diminution in value of works due to defects
TRANSCRIPT
PSZ 19:16 (Pind. 1/07)
DECLARATION OF THESIS / UNDERGRADUATE PROJECT PAPER AND COPYRIGHT
Author’s full name : NORHAIBATI HASHIM
Date of birth : 1st AUGUST 1986
Title : DIMINUTION IN VALUE OF WORKS DUE TO DEFECTS
Academic Session: 2010/2011
I declare that this thesis is classified as :
I acknowledged that Universiti Teknologi Malaysia reserves the right as follows:
1. The thesis is the property of Universiti Teknologi Malaysia.
2. The Library of Universiti Teknologi Malaysia has the right to make copies for the purpose
of research only.
3. The Library has the right to make copies of the thesis for academic exchange.
Certified by:
SIGNATURE SIGNATURE OF SUPERVISOR
860801-46-5124 ASSOC. PROF. DR. ROSLI ABDUL RASHID
(NEW IC NO. /PASSPORT NO.) NAME OF SUPERVISOR
Date : 27th JULY 2011 Date : 27th JULY 2011
NOTES : * If the thesis is CONFIDENTAL or RESTRICTED, please attach with the letter from
the organization with period and reasons for confidentiality or restriction.
UNIVERSITI TEKNOLOGI MALAYSIA
CONFIDENTIAL (Contains confidential information under the Official Secret
Act 1972)*
RESTRICTED (Contains restricted information as specified by the
organization where research was done)*
OPEN ACCESS I agree that my thesis to be published as online open access
(full text)
“I hereby declare that I have read this project report and in my opinion this project report is
sufficient in terms of scope and quality for the award of the degree of Master of Science in
Construction Contract Management”
Signature : ………………………………………...
Name of Supervisor : ……………….………………………..
Date : …………..………….…………………
ASSOC. PROF. DR. ROSLI ABDUL RASHID
27th JULY 2011
i
DIMINUTION IN VALUE OF WORKS DUE TO DEFECTS
NORHAIBATI HASHIM
A master’s project report submitted in fulfillment of the
requirements for the award of the degree of
Master of Science in Construction Contract Management.
Faculty of Built Environment
Universiti Teknologi Malaysia
JULY 2011
ii
DECLARATION
“I declare that this Master Research Project entitled “Diminution in Value of Works
Due to Defects” is the result of my own research and that all sources are
acknowledged in the references. The project report has not been accepted for any
degree and is not concurrently submitted in candidature of any other degree.”
Signature : ................................................................
Name : ................................................................
Date : ................................................................
NORHAIBATI HASHIM
27th JULY 2011
iii
With much love and respect
To my beloved Parents
Haji Hashim Long and Patimah Norizan Mohd Yasin
Brothers and Sisters,
&
Mohamad Sharfiq Zaini
For being there whenever I need them most
iv
ACKNOWLEDGEMENT
In the name of Allah, the Most Gracious, the Most Merciful. My utmost
thanks to the Allah Almighty for the help, guidance and blessings showered to finish
this master. Alhamdulillah.
I would like to take this opportunity to express my gratitude to those
concerned. I wish to express my sincere appreciation and thanks to my supervisor,
Assoc. Prof. Dr. Rosli bin Abdul Rashid for his patience, invaluable guidance,
encouragement and endless hours of effort rendered during the preparation of this
dissertation. Appreciation is also extended to all lecturers for their kind advice during
the process of completing this master project report.
I wish to express my eternal gratitude to my parents for giving me the full
support throughout my studies and praying for my success. Not forgetting, special
thank is also due to all my brothers, sisters and Mohamad Sharfiq Zaini for their
support and pray.
Finally, I would like to thank all my friends who have directly or indirectly
been involved throughout the research process and those who have shared their ideas
with me. Thank you.
v
ABSTRACT
Defect is one of the major causes of dispute in construction projects. In the
context of construction, a defect or defective work is work that is not in accordance
with the contract. It is common for standard forms of contract to make express
provision for dealing with the defects or defective work. This provision provides the
action that can be taken by the employer in the event of contractor’s default in
rectifying the defects. One of the alternative is the employer may ascertain the
diminution in value of the works if in his opinion that the defects should be
inconvenient to be rectified. However, there is no definition of an appropriate
deduction and rule to assess the diminution in value of the said works. At what point
is the deduction is determined? Hence, this research intends to identify the basis of
how the courts measure the diminution in value for construction defects. This
research was carried out mainly through documentary analysis of law cases and law
reports on diminution in value. Results show that there are several measures that the
courts used in assessing the diminution in value. They are based on the difference
between the value of the buildings without the defects and the value with the defects,
cost of repair, cost of reinstatement and cost of rectification. The date of assessment
is also different for the cases analyzed. It is recommended that the principle to
ascertain the diminution in value of the works due to the defects should be included
in the standard form of contract. The purpose is to provide the guideline on how to
measure the diminution in value of defective works.
vi
ABSTRAK
Kecacatan adalah salah satu punca utama pertikaian dalam projek pembinaan.
Dalam konteks pembinaan, kecacatan atau kerja yang rosak adalah kerja yang tidak
mengikut kontrak. Kebiasaannya, Borang Kontrak menyediakan peruntukan
berkaitan dengan kecacatan atau kerja yang rosak. Peruntukan ini menyediakan
tindakan yang boleh diambil oleh majikan sekiranya kontraktor lalai dalam
membaiki kecacatan. Salah satu alternatif adalah majikan boleh menentukan susut
nilai kerja-kerja jika pada pendapatnya bahawa kecacatan tersebut tidak patut atau
sukar untuk dibaiki. Walau bagaimanapun, tiada definisi potongan yang sesuai dan
kaedah untuk menilai susut nilai tersebut. Bagaimanakah pengurangan tersebut
ditentukan? Oleh itu, penyelidikan ini bertujuan untuk mengenal pasti asas
mahkamah mengukur susut nilai untuk kecacatan pembinaan. Kajian ini telah
dijalankan melalui analisis kes undang-undang dan laporan undang-undang.
Keputusan menunjukkan bahawa terdapat beberapa langkah yang digunakan
mahkamah dalam menilai susut nilai. Langkah-langkah tersebut adalah berdasarkan
perbezaan antara nilai bangunan tanpa kecacatan dan nilai dengan kecacatan, kos
pembaikan dan kos pengembalian semula. Tarikh penilaian juga berbeza bagi kes-
kes dianalisis. Adalah dicadangkan bahawa prinsip untuk menentukan susut nilai
kerja-kerja disebabkan oleh kecacatan hendaklah dimasukkan dalam Borang
Kontrak. Tujuannya adalah untuk menyediakan garis panduan mengenai cara untuk
mengukur susut nilai bagi kerja-kerja yang rosak.
