Employers’ right to recover costs of rectification works dented but not demolished by defects liability clause

The English common law trend of allowing the recovery of damages for rectification of defects even where the defects liability period remains ongoing has been followed in a recent judgement from the High Court of Singapore in Thio Keng Thay v Sandy Island Pte Ltd [2019] SGHC 175. It is likely this approach would be mirrored by the Scottish and English courts and so this decision serves as a valuable reminder to UK-based employers that if they unreasonably prevent the contractor from carrying out rectification, and engage an alternative contractor to carry out the works, the quantum of damages recoverable will be limited.

Thio Keng Thay (the plaintiff) purchased a luxury residential property from Sandy Island Pte Limited (the defendant). After taking possession of the property, the plaintiff discovered a total of 492 alleged defects, including significant water damage, of which approximately 200 were accepted by the defendant. The plaintiff elected to employ a second contractor to remedy the defects and then sought damages for the cost of the works from the defendant. It was the defendant’s position that under the sale and purchase agreement (the SPA) it had a right to remedy the defects during the defects liability period and that it had been prevented from exercising that right by the plaintiff. Therefore, the defendant submitted that the plaintiff was precluded from claiming damages in respect of the defects that they would have rectified if given the opportunity.

The High Court of Singapore found the defendant had breached the SPA due to the numerous and significant defects. Likewise, it found the plaintiff had breached the defects liability clause of the SPA by unreasonably preventing the defendant from carrying out the rectification works. Although the Court held that this did not preclude the plaintiff from recovering damages for the defects, it did find it relevant in assessing the quantum of damages. The judgement follows the Court of Appeal’s approach in Pearce and High Ltd v Baxter [1999] EWCA Civ 789 and more recently in the Technology & Construction Court in MUL v Hutton Construction Limited [2014] EWHC 1797 (TCC) by limiting the amount of damages that can be recovered to the hypothetical amount that it would have cost the original contractor itself to remedy the defects. Therefore, the employer has to bear the additional costs of engaging a second contractor at market rates. This reasoning is founded in the basic principle that a claimant must attempt to mitigate losses.

The legal system of Singapore has its roots in English common law and UK-based employers and contractors should be mindful of this decision. Defects liability periods are designed to benefit both contractor and employer and this case demonstrates how a practical balance can be struck between the interests of both parties. For the contractor, it will typically be more economical to carry out the rectification works itself rather than incur the added expense of another contractor carrying out the work. Similarly, from the employer’s point of view, hiring an alternative contractor is usually less time efficient and more costly. It is recognised that there are circumstances where defects are so severe that the employer has rightly lost faith in the contractor and should be able to use an alternative contractor. However, employers must carefully consider the additional cost of employing a second contractor rather than allowing the original contractor to carry out remedial works itself. As the High Court of Singapore recognised, a practical method of proceeding is to allow the contractor to rectify the defects that it is willing to rectify and to reserve your position in relation to any further disputed defects.