DEFECT LIABiLITY CLAUSE: WHAT IS IT FOR? WHO BENEFITS?

​Sandy Island Pte Ltd v Thio Keng Thay [2020] SGCA 86
 
Decision Date: 22 May 2020
 

​INTRODUCTION

In my prevous post, I wrote about Thio Keng Thay v Sandy Island Pte Ltd [2019] SGHC 175 (“Sandy Island HC”).
 
The case involved a dispute between the purchaser and developer of a bungalow. The purchaser sued the developer for the costs of rectification of defects.
 
Some of the defects were admitted by the developer. However, the developer argued that it should not be liable the cost of rectification as the purchaser had breached the defect liability clause in the sale and purchase agreement (“SPA”) by imposing unreasonable conditions and refusing to grant access.
 
The High Court (“HC”) disagreed with the developer’s contention. The HC determined that the purchaser’s breach of the defect liability clause did not exclude his right to claim for damages for the defects.
 
The developer appealed to the Court of Appeal (“CA”) on this point but failed.
 
The CA published its decision on 22 May 2020 in Sandy Island Pte Ltd v Thio Keng Thay [2020] SGCA 86 (“Sandy Island CA”).
 
In its decision the CA expounded on the purpose and nature of defects liability clauses as well as the impact of such clauses on the parties’ rights and obligations.
 
In this post, I will discuss the key aspects of the CA’s decision.

CA’s DECISION
 
The Defects Liability Clause: Clause 17
 
The defects liability clause in issue is Clause 17 in the in the standard SPA prescribed by the Housing Developers Rules.  Clause 17 provides a defect liability period of 12 months from the date of the notice of vacant possession. It requires the developer to make good any defect within one month of receiving notice of the defect from the purchaser. If the developer fails to do so, the purchaser may (i) inform the developer of its intention to rectify the defect or (ii) give the developer another 14 days to carry out the rectification. The full text of Clause 17 can be found Form 5 of the Housing Developers Rules at this link.

​Nature And Purpose Of A Defects Liability Clause
 
The CA observed that defects liability clauses conferred to owners a right to require contractors to rectify defects. Without it, the owners would have to rectify the defect and claim for damages against the original contractors. Since remedial work could usually be carried out at lower costs and more efficiently by the original contractors, such clauses are advantageous to both parties. However, defects liability clauses do not govern all the rights and obligations of the parties in relation to defects. Further, such clauses may not apply to some categories of defects for example latent defects or defects that will manifest after the defects’ liability period.
 
Clause 17 Did Not Replace Common Law Rights
 
In that context and considering the express words of Clause 17 of the SPA, the CA agreed with the HC’s decision that Clause 17 did not exclude the purchaser’s common law rights to claim for damages for defects even if the purchaser had breached Clause 17.
 
The CA opined that Clause 17 provides a “…procedure to rectify defects that are for the benefit of both parties and cannot be read as excluding the [purchaser’s] common law rights, which can only be done by clear words … cl 17 was not designed to cater for the more serious defects …, nor for rectification works that require the [purchaser] to vacate the premises or for defects that appear after the DLP or for latent defects”.
 
 
Defects Liability Clauses In Other Standard Form Conditions Of Contracts
 
The CA further opined that the defects liability clauses in the REDAS Conditions, the Public Sector Standard Conditions of Contract for Construction Works (7th Edition July 2014) (“PSSCOC”), and the Singapore Institute of Architects Conditions of Building Contract (9th Edition September 2010) (“SIA Conditions”) had the same effect as Clause 17.  They provided an “…alternative procedure for rectifying construction defects” and did not remove the owner’s common law remedies for defects.  The latter can only be removed by very clear words in the contract.
 
 
Duty To Mitigate
 
An owner or employer can breach a defects liability clause by (i) failing or refusing to call the contractor to return and rectify defects; or (ii) preventing the contractor from returning to carry out rectification.
 
Such conduct will have an impact on the owner’s or employer’s duty to mitigate and will be relevant to the amount of damages recoverable from the contractor for defects.

​COMMENTS
 
The CA’s decision is a timely reminder that defects liability clauses are beneficial to both parties to the contract and should be upheld by parties unless there are sufficiently valid reasons to not to do so.

Tan Joo Seng
20 Nov 2020