vii
TABLE OF CONTENTS
CHAPTER TITLE PAGE
DECLARATION ii
DEDICATION iii
ACKNOWLEDGEMENT iv
ABSTRACT v
ABSTRAK vi
TABLE OF CONTENTS vii
LIST OF TABLE xi
LIST OF FIGURES xii
LIST OF ABBREVATIONS xiii
LIST OF CASES xv
1 INTRODUCTION
1.1 Background of the Study 1
1.2 Problem Statement 4
1.3 Objective of the Study 6
1.4 Scope of the Study 6
1.5 Significance of the Study 7
1.6 Research Methodology 8
1.6.1 Identifying the Research Issue 8
1.6.2 Data Collection 8
1.6.3 Data Analysis 9
1.6.4 Writing 9
viii
2 CONSTRUCTION DEFECTS
2.1 Introduction 11
2.2 Definition of Defect 12
2.3 Causes of Defect 14
2.3.1 Design Error/ Faulty Design 15
2.3.2 Quality of the Material 18
2.3.3 Workmanship 20
2.4 Types of Defects 21
2.4.1 Patent Defects 22
2.4.2 Latent Defects 22
2.5 Time to Make Defect Claim 24
2.5.1 Defects Identified Before 25
Practical Completion
2.5.2 Defects Identified During the 26
Defect Liability Period
2.5.3 Defects Identified After the 27
Defects Liability Period
2.6 Defective Work in Malaysian 27
Standard Form of Contract
2.6.1 Defective Work Claim during 28
the Construction Period
2.6.2 Defective Work Claim during 31
the Defect Liability Period
2.7 Conclusion 34
3 DIMINUTION IN VALUE
3.1 Introduction 36
3.2 Definition of Value in Diminution 37
3.3 Diminution in Value and Depreciation 40
3.4 Types of Diminished Value 41
3.4.1 Inherent Diminished Value 41
3.4.2 Insurance Related Diminished 42
Value
ix
3.4.3 Repair Related Diminished 43
Value
3.5 Economic Waste Doctrine 43
3.6 Measuring Value Diminution 45
3.7 Conclusion 47
4 MEASURE OF DIMINUTION IN VALUE
4.1 Introduction 48
4.2 Measure of Diminution in Value 48
4.2.1 McBlain v McCollum and Others 49
4.2.2 Grossman Holdings Ltd v 51
Hourihan
4.2.3 Mahtani & Ors V Kiaw Aik 52
Hang Land Pte Ltd
4.2.4 Heninger v Dunn 54
4.2.5 Orndorff v Christiana Community 56
Builders
4.2.6 St. Louis LLC v. Final Touch 57
Glass & Mirror, Inc
4.2.7 Aerospace Publishing Ltd 60
and another v Thames Water
Utilities Ltd
4.2.8 Bellgrove v Eldridge 61
4.2.9 Westpoint Management Ltd 63
v Chocolate Factory Apartments
Ltd
4.2.10 Ruxley Electronic and 64
Construction Ltd V Forsyth
4.2.11 Heine v. Parent Construction, Inc. 66
4.2.12 Liew Choy Hung v Shah Alam 67
Properties Sdn Bhd
4.3 Summary of the Case Analysis 68
4.4 Findings Analysis 72
x
4.4.1 Difference in Value of the 72
Building as a Measure of
Diminution in Value
4.4.2 Cost of Repair/ Cost of 73
Rectification/ Cost of Reinstatement/
Cost of Restoration as a Measure of
Diminution in Value
4.4.3 Potential Loss Due to Nuisance 74
as a Measure of Diminution in Value
4.5 Conclusion 74
5 CONCLUSION AND RECOMMENDATIONS
5.1 Introduction 76
5.2 Findings 76
5.3 Problem Encountered During Research 79
5.4 Recommendation 80
5.5 Future Research 80
5.6 Conclusion 81
REFERENCES 83
BIBLIOGRAPHY 86
xi
LIST OF TABLES
TABLE NO. TITLE PAGE
4.1 List of Cases Related With the Measure 49
of Diminution in Value
4.2 Summary of the Case Analysis 62
xiii
LIST OF ABBREVIATIONS
AC Appeal Cases
All ER All England Law Reports
AMR All Malaysia Reports
App.Div Appellate Division
BLR Building Law Reports
Cal. California Reports
Cal. App California [CA] Appellate Reports
CCH Commerce Clearing House
Ch Chancery Law Reports
CIDB Construction Industry Development Board
CLJ Construction Law Journal
Cont. Cas. Fed. Contract Cases, Federal
Con LR Construction Law Reports
CLR Commonwealth Law Reports
DCA District Court of Appeal
EG Estate Gazette
EGD Estate Gazette Digest
EWCA England and Wales Court of Appeal
Exch Court of Exchequer
Fla. Florida Reports
HL House of Lords
LGR Local Government Reports
Lloyd’s Rep Lloyd’s List Reports
LR, CP Law Reports, Common Pleas
MLJ Malayan Law Journal
xiv
N.E North Eastern Reporter
NIHC Northern Ireland High Court
N.J. Super New Jersey [NJ] Superior Court Reports
NSWCA New South Wales Court of Appeal
N.Y New York [NY] Reports
PAM Pertubuhan Arkitek Malaysia
PWD Public Works Department
QB, QBD Law Reports: Queen’s Bench Division
SGHC Singapore High Court
SLR Singapore Law Reports
WLR Weekly Law Reports
WR Weekly Reporter
xv
LIST OF CASES
CASES PAGE
Aerospace Publishing Ltd and another v Thames Water 56, 63
Utilities Ltd [2007] EWCA Civ; 110 ConLR 1
Australian Knitting Mills Ltd. v. Grant [1933] 50 CLR. 387, 413 19
Baxall Securitites Ltd v Sheard Walshaw Partnership 13, 22
[2002] BLR 1000
Bellgrove v Eldridge [1954] 90 CLR 613 61, 70
Brunkswick Construction v Nowlan [1974] 21 BLR 27 17
Gloucestershire Country Council v Richardson [1969] 1 AC 480. 19
Granite Construction Co v United States 962 F.2d 998, 45
37 Cont.Cas.Fed. [CCH] P 76,290
Grossman Holdings Ltd v Hourihan 414 So. 2d 1037 [Fla. 1982] 51, 62
Hancock and others v BW Brazier (Anerly) Ltd [1966] 2 All ER 901, 20, 28
[1966] 1 WLR 1317, 198 EG 785, [1966] EGD 362
Heine v. Parent Construction, Inc. [2009] WL 763534 59, 63
(Fla. 4th DCA 2009)
Heninger v. Dunn [1980] 101 Cal.App.3d 858 38, 54, 69
Henry Kendall & sons v William Lillico & sons Ltd 18
[1968] 2 All ER 444, [1969] 2 AC 31, [1968] 3 WLR 110
Holland Hannen & Cubitts (Northern) Ltd v Welsh Health Technical 30
Servises Orhganisation [1981] 18 BLR 80.
Jackson v Mumford [1902] 51 WR 91 2
Jacob & Youngs v Kent 230 N.Y. 239, 129 N.E. 889 [N.Y. 1921] 44
Jacobitti v. Jacobitti 263 N.J. Super. 608 (App. Div. 1993) 50
xvi
Kaye v Hosier [1972] 1. WLR 146, [1972] 1 All ER 121 4, 25
Liew Choy Hung v Shah Alam Properties Sdn Bhd [1997] 2 MLJ 309 60, 64
Mahtani & Ors V Kiaw Aik Hang Land Pte Ltd [1995] 1 SLR 168 52, 62
McBlain v McCollum and Others [2005] NIHC 51 49, 62
McGiffin v Palmers Shipbuilding & Iron Co Ltd [1882] 10 QBD 5 2, 13
Mozzetti v. City of Brisbane [1977] 67 Cal.App.3d 565 38
Orndorff v. Christiana Community Builders [1990] 217 Cal.App.3d 683 38, 56, 69
Pearce & High Ltd v Baxter and Another 66 ConLR 110, 34
[1999] BLR 101
Perry v Sydney Phillips & Son [1982] 3 All ER 705 50
Plant construction plc v Clive Adams Associates and JHM Construction 17
Servises Ltd [2000] BLR 137
Prudent Tankers Ltd SA v The Dominion Insurance Co Ltd 23
[1980] 1 Lloyd's Rep.338
Riverstone Meat Pty Ltd v. Lanchashire Shipping Company Ltd 23
[1961] AC 807
Rotherham MBC v. Fank Haslam Milan & Co Ltd and M.J. 23
Gleeson (Norhern) Ltd [1996] 78 BLR 1 CA
Ruxley Electronics & Construction Ltd v Forsyth [1995] 73 BLR 1 6, 12, 58,
63
Salstrom v. Orleans Bar Gold Mining Company [1908] 153 Cal. 551 38
Sanderson v National Coal Board [1961] 2 QB 244 22, 23
St. Louis LLC v. Final Touch Glass & Mirror, Inc 54, 63
386 NJSuper.177, 899 A.2d 1018 [App.Div.2006]
Tate v Latham [1897] 1 QB 502 2, 13
Teh Khem On & Anor v Yeoh & Wu Development Sdn Bhd & Ors 33
[1995] 2 AMR 1558
Torres v. Schripps Inc 342 N.J. Super. 419 (App. Div. 2001) 50
Victoria University of Manchester v Hugh Wilson & Lewis 22
Wormsley and Pochin Ltd [1984] 2 Con LR 43 at 78
Westpoint Management Ltd v Chocolate Factory Apartments Ltd 63, 71
[2007] NSWCA 253
William Tomkinson and Sons Ltd v the Parochial Church 31
[1990] CLJ 319
xvii
Yandle & Sons v Sutton [1922] 2 Ch 1999 22
Yarmouth v France [1887] 19 QBD 647 1, 12
Young & Marten v Mcmanus Childs [1969] 1 AC 454, 19, 28
[1968] 2 All ER 1169, [1968] 3 WLR 630, 67 LGR 1,
9 Build LR 77, 207 EG 797, [1968] EGD 482
CHAPTER 1
INTRODUCTION
1.1 Background of the Study
It is unsurprisingly that defects are one of the major causes of dispute and
construction litigation.1 Professor Anthony Lavers said:
“Defects will occur in buildings. It is one of the great certainties in
construction, the equivalent of death and taxes in life more
generally”. 2
The term defects in construction always in disagreement since it tends not to
be defined in construction contracts.3 The first effort to define a defect arose in the
case of Yarmouth v France4 with respect of a carthorse that was considered unfit to
1 Barret, K., “Defective Construction Work.”, London: Wiley-Blackwell, 2008, pp. 118.
2 Cohen, L., “Building defects; the legal position!”, Retrieved on June 1, 2011 from
www.blaketurner.com/documents/building%20defects.pdf 3 Holmes, C. & Wilshire, K.,“The rectification of defects”, 2010, Retrieved on June 1, 2011 from
www.kensingtonswan.com/.../The_rectification_of_defects.pdf 4 (1887) 19 QBD 647
2
be driven.5 The Plaintiff was injured in an accident whilst driving the cart that was
pulled by the horse in question. The Court considered that the horse constituted plant
and if it was unfit for the use for which it was intended then it was defective.
