The case arose out of a claim for damages by a main contractor, particularly costs incurred by him for rectifying defective works executed by a sub-contractor.
Reading between the lines it might sound simple, but there is more to it than meets the eye. In the context of defective work carried out by a main contractor or any of his sub-contractors, it is the main contractor’s responsibility under any building contract to put it right for the owner with whom he has a contract and from whom he has received payment for the works. Extending this rue or maxim, whatever one might call the sub-contractor has a similar responsibility to the main contractor but not to the owner as the sub-contractor has no contract with the owner and all sub-contract work payments are paid direct by the main contractor from monies he has received from the owner. So, then what seems to be the problem?
When defects are detected either in a punch list at the time of taking over the works from the contractor or latent defects appear during the defects liability period (or defects notification period according to the FIDIC Red Book), the defects have to be rectified at his own by the person who caused – to the owner it is the main contractor, to the main contractor the sub-contractor. That may be simple in terms of understanding, but consider the time and expenses of the owner and his staff and the inconvenience he is put through depending on the extent of the defects.
I have ventured to cite the NSW case stated above in full for the benefit of owners, consultants, and contractors alike who continue to suffer from defective work and not only put stakeholders in difficulties but also many of the construction team’s reputation at stake. Incidentally, NSW and all Australian cases for that matter, being common law cases akin to Sri Lanka decisions of the Australian Courts can be cited in support in Sri Lanka as well as long as the case cited is not remote or overridden by another decision.
This case centers upon whether the one suffering the effects of the defective work can claim the cost of management time as damages.
THE FACTS OF THE CASE
Bastow Civil Constructions (Bastow) contracted with Energy Australia to undertake work that involved constructing trenches in public roads, installing cable ducts in those trenches and backfilling and sealing trenches.
Bastow subcontracted some of that work to PND Civil Group (PND).
Bastow claimed that PND's work was defective and successfully sued PND in the District Court of New South Wales, for (part of) the cost of the rectification works.
The District Court judge concluded that Bastow had suffered loss and quantified Bastow's loss as the costs of the rectification work, namely $269,355.
In quantifying the loss, the District Court judge excluded an amount of $43,669 claimed by Bastow for the time its employees spent in connection with the defects and their rectification.
The $43,669 part of Bastow's claim against PND was rejected by the District Court judge because "there is no evidence that the allocation this time resulted in any additional cost to Bastow".
Bastow challenged this conclusion in its cross-appeal filed in the New South Wales Court of Appeal.
Bastow submitted that the District Court judge had erred in holding that Bastow was not entitled to recover, as an element of its damages, the cost of the management time spent by its employees in dealing with PND's defective work.
THE DECISION OF THE NSW COURT OF APPEAL
The NSW Court of Appeal unanimously found against Bastow concluding that there was no evidence that Bastow had incurred any additional management expenses.
The Court found that:
a. it did not appear that Mr Bastow caused himself or the other staff member involved (who were both employees of Bastow) to be paid overtime or any other compensation or additional remuneration;
b. nor did it appear that any additional staff or contractors were employed, either to
i. to deal with PND's defective work and its consequences, or
ii. to attend to tasks from which Mr Bastow had been distracted because of his attention to matters of defect rectification; or
c. there was no evidence that Bastow had been prevented from seeking or taking up any valuable business opportunity because Mr Bastow's attention was focused on PND's breach of the contract and its consequences.
When might the cost of management time be allowed in a damages claim for rectification of defective work?
To successfully claim the cost of management time, as damages for breach (defective work), the claimant must prove that it incurred additional expense.
The Court noted that damages may be recoverable for lost management time in certain circumstances such as where the Claimant can prove that;
a. existing staff were paid more, or
b. additional staff were employed to either:
i. manage the breach of the contract and its consequences; or
ii. attend to tasks from which existing staff had been distracted because of their attention to the defective work issues; or
c. if no additional staff were employed, but the diversion of management time to the breach of contract meant that the employer lost other valuable business opportunities, then damages might be allowed, although the quantification of lost business opportunity may be difficult to establish.
So how can this decision be good news for the Owner or Main contractor?
Take heart one can still claim damages for the cost of management time lost in dealing with the rectification of defective work carried out by your contractor or subcontractor, but you must prove that you have incurred additional costs.
These additional costs incurred, which you must be able to prove, will most likely be in the form of:
a. additional payments (such as overtime or additional remuneration) made to staff members; or
b. the employment or engagement of additional staff or contractors, either to deal with the subcontractor's defective work and its consequences or to attend to tasks from which your employees have been distracted because of their attention to the rectification of the defective work.
Hence it is not a closed door for you if you are prudent enough to have records as the British eminent contacts and claims lawyer and Quantity Surveyor often stresses in his lectures – RECORDS, RECORDS AND RECORDS and nothing like proper records will prove a claim.
By M Haris Z Deen
Ph.D., MBA., BSc., LLB (Hons)., FRICS
