LEGAL UPDATE ON DEFECT LIABLITY CLAUSES

Thio Keng Thay v Sandy Island Pte Ltd [2019] SGHC 175
 
Decision Date: 29 July 2019
 
INTRODUCTION
This case arose from a dispute between the owner and developer of a bungalow house on Sandy Island, Sentosa.  The owner, who was the plaintiff in the action, sued the developer for costs of rectification of defects. The developer disputed the claim and counterclaimed against the owner for libel.
 
At the trial; some of the defects raised by the owner were admitted by the developer to be defects.
 
However, the developer argued that it should not be held liable for the costs of rectification of such defects because the owner had breached the defect liability clause in the Sale and Purchase Agreement (“SPA”) by imposing unreasonable conditions on the developer and refusing to grant access to carry out rectification works.
 
In its decision; the High Court clarified the extent of the legal rights and remedies of an owner who had refused to allow contractors to return to the project to rectify defective works.

In this post; I will explain and examine this aspect of the High Court’s decision.

FACTS
The owner purchased the bungalow from the developer in August 2009.
 
TOP was granted on 20 December 2011 and the owner took possession of the property on 15 March 2012.
 
After that; the owner complained of numerous defects to the developer. Joint inspections took place and the developer provided rectification schedules and method statements for rectification to the owner.
 
Additionally, in December 2012; the developer offered to pay to the owner a certain sum of money in lieu of rectification.
 
However, the developer’s proposals for rectification as well as the offer was rejected by the owner.
 
In February 2013, the owner proceeded to call a tender for the rectification works based on the methods of rectification specified by the owner’s building surveyor. The developer objected this and reiterated that it was ready and willing to rectify genuine defects.
 
In April 2013, the owner carried out another tender exercise for the rectification works. The second tender was based on the methods of rectification specified by the owner’s new building surveyor.
 
The developer was informed of the outcome of the second tender exercise in May 2014 and given seven days to “carry out rectification according to the said specifications under the supervision of [the owners] appointed architect”.  
 
The developer was not prepared to accept the owner’s terms and the owner engaged another contractor to carry out the rectification works.

The rectification was completed in May 2015 and the owner commenced legal action against the developer in October 2016.

 
DECISION
Two main issues were considered by the Court:

1. Whether the owner’s breached the defect liability clause under the SPA. (“First Issue”)

 

1. If so, whether the owner had a common law right to claim damages. (“Second Issue”)

 
First Issue
 The High Court found that that owner had breached the defect liability clause by failing to give the developer an opportunity to carry out rectification works. In the words of the High Court; the owner’s actions “…viewed holistically, were unreasonable.” The owner had “…not acted reasonably and had effectively closed the door on allowing the [developers] to perform the rectification works”. The owner should have allowed the developer to return to rectify the defects it was prepared to rectify, while reserving his position on other disputed items of defects.
 
 
Second Issue
 The High Court noted that generally; a right to claim damages can only be excluded “…by clear, express words or by a clear and strong implication from the express words…” in a contract.
 
The defect liability clause in the SPA did not have words to such effect. As such, a breach of the defect liability clause did not operate to exclude the owner’s rights to claim for damages for defective works.
 
However, the owner’s breach of the defect liability clause would have an impact on the quantum of damages.
 
The owner should have acted reasonably and mitigated their losses by allowing the developers to repair the defects. By failing to do so the owner had breached the defect liability clause. The amount of damages that the owner could recover may be limited to how much it would have costs the developer to rectify the defects.
 

COMMENTS
 
Defect liability clauses appear in various forms in almost all building and construction contracts as well as the standard form SPA under the Housing Developers Rules.
 
Parties should examine the wordings of the defect liability clause closely before deciding on how they wish to deal with defects.  
 
Preventing the contractors from returning to rectify defects may not be a wise option.

If the defect liability clause has words which exclude liability; owners should be aware that they could lose their rights to claim for damages for defects if they breach the defect liability clause by not affording the contractor an opportunity to repair.
 
In all other instances; shutting out the contractors from carrying out rectification works may limit or reduce the quantum of damages recoverable by the owners.


Tan Joo Seng
[email protected]