The issue in the somewhat later case Tate v Latham6 of was whether the
absence of a guard on a circular saw was a defect and the condition of the machinery
under Section 1(1) of the Employers’ Liability Act 1880. It was held that “defect”
means the absence of something essential to completeness. The absence of the guard
to the saw constituted a defect in this respect.
The other examples include McGiffin v Palmers Shipbuilding & Iron Co Ltd7
where an obstruction protruding from a furnace did not render the furnace defective
and the curious decision in Jackson v Mumford8 which decided that the word defect
did not include a design defect.
In construction, defect is defined as a component supplied or constructed
which is in some respect not in accordance with the contract or as some action
having consequences not authorized by the contract.9 As defined by the California
Jury Instructions, the construction defect is:
‘Failure of the building or any building component to be erected in a
reasonably workmanlike manner or to perform in the manner
intended by the manufacturer or reasonably expected by the buyer
which proximately causes damage to the structure.’
5 Cohen, L., “Building defects; the legal position!”, Retrieved on June 1, 2011 from
www.blaketurner.com/documents/building%20defects.pdf 6 (1897) 1 QB 502
7 (1882) 10 QBD 5 8 (1902) 51 WR 91
9 Robinson, N. M et al, “Construction Law in Singapore and Malaysia.” Kuala Lumpur: Butterworths
Asia, 1999, pp.159-160.
3
Most of the standard forms of contract include defects liability provision. The
clause will impose the obligations upon the contractor to make good defects. This
would ordinarily be to the contractor’s advantage given that this is likely to be less
costly than providing an indemnity to the employer against the cost of having
another contractor to remedy the defective work.10 Examples of the clauses relating
to the defects that have been spelt out are;
i. PWD 203A 2007
a. Clause 35.0 – Materials, Goods and Workmanship
b. Clause 36.0 – Inspection and testing of materials, goods and
equipment
c. Clause 48.0 – Defects after completion
ii. PAM 2006
a. Clause 6.0 – Materials, Goods and Workmanship to conform to
description, testing and inspection
b. Clause 15.0 – Practical completion and defect liability
iii. CIDB 2000
a. Clause 15.0 – Quality in construction
b. Clause 27.0 – Defects liability after completion
To carry out the works in a defective manner amounts to a non-compliance
with the contract. Any defect in the work is a breach of contract on the part of
contractor.11 The employer then has two separate remedies in dealing with this
matter. The employer may use the defects liability in the contract to compel the
contractor to rectify or alternatively it may sue the contractor in court or arbitration
proceedings, claiming damages for breach of contract.
10 Cohen, L., “Building defects; the legal position!”, Retrieved on June 1, 2011 from
www.blaketurner.com/documents/building%20defects.pdf 11 Chappell, D., “The JCT Design and Build Contract 2005”. London: Blackwell Publishing, 2006, pp.
139
4
The defects liability period clause is inserted for the benefit of both parties. It
allows period of time for defects to be remedied with the minimum fuss.12 Defects
liability period runs from the date of practical completion for a specified period. The
duration is usually fixed as stated in the contract particulars but sometimes
adjustable.13 It will last for a stipulated period of time inserted in the contract; failure
to name a period will mean that the period will be 6 or 12 months from the date of
practical completion.14
Since any defect in the work is a breach of contract on the part of contractor,
without such period, the employer would not have contractual remedy. More
importantly, if there were no defects liability period or rectification period, the
contractor would have no rights to enter the site to remedy the defective work.15
Whether the contractor has a right as well as an obligation to rectify defects
and therefore avoid liability for damages was considered by the Court of Appeal in
Kaye v Hosier.16 While recognizing the answer is likely to be dependant on the
wording of the contract, the court held that in most cases the contractor will not only
have to return to the site to rectify but also probably the right to do so.
12 Ibid, pp.138
13 Barret, K., “Defective Construction Work.”, London: Wiley-Blackwell, 2008, pp. 119.
14 Ibid
15 Ibid. 16 (1972) 1. WLR 146
5
1.2 Problem Statement
During the defect liability period, the contractor is obliged to return to site
and rectify the minor defects and omissions existing at practical completion and the
defects notified to it during the defects liability period. Defects may be notified at
any time up to the end of the defects liability period and must generally be rectified
within a reasonable time at contractor’s own cost. Failure of the contractor to rectify
such defects, it will be in breach of contract and the employer may employ others to
effect the necessary repairs and recover the full cost from the builder. 17
In the standard form of contract, usually it provides the action that can be
taken by the employer in the event of contractor’s default in rectifying the defects.
There seems a little doubt that if the contractor refuses to make good the defects on
the schedule or if it does not expressly refuses but simply does not make good, the
employer would be able to instruct the contractor not to make good and the
appropriate deduction is to be made from contract sum.18
Alternatively, the employer may ascertain the diminution in value of the
works if in his opinion that the defects should be inconvenient to be rectified.19 The
amount of such diminution then shall be deducted also from the contract sum or
amount due to the contractor.20 However, there is no definition of an appropriate
deduction.21 At what point is the deduction is determined? It is often contended by
the employer that it is the cost to the employer of having the defect rectified by the
others. The contractor on the other hand will argue that the deduction should be the
cost which the contractor would have expanded on making good.
17 Barret, K., “Defective Construction Work.”, London: Wiley-Blackwell, 2008, pp. 118
18 Chappell, D., “The JCT Design and Build Contract 2005”. London: Blackwell Publishing, 2006, pp.
142 19 Lim Chong Fong, “The Malaysian PWD Form of construction contract.”, Selangor: Sweet &
Maxwell Asia, 2004, pp. 107. 20 Ibid
21 Ibid
6
A similar problem can arise in diminution in value. In the case of diminution
in value, it is thought that the amount of diminution would not be the same as the
cost of rectification.22 In Ruxley Electronics & Construction Ltd v Forsyth,
23 the
plaintiff sued for compensation for the defective pool but then lost an appeal about
the correct approach to the assessment of compensation. The question then arises.
How does such diminution to be assessed?
1.3 Objective of the Study
The objective of this study is to identify the basis of the courts measure the
diminution in value for construction defects.
1.4 Scope of the Study
The approach adopted in this research is case law based which covers the
following areas:
i. Only construction defects cases are chosen
ii. The cases narrowed down to the case on the diminution in value
cases.
22 Lim Chong Fong, “The Malaysian PWD Form of construction contract.”, Selangor: Sweet &
Maxwell Asia, 2004, pp. 107. 23 (1995) 73 BLR 1
7
Selected standard forms of contract will also be referred to and they are as
follows:
i. PWD Form 203A (Rev 2007)
ii. PAM Contract 2006 (With Quantity)
1.5 Significance of the Study
Once the building work is complete, the concepts such as defects liability
period, making good defects, retention and final certificate come to mind and they
are sometimes subject to the misconception. The extent to which these concepts
come into play at all and their precise scope and effect depends entirely upon the
contractual terms of the contract.
In essence, this research is expected to provide an overview about the defects
in construction. This study also can be used as a basic guidance for those who are
involved in the construction industry, such as arbitrators, employers, architects,
contractor’s consultants and etc in regards to the scope and extent of defects that
might appear in construction.
This study also may assist especially the aggrieved party to realize the legal
measure adopted for recovery of damages upon breach of contract for defective
building work by defaulting party. This study may provide the rules that the court
will be used in awarding the damages to the aggrieved party in defective works. All
these together, this research is then will help to create awareness among the industry
players regarding to this aspect
8
1.6 Research Methodology
In order to achieve the research objective, a systematic research process had
been drawn up and adhered to. The research process consists of four major stages,
namely, identifying the research issue, data collection, data analysis and writing.
Each stage is shown in detail below. (Refer to Figure 1).
