Containing the cost of defective work claims

A claim brought by Ocado against Carillion highlights some straightforward but essential points that can have a dramatic effect on the financial scale of claims arising from defective work says Jacques Smith, Partner at Blandy & Blandy Solicitors.

The Ocado case arises from the allegedly defective construction of a service yard slab at the company’s distribution centre. It is claimed that the slab was not adequately reinforced and that a large proportion of the bays are now breaking up despite repairs having been carried out.

Ocado alleges that it has suffered losses as a consequence, and says that Carillion has admitted that the slab was not adequately reinforced. The value of the claim is now put at £1.2 million. Of this £300,000 is in respect of further repairs now said to be required. It has also been reported that after lengthy correspondence the parties were “unable to agree the appropriate remedial method and its cost”.

Jacques Smith, Partner at Blandy & Blandy Solicitors

These elements of the case illustrate a common problem in defective work cases, which is that the parties find it impossible to agree on the appropriate form of remedial work. Generally of course the client will want a solution to the problem regardless of the cost (and assuming that the contractor is footing the bill), whilst the contractor will want to minimise the cost of the solution as far as possible.

There are however certain key legal factors that must be borne in mind in this sort of situation. These factors have a significant bearing on the value of the claim.

If the employer’s claim is based on breach of contract, the compensation will be calculated as the amount required to put the employer in the position it would have been in had the contract been properly performed. In theory this means that the compensation should cover the cost of the remedial solution. However the Court will not force the contractor to provide an open cheque: the employer is only entitled to a form of remedial work that will achieve the original objective of the contract. Also, the Court will wish to avoid requiring the parties to unnecessarily incur cost – in other words the Court will wish to avoid “economic waste” in so far as possible.

This means that in general if there are two alternative forms of remedial work that will achieve the contractual objective, the Court will normally award damages based on the assumption that the cheaper solution will be used – for example patch repairs as against demolition and reconstruction. It is not therefore open to the employer to insist on one form of remedial work if another, cheaper form will do the job.

The Ocado case also illustrates another important element affecting the value of claims of this nature, which is that substantial cost can result from delay in agreement on the form of remedial work.

If the parties cannot agree and execute the solution promptly, the employer’s consequential losses (adverse effects on the business and so on) will continue to mount up over time. Those losses can end up dwarfing the cost of the remedial work.

It is therefore vital that parties involved in this type of claim are aware of these factors. On the one hand the employer must be realistic about the form of remedial solution and be prepared to accept a low-cost method if this will achieve the contractual objective. On the other hand the contractor must actively and promptly pursue agreement on the remedial method in order to contain any claim for consequential losses. If the parties take these approaches it is far more likely that they will be able to find common ground and resolve the position, avoiding the legal costs, management time and adverse publicity involved in Court proceedings.