effect no breach of contract. During the defects liability period, however, the position is different. By that time the contract contemplates that the employer shall have the use of the works for the purpose for which they were built. If the building does not comply with the terms of the contract, because of latent defects, the employer may sustain consequential damage which cannot be recompensed by the contractors simply making good the defects, nor does the breach involve any delay in completion which would give rise to any right to liquidated damages.

Counsel submitted that there was nothing in clause 16.2 to imply that the employer is giving up his right at common law to recover damages for consequential loss. In that situation, as it was clearly contemplated by the parties that a schedule of defects would have to be prepared, there is nothing to prevent the normal rules applying and the pursuer is accordingly entitled to recover, as consequential loss, the cost of the architect's investigation and report.

[3] In reply counsel for the respondent submitted that it was a matter of choice for an employer to decide whether or not he wished an independent report on the possibility of latent defects. That, however, was something which he would have to do at his own expense. While it may have been within the contemplation of parties that a schedule of defects would have to be submitted within 14 days of the end of the defects liability period, it did not follow that it was within the contemplation of parties that the employer could, at the contractor's expense, employ architects to trawl through the building in order to try to find any such defects. Clause 16 provided its own remedy. If a defect became apparent then, even though that might technically be a breach of contract, the remedy for that breach was to instruct the contractor to remedy the defect. What, therefore, was contemplated by the parties was that in the event of a defect becoming patent the matter could be put right by the contractors. Clause 16 accordingly contemplates the method by which breaches can be remedied, but it does not in the least follow that the cost of operating the mechanism can be recovered. There are other examples in the contract of the employer giving instructions to the contractor, and in none of these cases is there any suggestion that the cost of preparing such an instruction can be recovered from the contractor. The situations envisaged by Lord Diplock of consequential loss being recoverable outwith the confines of clause 16 are not relevant to the present case. What is being sought here is not true consequential loss but is simply the cost of operating the mechanism specifically contemplated in clause 16. If expenses are incurred in preparing a claim for damages these expenses are not recoverable in any subsequent litigation (see Shanks v. Gray 1977 S.L.T. (Notes) 26). By parity of reasoning expenses incurred in preparing a schedule of defects to be submitted to contractors so that the defects may be remedied cannot be recovered from the contractors. Counsel also referred to the decision of the Lord Justice Clerk in Landcatch v. International Oil Pollution Compensation Fund 1999 SLT 1208 at p. 1219C-D that the expenses of the pursuers in preparing claims against the Fund could not be recovered from the shipowners. In our view that passage has no bearing on the present matters since the basis of the decision was that the claims against the Fund would arise only in respect of amounts for which the shipowners were not liable because they exceeded the relevant limit.

[4] In our opinion the pursuer's claim cannot succeed. We would accept that Shanks does not give much assistance in so far as that dealt with the matter of extrajudicial expenses, and in that context special rules apply. The decision in Shanks, however, does point to the fact that if defects were discovered after the expiry of the defects liability period, the employer's only remedy would be an action of damages for breach of contract, and he would have no remedy under the contract itself by instructing the contractors to remedy the defects. If, in that situation, the employer instructed architects to ascertain the nature and extent of the defects, he would not be able to recover the costs of so doing in the subsequent action for damages. It might therefore be regarded as illogical that he should be entitled to recover such costs against the contractor if the defects were discovered during the defects liability period.

[5] However, this is not, in our view, a conclusive consideration. The main problem for the reclaimer is that clause 16 appears to contain its own remedy. If there are defects discovered before the expiry of the defects liability period, the remedy is for the employer to give instructions to the contractor to remedy such defects. If they are duly remedied there is no further redress for the employer under clause 16. We entirely accept that if, by reason of defects, there is true consequential loss such as damage to furnishings or equipment arising out of leaks caused through defects then that would be recoverable against the contractor. This is because there is nothing in clause 16 to exclude any such claims to which an employer would normally be entitled arising out of a breach of contract. Such claims are, however, separate from the right of the employer to have the defects themselves remedied. The means whereby defects can be remedied are dealt with in clause 16, but additional damages are not dealt with in that clause. The remedy provided under clause 16.2 is for the employer to issue a schedule of defects to the contractor and an instruction that these defects be remedied. This does not, in principle, differ in any way from any other instructions which the employer is, in terms of the contract, entitled to give to the contractor. If an employer chooses to enter into a building contract without employing an architect to design the building and to supervise its construction, he must be taken in effect to be acting as his own supervisor of the works. If he chooses to employ a third party to examine the building to see if there are any defects then, in our view, he must do so at his own expense and not at the expense of the contractor, even though some defects may be found. On the whole matter, therefore, we are satisfied that the cost of preparing a schedule of defects by a third party is not truly consequential loss as that term is understood in Hadley. For these reasons we are satisfied that there is no proper foundation for this claim and, accordingly, the reclaiming motion is refused.