1.6.1 Identifying the Research Issue
The initial stage is to identify the area of study and research issue. Initial
literature review was done in order to obtain the overview of the particular research
topic. It involved reading on various sources of published materials for example,
articles, journals, seminar papers, related cases, previous research and other related
research materials. Then, the next step is to formulate a suitable objective and
designing a scope of study.
1.6.2 Data Collection
The second stage is to develop research design and data collection. The main
purpose of research design is to determine the important data to be collected and the
method to collect it. The data will be collected through documentary study on the
Court cases form MLJ, Building Law Report and other law journals form Lexis
Nexis. Next data also will collected through published resources, like books,
journals, articles, varies standard form of contract and related statutory are the most
9
helpful sources in collecting primary and secondary data. Data collection stage is an
important stage where it leads the researcher towards achieving the main objectives.
1.6.3 Data Analysis
During this stage, the case laws collected and all the relevant information will
be specifically arranged and analyzed and also interpreted based on the literature
view is converted into information that is useful for the research. Researcher will
carefully review the relevant case laws collected and also with special attention on
the facts of the case, issues and judgments presented by each case law.
1.6.4 Writing
In the last stage, process of writing up and checking will involves to complete
the report. A conclusion will be made up and at the same time recommendations that
related to the problem may be made in this stage. The author had also reviewed the
whole process of the research to identify whether the research objective has been
achieved.
10
Figure 1.1: Research methodology and methods of approach
Research Methodology
Establish Area of Study
• Books
• Arcticles and Journal
• Seminar Papers
• Internet Websites
Formulate Objective and Defined Scope
Research Design
Data Collection
Documentary Analysis
• Court Cases from Lexis Nexis,
Building Law Report
• Academic Books
• Seminar Papers
• Journals and Articles
Data Arrangement
Data Analysis and Interpretation
Writing and Checking
CHAPTER 2
CONSTRUCTION DEFECTS
2.1 Introduction
Unsurprisingly, defects are one of the major causes of dispute and
construction litigation. Dealing with construction failures requires various degrees of
familiarity with law, building technology and practice. There is often disagreement
when it comes to identifying what a construction defect is.1 This, of course, will be
down to the differing viewpoints and interests of those who are asking the question
and making the determination. These parties typically include the employer,
contractor, and subcontractor.
Thus, in this chapter it is fundamentally as the introductory chapter which
intends to discuss and provide an overview of defects in the construction industry
that will be useful to enhance the understanding when reading the following
chapters.
1 Glover, J., “Liability for defects in construction contracts - who pays and how much?”, 2008,
Retrieved on June 1, 2011 from www.fenwickelliott.co.uk/.../Contract%2010%20-
%20Liability%20for%20Defects.pdf
12
2.2 Definition of Defect
In Ruxely Electronics & Construction Ltd. v. Forsyth2, Mr Steven Forsyth
discovered that his recently constructed swimming pool was shallower by 9 inches
than the specification called for.3 Although the workmanship and materials
conforming in all other respects with the quality requirements of the specifications,
the pool was nevertheless, in law, defective. 4 Mr Forsyth’s complaint about the
depth of his pool serves an illustration that defects can encapsulate more than just
bad workmanship and materials, and the quality was just one category of defective
works.5 Therefore, it is useful to have a general definition of the term ‘defect’ and to
appreciate the impact of discoverability on the status and legal consequences of
defects.6
In Oxford Thesaurus of English7 dictionary, defect has been defined as:
a) Fault, flaw, imperfection, deficiency, weakness, weak spot/point, inadequacy,
shortcoming, limitation, failing, obstruction
b) Snag, kink, deformity, blemish, taint, crack, break, tear, split, scratch, chip,
fracture, spot
c) Mistake, error
Meanwhile, Webster Dictionary defines the defect as lack of something necessary
for completeness; shortcoming and an imperfection; fault; blemish.
In law, the first attempt to define a defect arose in the case of Yarmouth v
France8 with respect of a carthorse that was considered vicious and unfit to be
2 (1995) 73 BLR 1 3 Barret, K., “Defective Construction Work.”, London: Wiley-Blackwell, 2008, pp. 1 4 Ibid. 5 Ibid. 6 Ibid. 7 Oxford Thesaurus of English. 2nd edition, Oxford University Press, Oxford, 2004
13
driven. The Plaintiff was injured in an accident whilst driving the cart that was pulled
by the horse in question. The Court considered that the horse constituted plant and if
it was unfit for the use for which it was intended then it was defective.
The issue in the slightly later case Tate v Latham9of was whether the absence
of a guard on a circular saw was a defect and the condition of the machinery under
Section 1(1) of the Employers’ Liability Act 1880. It was held that “defect” means
the absence of something essential to completeness. The absence of the guard to the
saw constituted a defect in this respect.
Other example of cases which attempt to define ‘defect’ include McGriffin v.
Palmers Shipbuilding & Iron Co Ltd.10 where an obstruction protruding from a
furnace (but which was not a part of it) did not render the furnace defective and the
curious decision in Jackson v. Mumford11 , which decided that the word ‘defect’ did
not include design defect.
The Tate definition is not satisfactorily all embracing. In any case, the
building work can be completed however found defective in somewhat later.12 While
in Yarmouth, the definition is potentially too wide as the building can be unfit for use
yet not be defective in the sense that someone can be held responsible for its
unfitness.13 In Baxall Securitites Ltd v Sheard Walshaw Partnership
14, the Court of
Appeal considered that a flaw includes design as well as workmanship.
Defect in the clause means any part of works not executed provided or
completed in accordance to with the contract. For the avoidance of doubt and
8 (1897) 19 QBD 647 9 (1897)1 QB 502 10 (1882) 10 QBD 5
11 (1902) 51 WR 91
12 Barret, K., “Defective Construction Work.”, London: Wiley-Blackwell, 2008, pp. 1 13 Ibid., pp 2
14 (2002) BLR 1000
14
without limiting the generality of plant the expression the term shall be taken to
include any item of plant, material, goods or work incorporated or used in the works
which does not or may not conform to the relevant quality standards or pass the tests
prescribed in or to be inferred from the contract.15 As defined by the California Jury
Instructions, the construction defect is:
“A failure of the building or nay component to be erected in a
reasonably workmanlike manner or to perform in the manner
intended by the manufacturer or reasonably expected by the buyer,
which proximately causes damages to the structure.”
2.3 Causes of Defect
The courts have recognized that construction defects can be grouped into the
following four major categories.16 These categories are the causes of the defects. The
categories are;
a) Design deficiencies
b) Material deficiencies
c) Specification problems
d) Workmanship deficiencies
Furthermore, in PAM 2006, Article 7, the defective work is defined as
defects, shrinkage or other faults due to materials and workmanship not in
15 PhilipCF Chan, “Commonwealth Construction Cases-The Singapore Perspective.” Singapore:Sweet
& Maxwell Asia, 2002, pp. 68 16 Glover, J., “Liability for defects in construction contracts - who pays and how much?”, 2008,
Retrieved on June 1, 2011 from www.fenwickelliott.co.uk/.../Contract%2010%20-
%20Liability%20for%20Defects.pdf
15
accordance with the contract and/or due to any faulty design undertaken by the
contractor. Thus, from the wording of the meaning, it is found that the defective
works are caused by improper material, workmanship and faulty design.
In The Malaysian Surveyor the causes of defects fall in three categories, there
are17;
a) Design error / Faulty design
b) Quality of the materials and goods
c) Workmanship
Sundra Rajoo and Lim Chong Fong also have the same thought that before the
contractor is liable to remedy the defects these must be shown to have arisen from
materials and workmanship not being in accordance with the contract.18
From all these views, we can conclude that the causes of defect can be
divided into three categories that are design error, quality and material error and
workamanship error.
2.3.1 Design Error/ Faulty Design
A number of people claim that it is not usually conceptual design which is at
fault but the detailing.19 In fact, a competent designer will have at least the principles
of good detailing in his mind right from the start of the design process.
17 Mohd Suhaimi Mohd Danuri. “The Employer’s Rights and the Contractor’s Liabilities in Relation
to the Defects Liability Period.” The Malaysian Surveyor, 2004, pp. 55 18 Sundra Rajoo, “The Malaysian Standard Form of building contract – the PAM 1998 Form.” Kuala
Lumpur: Malayan Law Journal Sdn Bhd, 1999, pp.146. Lim Chong Fong, “The Malaysian PWD
Form of construction contract.” , Selangor: Sweet & Maxwell Asia, 2004 19 Crocker, A., “Building Failures: Recovering the Cost.”, UK: BSP Professional Books, 1990, pp. 6-7
16
A good basic design may be partly upset by poor and unchecked detailing
during the production drawing stage. It is equally certain that many buildings which
fail prematurely do so because knowledge of good detailing principles and choice of
materials were not possessed or the detailing was not considered worthy of thought
in the early design stage.
