Defects liability clauses do not extinguish common law right to damages - new Supreme Court of Singapore Guidance

This article is produced by CMS Holborn Asia, a Formal Law Alliance between CMS Singapore and Holborn Law LLC.

The recent decision of the Singapore Court of Appeal (“SGCA”) in Sandy Island Pte Ltd v Thio Keng Thay [2020] SGCA 86 (“Sandy Island”) has confirmed that the refusal by an employer to allow the contractor to access site to perform rectification works pursuant to a defects liability clause does not operate to extinguish the employer’s common law rights to recover damages for defects, but would be relevant for the quantum of those damages.

Background

A dispute arose from the contract (the “Contract”) for construction and sale of a SGD 14.4 million four-storey detached bungalow at Sentosa Cove in Singapore (the “Property”) between the developer, Sandy Island Pte Ltd (“Contractor”) and the purchaser, Thio Keng Thay (“Employer”).

The Contract contained a defects liability clause (the “Defects Clause”) that required the Contractor to make good defects in the Property apparent within 12 months of vacant possession. The Defects Clause also required the Contractor to make good any defect within one month of receipt of notice from the Employer, failing which the Employer could provide notice of his intention to cause the rectification works to be done and give the Contractor the opportunity to carry out the rectification works within 14 days of such notice. Failing such compliance by the Contractor, the Employer could proceed to rectify the defects himself.

Upon possession, the Employer complained of multiple defects including leaks and various failures of design and workmanship, and requested that rectification works be carried out. However, following a joint inspection, the Employer refused to give permission to the Contractor to carry out the rectification works on the basis that the works proposed were unsatisfactory and insufficient.

After conducting two tender exercises, the Employer engaged a new contractor to carry out the rectification works.

The High Court Decision

The Employer instituted proceedings in the Singapore High Court claiming damages for the costs of engaging a third party contractor to rectify defects in the Property, damages for the cost of engaging third parties to investigate the Property, and for the loss of use of the Property.

Out of an alleged 492 defects, the Contractor admitted to 222 in full and 86 in part, but argued that it had been prevented by the Employer from accessing the Property to carry out the necessary rectification works.

The High Court Judge found that the Contractor was in breach of its obligations under the Contract to construct the Property “in a good and workmanlike manner according to the Specifications and plans”. However, the Judge also found that the Employer had acted unreasonably in refusing to grant the Contractor access to the Property to carry out repairs in respect of the general defects.

The High Court Judge, referring to both English[1] and Singapore case law,[2] found that departure from the requirements of a defects liability clause (for example refusing to provide access) will affect the quantum of damages one is entitled to recover (due to the requirement at common law to mitigate one’s loss), rather than exclude one’s right to claim damages altogether.

Further, the Defects Clause in this case did not contain any clear wording excluding the right to claim damages at common law, which would be needed since it is a principle that a common law right cannot be abrogated in the absence of clear wording.

The Employer was therefore entitled to claim damages at common law despite there being a Defects Clause in the contract, but that the quantum of the claim would be affected by his departure from the requirements of that clause.

The Decision of the SGCA

There was no appeal of the findings of the High Court that: (i) The Contractor was in breach of the Contract as the Property contained multiple defects; (ii) the Employer had “invoked” the Defects Clause; and (ii) the Employer acted unreasonably in not granting the Contractor access to the Property.

The Contractor instead argued that the Defects Clause was a “complete code” or self-contained regime of rights and remedies that kicks in once invoked by a party, and having “invoked and breached” the Defects Clause, the Employer should not be entitled to claim damages at common law.

In addition, the Contractor argued that breach by the Employer of the Defects Clause broke the chain of causation between the Contractor’s breach of contract and the costs incurred by the Employer in rectifying the defects. The Contractor also argued that recovery of damages at common law after refusing to give the Contractor the opportunity to rectify constituted a breach of the “prevention principle”, and that allowing the Employer to sue the Contractor would result in a so-called circuity of action (the Employer would sue the Contractor for rectification costs then the Contractor would sue the Employer for failing to allow it to access the Property to carry out rectification works).

The SGCA denied the appeal finding that the relevant provisions of the Defects Clause operated to give the Employer an option to require the Contractor to return to site, and did not operate as a “complete code” for the rectification of defects once invoked.

That the Defects Clause did not operate as a complete code was clear from the fact that the types of defects which can arise in building and construction cases are myriad, and a defects liability clause does not and cannot cater for all defects (for example those which manifest after the relevant defect liability period). Therefore, the Defects Clause did not govern all breaches of the obligations on the Contractor to build the Property in a good and workmanlike manner according to the specifications.

The SGCA also found that there were no words in the Defects Clause suggesting that, upon notification of defects to the Contractor, a condition precedent, based upon the right of the Contractor to be given an opportunity to rectify defects, had to be fulfilled before the Employer had a right to claim common law damages.

However, the SGCA also held that if an owner or employer does not, without good reason, exercise its option to require the contractor to return to site, or (having exercised that right) prevents the contractor from carrying out that rectification, the employer’s duty to mitigate will be impacted and will be relevant to the amount of damages recoverable from the contractor at common law.

The SGCA also dismissed the Contractor’s arguments that the Employer’s failure to grant it access broke the chain of causation (holding that the Employer’s actions were not of such significance that would displace the Contractor’s legal responsibilities), and as regards the prevention principle (holding that the Employer’s claim for rectification costs was as a direct result of the Contractor’s breaches, not the Employer’s). The circuity of action argument was also dispensed with by the SGCA, holding that the Employer’s failure to grant the Contractor access does not result in a free-standing cause of action.

Conclusions

In making its decision, the SGCA provided useful commentary on the nature of a defects liability clause, referring to several leading texts and noting that prior to the introduction of these types of clauses, contractors had no right to return to site to rectify defects, nor did the employer have any right to require the contractor to return to site.

The SGCA made a point of emphasising that a defects liability clause is ultimately for the benefit of both the employer and contractor, largely due to the likely greater speed and lower cost with which the original contractor would be able to remedy the defects.

Defects liability clauses are often relied upon but frequently misunderstood. The decision in Sandy Island clarifies that:

• Not all of the myriad defects that can occur on a construction project can be within the contemplation of the defects liability clause, including latent defects or defects that manifest after the defects liability period;
• The defects liability clause is not a “complete code” for regulating the conduct of the parties if invoked, and the requirements contained within do not act as a “condition precedent” before costs of rectification could be recovered;
• The existence or invocation of defects liability provisions do not extinguish the common law right to claim damages; and
• The failure by an employer to permit access to the contractor to carry out rectification works allows the court to make a finding that the employer had acted unreasonably in failing to properly mitigate his losses.

Employers should take note of the clarification and guidance provided in Sandy Island, and be cognisant of the potential ramifications of invoking the provisions of a defects liability clause requiring the Contractor to complete work, but denying access. Contractors too should be aware that they do not have an absolute right to return to site to rectify defects, but failure by the Employer to allow it to do so will likely impact the quantum of damages recoverable at common law, though not the right to recover at common law.

Including [1] Pearce and High Ltd v Baxter and Baxter [1999] BLR 101 (“Pearce”).

Including [2] Management Corporation Strata Title Plan No 1993 v Liang Huat Aluminium Ltd [2001] 2 SLR(R) 91 (“Liang Huat Aluminium”).