UK: Building Contractor Not Liable For Deductions Arising From Defects In Its Works

Building Contractor not liable under Building Contract or Interface Agreement for deductions arising from defects in its Works

A recent Scottish case has held that the building contractor on a schools project is not liable for deductions made from the unitary charge due to the provision of faulty tables – even though the tables formed part of the works, all parties accepted that the tables were faulty and there was an interface agreement in place to enable the FM Contractor to recover from the Building Contractor deductions arising from defects in the works.

The case was heard at an initial hearing in March 2009, and then there was a second hearing (at which the Building Contractor was permitted to revise its arguments) in August this year. It concerned the Aberdeenshire Schools Phase II PPP Project, and in particular a sub-subcontract for the provision of furniture and equipment for the school.

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Building Contractor not liable under Building Contract or Interface Agreement for deductions arising from defects in its Works

A recent Scottish case has held that the building contractor on a schools project is not liable for deductions made from the unitary charge due to the provision of faulty tables – even though the tables formed part of the works, all parties accepted that the tables were faulty and there was an interface agreement in place to enable the FM Contractor to recover from the Building Contractor deductions arising from defects in the works.

The case was heard at an initial hearing in March 2009, and then there was a second hearing (at which the Building Contractor was permitted to revise its arguments) in August this year. It concerned the Aberdeenshire Schools Phase II PPP Project, and in particular a sub-subcontract for the provision of furniture and equipment for the school.

In line with the typical PFI structure, the main obligations under the Project Agreement were split between sub-contracts with the Building Contractor and an FM Contractor. An Interface Agreement governed the relationship between ProjCo, the Building Contractor and FM Contractor. Among the Building Contractor's obligations that formed part of the "Works" was the provision of loose furniture and equipment for the schools. The Building Contractor, in turn, sub-contracted this obligation to Kent County Supplies.

The dispute arose because the Council contended that tables provided for the schools were non-compliant with the Authority Requirements under the Project Agreement. The Technical Adviser had issued an Acceptance Certificate for the Works, but the problem with the tables was treated as a snagging matter. The problem with the tables took some considerable time to resolve, during which time the Council made Performance Deductions from the unitary charge.

Project Co accepted liability for the deductions, and passed them down to the Building Contractor, who in turn withheld equivalent amounts from Kent County Supplies. Kent County Supplies accepted that the tables were non-compliant with the Authority Requirements, and even accepted that it was responsible for that non-compliance, but it disputed the right of the Building Contractor to withhold payment for the deductions – on the grounds that the Building Contractor itself had no contractual liability for those deductions.

The Building Contractor tried a number of different routes to argue that it was in fact liable for the deductions. The Court rejected all of these arguments.

• Wording in the Building Contract that stated that the award of an Acceptance Certificate would not relieve the Building Contractor for liability for deductions did not in itself create a liability for deductions. That liability would need to be demonstrated by some other clause.
• The wording in the Interface Agreement that stated that ProjCo could allocate deductions to its sub-contractors "as appropriate" did not allow ProjCo to allocate deductions as it saw fit without having to show that breach by the sub-contractor had caused ProjCo to suffer the deductions. This, the Court said, would make "no commercial sense".
• The deductions could not be allocated directly to the Building Contractor for breach of the Building Contract. This was because the deductions did not in themselves relate to failures in the Works, but rather to failures in the Services, and the Building Contractor had no responsibility for delivering the Services. It could not, therefore, directly cause deductions.
• The Court seemed to be amenable in principle to the argument that the Building Contractor's failures had caused the FM Contractor to breach its obligations, and hence caused deductions to be awarded. If this argument succeeded, the FM Contractor should have been entitled to recover the deductions from the Building Contractor under the Interface Agreement – as is typical in an Interface Agreement, there existed wording precisely to this effect.
• However, the deductions that had been made by the Authority were Performance Deductions for failure to meet the Performance Standards i.e. a failure to maintain, replace or upgrade the furniture in accordance with the Authority Requirements. The Court decided that the Building Contractor's initial failure to supply compliant furniture did not cause a failure by the FM Contractor to comply with its obligation to maintain, replace or upgrade the furniture, and could not therefore have lead to Performance Deductions being incurred.

In the end, the outcome appears to be the right one, and the Court seems correct in all of its findings. Had the deductions been awarded as Availability Deductions the outcome may have been very different. Availability Deductions could be awarded if the furniture was not available, safe and operational at all times in accordance with the Authority Requirements. Clearly, there is a connection between a failure of the Building Contractor to supply tables that comply with the Authority Requirements and the award of Availability Deductions therefore.

The reason for the Council awarding Performance Deductions rather than Availability Deductions is unclear. Perhaps it was agreed with ProjCo, or perhaps simply the wrong deductions were awarded. In either case, there is a lesson to be learned in how to manage this sort of circumstance. The Building Contractor had an opportunity, before it allowed ProjCo to tie its hands with the Council, to discuss and agree the deductions with Kent County Supplies. A negotiated compromise at this stage could have avoided the case altogether.

In terms of the drafting of interface arrangements, the case does not seem too worrying. The Court seemed amenable to the key argument that the FM Contractor can recover deductions from the Building Contractor where it can demonstrate that a breach by the Building Contractor of its obligations has caused the FM Contractor to incur the deductions. This is a key principle behind interface agreements – and the Court appears to consider it sound.

But why take the risk of having to demonstrate this? If it is the intention of the parties that the Building Contractor should be liable for any deductions that are awarded as result of snagging matters or defects, why not just say this? Or instead of simply saying that ProjCo is entitled to allocate deductions "as appropriate" under the Interface Agreement, why not clarify that this includes a right to allocate deductions to the Building Contractor in respect of snagging matters or defects?

It is a simple drafting step – but one that potentially makes the interface arrangements much more robust.

Kent County Council trading as Kent County Supplies v Robertson Construction Northern Limited, Scottish Court of Session, Outer House [2009] CSOH 41

This is a decision of the Outer House and may be subject to appeal.

This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq

Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.

The original publication date for this article was 01/10/2009.