In traditional building procurement, there is a strict dividing line between the
functions of design and construction.20 It is the responsibility of the employer’s
design team to prepare the design that includes a wide concept of building and
matters of considerable detail. As for the contractor, it is his obligation to construct
such design in accordance with the contract documents.21
However, in the design and build contract, the contractor is responsible for
the design responsibility not only to the reasonable care and skill standard which an
architect or engineer will owe but also with a duty of fitness for purpose consistent
with the overall construction obligations.22
Deal with defect due to faulty design, mostly employer wishes to find out the
liability is rested on who. This is because, that particular person becomes liable for
employer’s losses under which contract he has carried out the design function.
Normally, traditional method of procurement indeed regards design as the exclusive
responsibility of the architect, plus such specialist as are necessary.23
20 Murdoch, J. and Hughes, W., “Construction Contracts – Law and Management.” 4th edition,
London:Taylor & Francis , 2008, pp. 179 21 Ibid
22 Robinson, N. M et al, “Construction Law in Singapore and Malaysia.” Kuala Lumpur: Butterworths
Asia, 1999, pp. 136. 23 Murdoch, J. and Hughes, W., “Construction Contracts – Law and Management.” 4th edition,
London:Taylor & Francis , 2008, pp. 179
17
However, the truth is the contractor under this traditional procurement are
tending to take on a measure of design responsibility in several ways namely;24
a) When the contract documents give insufficient fine detail such as how
far apart to place a fixing screw, a contractor who exercises discretion
is in fact taking on a design function. Contractor who uses his own
initiative without seeking an architect’s instruction, will liable for any
defects that arise.
b) Contractors are often asked during the progress of construction, for
their opinion to overcome a particular problem that has arisen. If such
an opinion is given (at least where the person giving it is a specialist)
a duty of care will arise.
c) Where the contractors are required to produce drawings for the
architect’s approval, any matters of designs that are included, and
contractor may be liable. This is regardless of the possibility where
the architect may be held jointly liable.
d) Where the contractor is required to warn the employer of any design
defects that he knew about. See Plant construction plc v Clive Adams
Associates and JHM Construction Servises Ltd25 and Brunkswick
Construction v Nowlan26
. In Brunkswick Construction v Nowlan,
Supreme Court of Canada has held contractor is liable for employer
to warn him of faulty design which subsequently has resulted in
defects.
24 Murdoch, J. and Hughes, W., “Construction Contracts – Law and Management.” 4th edition,
London:Taylor & Francis , 2008, pp. 179 25 (2000) BLR 137.
26 (1974) 21 BLR 27.
18
Therefore, in traditional method of procurement, contractor liability towards
defective work due to design error or faulty design will be found existed if it falls in
any of the above mentioned circumstances.
2.3.2 Quality of the Material
In PAM 2006, Clause 1.1 and 6.1 state that the contractor shall provide
materials and goods of the respective quality and standard as described in the
contract document or as required by the architect while Clause 35.1 of PWD 203A
2007 states that all materials and goods shall be of respective kinds and standard
described in the specification and of good quality. These are important provisions in
both PAM and PWD Standard Form of Building Contract, because they set out the
matters on kind, quality and standard of materials.
On the other hand, where there are situations that the contract documents fail
to specify the kind, quality or standard of materials and goods, and then the usual
implied duties of the contractor apply and these implied duties or terms require that
the materials and goods will be of merchantable quality.27
Merchantable quality means that goods and materials are to be free from any
defects as it is reasonable to expect, given such factors as their price and the way
they are described.28 In Henry Kendall & sons v William Lillico & sons Ltd
29, Reid
LJ has defined the merchantable quality as “commercially saleable…the lowest
quality commercially so sold”.
27 Sundra Rajoo, “The Malaysian Standard Form of Building Contract – The PAM 1998 Form.” Kuala
Lumpur :Malayan Law Journal Sdn Bhd, , 1999, pp. 95 28 Murdoch, J. and Hughes, W., “Construction Contracts – Law and Management.” 4th edition,
London:Taylor & Francis , 2008, pp. 161 29 (1968) 2 All ER 444, (1969) 2 AC 31, (1968) 3 WLR 110
19
Dixon J in Australian Knitting Mills Ltd. v. Grant30 brought that:
"The condition that goods are of merchantable quality requires that
they should be in such an actual state that a buyer fully acquainted
with the facts and, therefore, knowing what hidden defects exist and
not being limited to their apparent condition would buy them without
abatement of the price obtainable for such goods if in reasonable
sound order and condition and without special terms."
Thus, the contractor is liable to supply goods and materials which are
merchantable quality, even the materials or goods has selected by employer for
instance, by nominating a particular supplier.31 In Young & Marten v Mcmanus
Childs32, a roofing sub-contractor has complied fully to employer’s instruction on
installation of “Somerset 13” tile which both the brand and manufacturer are
specified by the employer. It is held that the specification of a particular brand has
excluded the sub-contractor to warrant that the tiles will be fit for purpose but is not
excluded from merchantable quality. Hence, the sub-contractor is held liable for
breach of implied warranty when the tiles fail due to a latent and undiscovered
defect.
However, contractor will not be liable for defective materials where he is
forced by the employer to obtain those materials from a supplier who, to the
employer’s knowledge, excludes or limits liability for defects. In Gloucestershire
Country Council v Richardson33
under a contract to build an extension to a college,
contractor was directed to enter into contract for supply of concrete columns without
any reference to the contractor. The design, materials, specification, quality and price
were fixed between the employer and his supplier. It was held that the contractor was
30 (1933) 50 CLR. 387, 413
31 Murdoch, J. and Hughes, W., “Construction Contracts – Law and Management.” 4th edition,
London:Taylor & Francis , 2008, pp. 161 32 (1969) 1 AC 454, (1968) 2 All ER 1169, (1968) 3 WLR 630, 67 LGR 1, 9 Build LR 77, 207 EG
797, (1968) EGD 482 33 (1969) 1 AC 480.
20
not liable since the circumstances of this case indicates an intention to exclude from
main contract any implied terms that the column will be fit for their purpose or of
good quality.
2.3.3 Workmanship
It is very important that the standard of workmanship for each item of work
in a building project should be expressly provided in the building contract to avoid
creating uncertainties in the scope of the contractor’s obligations.34
With regard to workmanship, there may be deficiencies in the labour of both
main and sub-contractors.35 These may be the consequences of lack of skill, lack of
care and interest, or lack of knowledge of the importance of special care in the
execution of some vital piece of work. If there are no express terms in regard of
workmanship, the court will imply a term in the contract that the work will be carried
out with proper skill and care.36
In Hancock and others v BW Brazier (Anerly) Ltd37
, a builder sold an estate
of houses, which he was then erecting, to a purchaser under a contract which
provided that the builder would erect, build and complete a dwelling-house in
accordance with the plan and specification prior to completion in a proper and
workmanlike manner. Not too long after the completion, the floors and walls began
to crack because of the use of sodium sulphate in the hardcore under the concrete
ground floor and cause substantial damage to the house. The purchaser had sued for
34 Philip CF Chan, “Commonwealth Construction Cases-The Singapore Perspective.”
Singapore:Sweet & Maxwell Asia, 2002, pp. 51 35 Crocker, A., “Building Failures: Recovering the Cost.”, UK: BSP Professional Books, 1990, pp. 8
36 Murdoch, J. and Hughes, W., “Construction Contracts – Law and Management.” 4th edition,
London:Taylor & Francis , 2008, pp. 160 37 (1966) 2 All ER 901, (1966) 1 WLR 1317, 198 EG 785, (1966) EGD 362
21
damages for breach to build in a proper and workmanlike manner in accordance with
the plan and specification. It is held that the purchaser was entitled to damages for
breach by the builder of implied warranty in doing his work in a good and
workmanlike manner and supply good and proper materials so that the house would
be reasonably fit for human habitation.
In any contract, the contractor is not only liable for personal workmanship,
but also responsible to the sub-contractor, either domestic sub-contractor or
nominated sub-contractor.38 Therefore, the contractor and sub-contractor should
ensure that they build the building in a good workmanship to prevent adverse
influence on the performance of the completed building.
