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Appropriate since 1973

03 July 2014 #Construction

What happens in a residential construction contract where the value of defects might exceed the amount of Retention being withheld by the Employer? Is the Employer limited to the stated percentage of Retention, or, if not, how is the sum of what can be withheld established?

This can be particularly relevant for an Employer who, as a result of a Contractor’s consistent poor workmanship or refusal to carry out remedial works, might be forced to engage third party contractors to complete works satisfactorily.

Under the JCT contracts, an Employer may set-off such sums during the Defects Liability Period as the Contract Administrator considers to be an ‘appropriate deduction’.

The starting point for this long understood position is that construction contracts do not enjoy a special status different to other contracts for the provision of goods and services. Unless, therefore, there are clear words to the contrary, an Employer will be able to avail of all the usual rights of set-off and abatement against sums a Contractor might be due.

Recently in Oksana Mul v Hutton Construction Limited, and for the first time, the Technology and Construction Court (‘TCC’) was asked to decide on whether in assessing ‘an appropriate deduction’ under the JCT Intermediate Form the Contract Administrator was limited to valuing the deduction using the rates/prices included by the Contractor in the relevant pricing document, or whether the Contract Administrator was able to look beyond the pricing document and consider other factors that could influence what might be considered appropriate in the circumstances.

In effect, the TCC was being asked if the JCT wording limited set-off under the contract to rates used in the contract, or did the Contract Administrator have the ability consider other potential costs/losses the Employer might incur.

Somewhat unsurprisingly, the TCC held that the reference to an ‘appropriate deduction’ in the JCT did not limit the amount of money being withheld to the prices and rates set out in the pricing document. The judgment reflects the 1973 position of the Court of Appeal in Gilbert-Ash (NI) Limited v Modern Engineering in connection with applying set-off to sums due under a construction contract, in that:

  1. An amount included in a certificate (whether interim or final) does not constitute a debt of a particular character and enjoys no special immunity from any cross-claim or right of set-off to which the debtor may be entitled
  2. One starts with the presumption that each party to a building contract is entitled to all those remedies for  breach as would arise by operation of law including the remedy of setting up a breach of warranty in diminution or extinction of the price of materials supplied or work executed under the contract
  3. Parties to a building contract/sub-contract are entitled to incorporate any clause they choose
  4. Whether the parties have in fact curtailed or restricted the common law or equitable right of set-off depends upon the construction of the agreement between them

The wording ‘an appropriate deduction’ is therefore only limited by what might in the reasonable opinion of the Contract Administrator be appropriate. In circumstances where the value of defects exceeds the value of Retention, a Contract Administrator may take into account other factors when making an appropriate deduction.

Can a Contractor limit what can be an ‘appropriate deduction’, or similar considerations for set-off? Yes, absolutely, but in including any such limitation in a contract, the Contractor must be careful to ensure that its proposed limitation complies with the statutory requirements of reasonableness and fairness. One such way would be to amend the JCT clause using clear and unambiguous wording and bring the amendment specifically to the Employer’s attention.

Clarkslegal, specialist Construction lawyers in London, Reading and throughout the Thames Valley.
For further information about this or any other Construction matter please contact Clarkslegal's construction team by email at by telephone 020 7539 8000 (London office), 0118 958 5321 (Reading office) or by completing the form on this page.
This information is for guidance purposes only and should not be regarded as a substitute for taking legal advice. Please refer to the full General Notices on our website.

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