UK: Damages: Your Building Is Defective - Are You Entitled To Demolition And Reinstatement Costs Or Simply The Costs Of Repair?

Since The Board of Governors of the Hospitals for Sick Children and Another v McLaughlin & Harvey plc and others – ("the Great Ormond Street case") [1987] 19 Con LR 25) - it has become something of a construction lawyer's "rule of thumb" that if a claimant wants to recover the cost of rectification it is more likely to do so if remedial works have been carried out upon a professional consultant's advice.

That rule of thumb was tested in an unusual case which recently came before His Honour Judge Coulson QC. That case was McGlinn v Waltham Contractors Ltd & Others [2007] EWHC 149 (TCC), which concerned a house called 'Maison d'Or' that was built for the Claimant, in St Aubin, in Jersey. The house took three years to build. Following the departure of the building contractors in January 2002, when the house was substantially complete, it sat empty for the next 3 years whilst the alleged deficiencies in its design and construction were the subject of extensive investigation by a team of experts and contractors.

In the early part of 2005, it was completely demolished. It was never lived in and has not been rebuilt. It was the Claimant’s case that Maison d'Or was so badly designed, and so badly built, that he was entitled to demolish it and start again. The original claim was for damages for breach of contract/negligence against the building contractors, the architects the structural, mechanical and electrical engineers and the quantity surveyors and project managers. The contractor played no part in the hearing because they were in administration.

The Claimant’s primary case on damages was put by reference to the actual cost of demolition and the estimated cost of rebuilding the whole house, calculated at £3,649,481.34. An alternative case was put by reference to the estimated costs of repairing the individual elements which are said to be defective, producing a final figure of £2,487,246.29.

The basic starting point is that awards of damages for breach of contract are intended to put the innocent party in the position they would have been in had the contract been properly performed, so far as money can do this. So, for example, the usual measure of damages for defective work or materials is either the diminution in value of the property which results from the defects, or the cost of putting the defects right, subject to considerations of reasonableness and mitigation of loss. The normal measure of damages for defective work is the cost of reinstatement taken at the time when the defect was discovered. However, if the cost of reinstatement is out of all proportion to the benefit to be obtained by the building owner from the remedial works then the correct measure is the diminution in value.

This was made clear in the House of Lords’ decision in Ruxley Electronics and Construction Ltd v Forsyth. Following Ruxley, the following applies:

1. The question of whether you will be allowed the cost of the remedial works claimed should be answered according to whether remedial cost would be so wholly disproportionate to its benefit as to make it unreasonable;
2. If it is so disproportionate, you may be entitled to recover on the basis of diminution of value, if there has been any, and
3. Damages are not limited to only diminution of value or reinstatement. There may be a middle figure to reflect loss of amenity or inconvenience through the claimant not having received what he wanted and what he contracted for.

Therefore following Ruxley, where reinstatement is the appropriate basis for the assessment of damages, it must be both reasonable to reinstate and the amount awarded must be objectively fair as between all parties. In the case here before Judge Coulson, the following two issues arose:

1. Was the Claimant entitled to damages against each Defendant based on the costs of demolition and rebuilding, as opposed to the costs of repair, as a result of the decision in Great Ormond Street? And
2. What was the right measure of loss in the present case?

As noted above, it has been often been thought that a claimant would be entitled to the cost of the work carried out pursuant to that expert advice. Judge Coulson disagreed with that proposition. He referred to the case of Skandia Property UK Ltd v Thames Water Utilities Ltd [1999] BLR 338 where the claimant was advised by experts that a tanking system was the only practical way to protect a building that had been damaged by a flood caused by the defendant. However, at the time that such advice was given and acted upon, the experts had been unaware of pressure grouting treatment which had been performed some time prior to the flood, and which meant that the flood had not in fact damaged the integrity of the building. The tanking system that was put in as part of the remedial scheme was therefore shown to be unnecessary. In the Court of Appeal Waller LJ noted that:

The Claimant argued that as the decision to demolish Maison d'Or was taken on expert advice and it was not suggested that that expert advice was negligent, accordingly, he was entitled to the costs, or a proportion of the costs, of demolition and rebuilding as against each of the Defendants. The Defendants argued that Great Ormond Street was not authority for the wide proposition that the existence of expert advice to demolish and rebuild automatically means that, without more, the Defendants are liable for the costs of such work, and that all other considerations are essentially rendered irrelevant.

This was the approach the Judge preferred. The correct way to proceed was on the basis that each Defendant should only be liable for the damage for which that Defendant was responsible. The over-riding test was one of reasonableness. Accordingly damages in respect of each Defendant should be measured by reference to the cost of reinstating those individual defects for which each Defendant was found to be liable, not for the (greater) costs of demolition and rebuilding. The decision in Great Ormond Street could be distinguished from the present case in a variety of significant ways. For example, the defects at Maison d'Or affected all of the main elements of the house. However most of these defects were aesthetic in nature. In Great Ormond Street, most of the problems were connected with the structural soundness of the building itself.

The Judge was also troubled by the decision to demolish the building. As he noted, this is an extreme course particularly where the majority of the defects related to aesthetic matters only. The only justification to demolish, in the view of the Judge, would be because the building is dangerous or structurally unsound. Further, there was only a relatively modest difference between the costs of demolition and rebuilding and the cost of repair. That was a relevant matter in any consideration of which remedial scheme to adopt. Demolition and rebuilding should always be an option which should only be considered as a last resort.

Finally, it was necessary to bear in mind that the Claimant's claim was made against a number of defendants who had different liabilities for the items which were said to have justified the demolition. Even if the Claimant had acted reasonably in deciding to demolish the house, was it right that he could recover the costs of demolition as damages against a particular Defendant in circumstances where only a handful of those defects were the responsibility of that Defendant? The Judge felt that the attempt to allocate the costs to each Defendant on percentage basis was global or even arbitrary, and thus contrary to practicalities and common sense.

The claim for the costs of demolition and rebuilding should be contrasted with the claim for the costs of repair. The claims in respect of the cost of repair of were largely agreed having been the subject of careful consideration and discussions between the experts. Detailed remedial solutions had been agreed by the technical experts and quantified by the surveying experts.

The Judge was clear that the recent authorities make plain that the court must award damages which are reasonable and objectively fair as between the claimants and the defendants. It would be unreasonable to award an arbitrary allocation of the costs of demolition and rebuilding instead of the agreed figures for the cost of repair. The Judge also took heed of the warning in Skandia, and treated the expert advice as a factor, but not the only factor, relevant to the issue of reasonableness. Therefore he decided that the right measure of loss in this case was the agreed cost of the work necessary to repair the defects for which each Defendant is liable. That was the basis on which the liability experts had worked in agreeing remedial schemes for the individual Items in the Scott Schedule, and it was the basis on which the quantum experts had agreed the figures. The cost of the remedial work was the reasonable measure of loss in all the circumstances and it would be unreasonable to assess the damages by reference to any other methodology.

This article is based on an article from a forthcoming issue of the Fenwick Elliott Dispatch, a monthly newsletter which summarises recent key developments relating to contentious and non-contentious construction law issues. To see the current issue please visit www.fenwickelliott.co.uk.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.