2.4 Types of Defects
The defects, regardless of whatever their qualitative nature, may be patent or
latent. The consequences may differ depending on whether defects are patent or
latent. The fact that there may be different consequences means that it is important to
be able to decide when a defect is patent or latent.39
The cases on disputes caused by defects have featured strongly in the
development of construction law although the issues raised have varied depending on
whether the defect is patent or latent. 40
38 Murdoch, J. and Hughes, W., “Construction Contracts – Law and Management.” 4th edition,
London:Taylor & Francis , 2008, pp.161. 39
Barret, K., “Defective Construction Work.”, London: Wiley-Blackwell, 2008, pp. 3 40Philip CF Chan, “Commonwealth Construction Cases-The Singapore Perspective.” Singapore:Sweet
& Maxwell Asia, 2002, pp. 69
22
2.4.1 Patent Defects
A patent defect is discoverable and may be open to view, exposed, manifest,
evident or obvious. It can be discovered by normal examination or testing.41 In
Yandle & Sons v Sutton42, it was decided that the defect is patent if it is open or
visible to the eye. In Victoria University of Manchester v Hugh Wilson & Lewis
Wormsley and Pochin Ltd43, the defect was held as a patent defect when it could be
discovered by the exercise of ordinary care. However, in Sanderson v National Coal
Board44, a defect was said to be patent if observable, whether or not actually
observed.
Thus, the patent and latent defects which become patent within the defects
liability period may be discovered in time for the employer to take action against the
contractor under the terms of the building contract and would therefore create fewer
issues as compared with the latent defects.
2.4.2 Latent Defects
The latent defects are the defects which cannot reasonably be discovered at
the stage of a building’s practical completion or during the period of contractual
liability for defects.45 The latent defects are those that are hidden and as a corollary
to Sanderson v National Coal Board46, not observable. In Baxall Securitites Ltd v
41 Robinson, N. M et al, “Construction Law in Singapore and Malaysia.” Kuala Lumpur: Butterworths
Asia, 1999, pp. 160. 42 (1922) 2 Ch 1999
43 (1984)2 Con LR 43 at 78
44 (1961) 2 QB 244 45 James, M. F., “Construction Law.”, London: The Macmillan Press Ltd, 1994, pp 145.
46 (1961) 2 QB 244
23
Sheard Walshaw Partnership 47, it was explained that whether the defect is latent is
determined by reference to the inadequacy of the work materials. The judge held
that:
‘the concept of a latent defect is not a difficult one. It means a
concealed flaw. What is flaw? It is the actual defect in the
workmanship or design…’
However, the question arises on when a concealed flaw in workmanship or
design to be regarded as observable even though not actually observed. The
Sanderson v National Coal Board48confirms that answering that question is an
exercise that must ne objectively approached. For instance, in Riverstone Meat Pty
Ltd v. Lanchashire Shipping Company Ltd49
, and Prudent Tankers Ltd SA v The
Dominion Insurance Co Ltd50, it was decided that defects were not latent if
discoverable by the exercise of due diligence.
Consequently, in Rotherham MBC v. Fank Haslam Milan & Co Ltd and M.J.
Gleeson (Norhern) Ltd51
, the latent defect was illustrated as meaning ‘in its widest
sense a … failure in work or materials to conform to contract in a respect not
apparent on reasonable examination. In this case it was not appropriate by the
specifier or builder at the time of specification or supply, and could not have been
ascertained by the customary examination available, that the specified materials
suffered from an inherent characteristics that rendered them unsuitable for the
purpose for which they had been specified.52 Therefore, the defect was truly latent.
47 (2002) BLR 1000
48 (1961) 2 QB 244
49 (1961) AC 807
50 (1980) 1 Lloyd's Rep.338
51 (1996) 78 BLR 1 CA 52 Barret, K., “Defective Construction Work.”, London: Wiley-Blackwell, 2008, pp. 3
24
The latent defect will discoverable after some time. It may not be noticed
immediately since there may be no immediately apparent signs to indicate the
presence of the defects. Thus, this creates the difficulties to those who suffer loss a
result of the said defects and wish to seek compensation. The challenges are53;
a) The applicable limitation period has expired when the latent defects become
apparent.
b) The latent defect becomes apparent only after the developers/ owners have
sold the completed structure thereby diminishing the value of the same and
now classified as pure economic loss in a tortuous claim relating to defects.
2.5 Time to Make Defect Claim
There are three distinct time periods in the progress of a building contract in
which defective work claims can be made.54 The contractor is responsible to rectify
the defects at these three different periods.55 The first period falls before the practical
completion. The second period is during the defect liability period and the third is
after the defect liability period.
53 PhilipCF Chan, “Commonwealth Construction Cases-The Singapore Perspective.” Singapore:Sweet
& Maxwell Asia, 2002, pp. 72 54Doyle, J., “Defective Work Claims.” (2002). Retrieved on May 20, 2011 from
www.doyleconstructionlawyers.com 55 Holmes, C. & Wilshire, K.,“The rectification of defects”, 2010, Retrieved on June 1, 2011 from
www.kensingtonswan.com/.../The_rectification_of_defects.pdf
25
2.5.1 Defects Identified Before Practical Completion
Different views have been expressed as to the status of defective work prior
to practical completion. The suggestion that the defects before practical completion
were temporary disconformities has not had many supporters (Per Lord Diplock in
Kaye v Hoiser)56 In fact, it is generally accepted that a contractor will be in
immediate technical breach of contract whenever works fail to comply with
contractual descriptions or requirements. 57
Notwithstanding the above, most standard form of contract enable the
contract administrator to direct the contractor to rectify the defects or non-compliant
work at the contractor’s own cost or to accept the non-compliant work and adjust the
contract sum by the value of the defect or non-compliance.58
The principal will only have recourse to such measures if the work and
materials do not conform to the requirements of the contract. If there is an argument
over whether the works are conforming or not, any of the above measures will be
subject to subsequent determination as to who is liable to meet the cost.
56 (1972) 1 All ER 121
57 I N Duncan Wallace., “Hudson’s Building Contracts”11
th Ed., London:Sweet & Maxwell, 1995, pp
78. 58 Holmes, C. & Wilshire, K.,“The rectification of defects”, 2010, Retrieved on June 1, 2011 from
www.kensingtonswan.com/.../The_rectification_of_defects.pdf
26
2.5.2 Defects Identified During the Defect Liability Period
A defect liability period runs from the date of practical completion and
continues for a specified period as stated in the contract. Most of DLP provisions in
standard form of contract constitute both the right of employer and obligation on the
part of contractor. The employer is entitled to require the contractor to return to the
site and rectify the defects notified during this period and minor defects and
omissions existing at practical completion. 59 The requirement for the contractor to
rectify defects during the defects liability period is for the benefit of the contractor as
much as it is for the principal.
The employer also has the right to have the defects to be rectified by another
contractor at the original contractor’s expense in certain circumstances. This means
that the employer is entitled to deduct the costs of that rectification from the
retention money held by the employer.60
Whether the contractor has a right as well as an obligation to rectify defects
and therefore avoid liability for damages was considered by the Court of Appeal in
Kaye v Hosier61 While recognising the answer is likely to be dependent on the
wording of the contract, the court held that in most cases the contractor will not only
have the obligation to return to site to rectify, but also probably the right to do so.
The defects liability certificate signals the end of the defects liability period.
It will be issued once the contractor has rectified all defects notified to it. The defects
liability certificate will not generally release the contractor from liability for any
defects subsequently arising.
59 Holmes, C. & Wilshire, K.,“The rectification of defects”, 2010, Retrieved on June 1, 2011 from
www.kensingtonswan.com/.../The_rectification_of_defects.pdf 60Doyle, J., “Defective Work Claims.” (2002). Retrieved on May 20, 2011 from
www.doyleconstructionlawyers.com 61 (1972) 1 All ER 121
27
2.5.3 Defects Identified After the Defects Liability Period
The contractor’s primary obligation is to deliver up the work upon final
completion, free of defects. The issuance of a final certificate under a building and
construction contract does not terminate the contractor’s obligation for damages
arising out of defective work claims.62 In some cases the court or an arbitrator may
compel the contractor to rectify the works under an order for specific performance.
However, this is unusual as in most cases damages will be considered a satisfactory
recompense for the principal.
The usual measure of damages for defective work is the cost of rectifying
defects in order to produce conformity with the contract.63 Where this is considered
an unreasonable or unnecessary course to adopt, the courts will consider an
alternative measure of damages.
2.6 Defective Work in Malaysian Standard Form of Contract
It is common for parties to the contract of larger project, will adopt Standard
Form of Contract such as PAM or PWD Standard Form of building Contract to enter
a formal contract with contractor. Normally, these standard forms of contracts do
specify a numbers of provisions regarding defective building work which only deal
with the defective works during construction period and defect liability period.
62 Doyle, J., “Defective Work Claims.” (2002). Retrieved on May 20, 2011 from
www.doyleconstructionlawyers.com 63 Holmes, C. & Wilshire, K.,“The rectification of defects”, 2010, Retrieved on June 1, 2011 from
www.kensingtonswan.com/.../The_rectification_of_defects.pdf
28
2.6.1 Defective Work Claim during the Construction Period
There are numbers of provisions that govern the quality of the contractor’s
work and the material supplied as well as the rights, duties and obligations of the
parties in respect of defects under the PAM Contract 2006 and PWD Form 203A
2007 Standard form of building contract.
Clause 6.1 of PAM 2006 and Clause 35.1 of PWD 203A 2007 require the
materials, goods and workmanship of the contractor to be of ‘the respective qualities,
kinds and standards described’, ‘in accordance with the standard of workmanship in
the industry’ and conformity ‘with the contract document or specification’. The
contractor is obliged to procure and achieve the specified quality, kind and
standard.64
Failure of contractor to do so, he will be in breach of contract unless the
Superintending Officer is willing to permit a substitution by way of a variation
instruction.65 Where the contract documents do not specify, there will be an implied
term that the materials or goods will be of merchantable quality and the
workmanship will be carried out with reasonable care and skill: see Hancock and
others v BW Brazier (Anerly) Ltd66
and Young & Marten v Mcmanus Childs67
The contractor is also obliged under the Clause 35.1 PWD 203A 2007 and
Clause 6.2 PAM 2006 to submit documentary such as voucher, manufacturer’s test
certificate or such other evidence to proof that the respective qualities, kinds and
standards of materials and goods, which are being used in the construction work,
complied with the contract. If contract silent on this kind or standard of materials or
64 Lim Chong Fong, “The Malaysian PWD Form of construction contract.”, Selangor: Sweet &
Maxwell Asia, 2004, pp. 29 65 Ibid. 66 (1966) 2 All ER 901
67 (1969) 1 AC 454
29
goods, presumably as selected by the superintending officer or the architect.68 In the
event if there is failure by the contractor to submit what has been requested, the
superintending officer or the architect may order to:-
a) Rectify, demolish, reconstruct or remove such materials or goods at the
contractor’s own cost.
b) Deduct the amount of money of such to rectify, demolish, reconstruct or
remove from the money due to contractor.
Clause 6.3 of PAM 2006 and Clause 35.2 of PWD 203A 2007 authorize the
architect or superintending officer to direct contractor to do the following when the
architect or superintending officer has grounds for suspecting that there may be
defective work69:-
a) To open up for inspection of any work covered up
b) To carry out any test on any materials and goods already incorporated in the
proposed work or any executed work.
Furthermore, Clause 6.5 of PAM 2006 and Clause 36.3 of PWD 203A 2007
states that in case where the materials, goods and workmanship provided by the
contractor are not in accordance to the contract, the Superintending Officer of the
Architect have the power, to instruct the contractor as follow:
a) Removal, demolition and construction70
In PAM 2006, architect has the power to instruct the contractor to remove,
demolish and reconstruct the defective work. Similar in PWD 203A where
the Superintending Officer has the power to instruct contractor to remove or
68 Sundra Rajoo, “The Malaysian Standard Form of building contract – the PAM 1998 Form.”, Kuala
Lumpur: Malayan Law Journal Sdn Bhd, 1999, pp. 97. 69 Ibid
70 See Clause 6.5(a), 6.5(b) of PAM 2006 and Clause 5.1(d), 36.3 of PWD 2007.
30
reconstruct any defective works. Both standard forms require this to be done
in writing. Architect or Superintending Officer cannot merely condemn the
defective works without ordering removal. In the case of Holland Hannen &
Cubitts (Northern) Ltd v Welsh Health Technical Servises Orhganisation71, it
was held that a notice condemning the windows that installed by the sub
contractor are not in accordance with the contract does not create a valid
notice as the notice does not require removal of anything by the architect.
b) Acceptance72
With the consent of employer, the architect may in writing to allow
contractor to leave all work, materials, goods or workmanship without any
removal, demolition or reconstruction to the work. However, this acceptance
is subject to set off of all cost, loss and expense incurred and suffered by the
employer.
c) Variation73
The obligation of the contractor to procure and achieve the specific kind,
standard and quality of materials, goods and workmanship is an absolute
one.74 If the contractor fails to do so, he will be in breach of contract unless
the architect or Superintending Officer is willing to permit substitution by
way of variation order.75
Clause 6.7 of PAM 2006 and Clause 5.3 of PWD 203A 2007 empower the
employer to employ other person or a third party to rectify the works or to make
good all the non compliance works by the contractor if he in default in not
complying with the Superintending Officer’s or the Architect instruction to remove,
demolish, reconstruct or rectify the defective works.
71 (1981) 18 BLR 80.
72 See Clause 6.5(e) of PAM 2006.
73 See Clause 6.1 and Clause 11 of PAM 2006 and Clause 35.1 and Clause 24 of PWD 203A 2007.
74 Sundra Rajoo, “The Malaysian Standard Form of building contract – the PAM 1998 Form.”, Kuala
Lumpur: Malayan Law Journal Sdn Bhd, 1999, pp. 96. & Lim Chong Fong, “The Malaysian PWD
Form of construction contract.”, Selangor: Sweet & Maxwell Asia, 2004, pp. 29 75 Ibid.
31
All the cost incurred by the Employer including the cost for loss and expense
is recoverable from the contractor. This is an addition to the other two remedies
which the employer possesses: an action for breach, namely, treating the contract as
repudiated at common law and the drastic procedure of determination.76 This clause
provide employer with a more practically effective remedy. Its object is to enable the
employer to secure the physical performance on the site of the Super Intending
Officer’s or the Architect’s instruction when a contractor refuses or neglects to obey
the instruction.77
However, it has to be borne in mind that employer has to call the original
contractor to rectify the defect in the first place. See William Tomkinson and Sons
Ltd v the Parochial Church Council of St Michael78
2.6.2 Defective Work Claim during the Defect Liability Period
The PAM 2006 and PWD 203A 2007 provide the right and obligations of
the contractor’s responsibility for any defects after completion of the work which
specified the contractor’s responsibility for defective work during the construction
period. Clause 15 of PAM 2006 and Clause 48 of PWD 203A 2007 oblige the
contractor to be responsible for any defect, imperfection, shrinkage or any other
default which arise during the Defect Liability Period (DLP). This defect liability
period will be of twelve (12) months from the day mentioned in the certificate of
practical completion unless there is some other period is specified in the Appendix.
76 Sundra Rajoo, “The Malaysian Standard Form of building contract – the PAM 1998 Form.”, Kuala
Lumpur: Malayan Law Journal Sdn Bhd, 1999, pp. 99. & Lim Chong Fong, “The Malaysian PWD
Form of construction contract.”, Selangor: Sweet & Maxwell Asia, 2004, pp. 30 77 Ibid.
78 (1990) CLJ 319
32
Clause 15.4 PAM 2006 and Clause 48.1(b) PWD 203A 2007 allow the
Architect or Superintending Officer to specify in a schedule of defect any defect,
shrinkage, imperfection or any other fault which appear within the DLP and deliver
to the contractor not later than fourteen (14) days after the expiry of the DLP. When
contractor receives such a schedule, he is obliged to make good such defect,
imperfection, shrinkage or any other fault within a reasonable time, entirely at his
own cost. What is a reasonable time to make good the defects is dependent on the
nature of the defects and the methods used by the contractor to rectify them.79
However, in the event that the contractor fails or refuse to remedy the defects,
the employer may recover such a cost of making good defect under clause 15.4 and
30.4 of PAM 2006 and clause 48.2 of PWD 203A 2007 from the money due or
become due to the contractor or from the performance bond. In this regard, the
employer is allowed under clause 15.3(b), Clause 15.4 and Clause 15.5 to directly
employ a third party and pay another person or third party to remedy such defects.
The cost which is incurred by employer to employ a third party to carry out the
rectification work is recovered from the original contractor.
It is provided in Clause 48.3 PWD 203A 2007 that if in the opinion of
superintending officer that either impractical or inconvenient for the employer to
require the contractor to remedy the defects, imperfection, shrinkage or other fault,
the superintending officer then may decide that they need not be remedied. He then
must ascertain the diminution in value of the works due to the defects. The amount
of money may again be deducted from the money remaining to be paid to the
contractor or from performance bond. It is thought that the amount of diminution in
value would not be the same as the costs of rectification.80
79 Sundra Rajoo, “The Malaysian Standard Form of building contract – the PAM 1998 Form.”, Kuala
Lumpur: Malayan Law Journal Sdn Bhd, 1999, pp. 146. 80 Lim Chong Fong, “The Malaysian PWD Form of construction contract.”, Selangor: Sweet &
Maxwell Asia, 2004, pp. 107.
33
This provision is not in derogation of the employer’s rights and remedies for
breach of contract on the part of contractor in not executing the works on accordance
with the contract which is subject to the Limitation Act 195381 as in Teh Khem On &
Anor v Yeoh & Wu Development Sdn Bhd & Ors82
On the other hand, by this provision, the contractor does not only have the
obligation but also the right to be given the first opportunity to remedy the defects,
imperfection, shrinkage or other fault in the works that has arisen. Lord Diplock P &
M in Kaye Ltd v Hosier & Dickinson Ltd83
said:
“Condition 15 imposes upon the contractor a liability to mitigate the
damages caused by his breach by making good defects of
construction at his own expense. It confers upon him the
corresponding right to do so. It is necessary implication from this
that the employer cannot, as he otherwise could, recover as damages
from the contractor the difference between the value of the works if
there had been constructed in conformity with the contract and their
value in their defective condition, without first giving to the
contractor the opportunity of making good the defects.”
From that, it is clear that contractor has the right to be given an opportunity to
make good any defects which falling within the defect liability period. If employer
fails to do so, whether by refusing to allow the contractor to carry out the repairs or
by failing to give notice of the defects, limits the amount of damages which
employer entitles to recover.84
81 Lim Chong Fong, “The Malaysian PWD Form of construction contract.”, Selangor: Sweet &
Maxwell Asia, 2004, pp. 105 82 (1995) 2 AMR 1558
83 (1972) 1 All ER 121, (1972) 1 WLR 146, HL
84Atkinson, D., “Measure of Damages for Defects.” 1999, Retrieved on May 29, 2011 from
http://www.atkinsonlaw.com/cases/CasesArticles/Articles/Measure_of_Damages_for_Defects%20.ht
m
34
Based on Pearce & High Ltd v Baxter and Another85
where a dispute arises
between the building contractors, Pearce & High Ltd and their employer, Mr. and
Mrs. Baxter where the defects become apparent before the end of defect liability
period, but the alleged defects are not notified to the contractor. Court of Appeal has
held that the obligation of the contractor to make good defects cannot be enforced on
the contractor unless he is given notice of the defect. Failure of employer in giving
the notice does not preclude employer right to damages, it will however limit the
amount of damages that the employer is entitled to recover.
2.7 Conclusion
In construction, the defect is defined as a failure of the building or nay
component to be erected in a reasonably workmanlike manner or to perform in the
manner intended by the manufacturer or reasonably expected by the buyer, which
proximately causes damages to the structure. The defect can be caused by design
error, the quality of the materials and goods deficiencies and workmanship
deficiencies.
The contractor’s primary obligation is to deliver the work in accordance to
the contract. Standard form of contracts generally provide for specific timing and
notification procedures related to defective work claims. As with the process of
making a defective work claim, most standard form of contract contains express
provisions relating to the valuation of rectification works ordered as a result of a
defective work claim.
85 66 ConLR 110, (1999) BLR 101
35
The employer is obliged to give first priority to the original contractor to
rectify the defects instead of engage another contractor to remedy the defects. Failure
of such obligation, the employer will be held in breach of contract.
CHAPTER 3
DIMINUTION IN VALUE
3.1 Introduction
It is provided in Clause 48.3 PWD 203A 2007 that if in the opinion of
superintending officer that either impractical or inconvenient for the employer to
require the contractor to rectify the defects, imperfection, shrinkage or other fault,
the superintending officer then may decide that they need not be rectified. He then
must ascertain the diminution in value of the works due to the defects. The amount
of money may again be deducted from the money remaining to be paid to the
contractor or from performance bond. It is thought that the amount of diminution in
value would not be the same as the costs of rectification.
In contract cases, typically construction or mining cases, courts frequently
measure the damages of the innocent party either by the diminution in market value
at the time of breach from less than a perfect performance or by the cost of rendering
performance contract.1 The diminution measure is objective that is observes external
1 Murris, T. J., “Cost of Completion or Diminution in Market Value: The Relevance of Subjective
Value.” The Journal of Legal Studies, Vol. 12, No. 2 (Jun., 1983), pp. 379-400
37
to the contract such as the judge in a lawsuit can ascertain its amount with reasonable
accuracy at a tolerable cost.
Diminution in value is a legal term used when calculating damages in a legal
dispute, and describes a measure of value lost due to a circumstance or set of
circumstances that caused the loss.2 Specifically, it measures the value of something
before and after the causative act or omission creating the lost value in order to
calculate compensatory damages.3
Fundamentally, this chapter intends to discuss some basic knowledge about
the diminution in value. This chapter also includes the definition of diminution in
value, types of diminished value, the application of the diminution in value and that
will be useful to enhance the understanding when reading the following chapters
3.2 Definition of Diminution in Value
Cases involving damage to the building often focuses primarily on
rectification or repair costs as the measure of damages. A construction defect case,
for example, will entail considerable investigation to determine whether or not a
particular component was built to code, and if proper standards of care were
exercised in construction.4 If not, additional research will seek to determine
responsibility, type and scope of repair, and ultimately, cost. Diminution in value is
2 Tidball, C., “Diminution of value: What’s your claim really worth?”, 2011, Retrieved on June 11,
2011 from http://findingmillions.wordpress.com/2011/06/02/diminution-of-value-whats-your-claim-
really-worth/ 3 Ibid. 4 Monica Neo, “Construction defects: your rights and remedies” Singapore:Sweet & Maxwell Asia, 2005, pp. 22.
38
arguably the best measure of true economic loss, but its importance is often
overlooked in real estate damage cases.5
The idea of diminished property value as a limit to damages was articulated
nearly a century ago in Salstrom v. Orleans Bar Gold Mining Company6, where the
court ruled that damages should be computed as the lesser of cost to repair or the
value of the property before the injury.7 This rule was reiterated in a number of
subsequent cases. For example, the concept was restated in Mozzetti v. City of
Brisbane8 creating the modern version of the lesser of rule, limiting property
damages to the lesser of diminution in value, or the cost of repairing the injury and
restoring the premises to their original condition.9
In Heninger v. Dunn10, and Orndorff v. Christiana Community Builders
11,
courts in fact allowed repair costs which exceeded lost value, creating the personal
reason exception to the lesser of rule, where there is a reason personal to the owner
for restoring the original condition, provided there is a reasonable nexus between the
repair costs, damage to the property, and value after repair.12
What is actually defined by diminution in value? First of all, the word of
diminution is from the root word of diminish. The diminution is defined as;13
a) The act or process of diminishing; a lessening or reduction.
5 Sanders, M. V., “ Value Diminution as a Measure for Property Damages.”, 2000, Retrieved on May 28, 2011 from www.realestatedamages.com/pdf/ValueDiminution.pdf 6 (1908) 153 Cal. 551
7 Sanders, M. V., “ Value Diminution as a Measure for Property Damages.”, 2000, Retrieved on May
28, 2011 from www.realestatedamages.com/pdf/ValueDiminution.pdf 8 (1977) 67 Cal.App.3d 565 9 Sanders, M. V., “ Value Diminution as a Measure for Property Damages.”, 2000, Retrieved on May 28, 2011 from www.realestatedamages.com/pdf/ValueDiminution.pdf 10 (1980) 101 Cal.App.3d 858 11 (1990) 217 Cal.App.3d 683 12
Sanders, M. V., “ Value Diminution as a Measure for Property Damages.”, 2000, Retrieved on
May 28, 2011 from www.realestatedamages.com/pdf/ValueDiminution.pdf 13 http://www.thefreedictionary.com
39
b) The resulting reduction; decrease.
Diminution in value is a legal term used when calculating damages in a legal
dispute, and describes a measure of value lost due to a circumstance or set of
circumstances that caused the loss.14 Specifically, it measures the value of something
before and after the causative act or omission creating the lost value in order to
calculate compensatory damages.15
The diminution in value generally refers to a reduction in the worth of
something caused by an action of a third party or entity. In the context of contract
law, it refers to a breach of contract causing the decrease in value of property due to
the failure to construct something exactly as specified in the contract. 16 It is the
difference in the market value of a property without a damage or defect and the
market value of the same property with the damage or defect.17
This measure gives the owner’s balance sheet what it would have had by the
time of full performance. This aim is achieved by combining the value of the project
as it sits with the diminished value measure of recovery because performance has
been less than complete.18 The diminution in value theory is currently gaining
strength as a major consumer concern. In tort law involving auto accidents for
instance, this theory holds that damage to an auto results in a monetary loss in the
market value even though the damage has been properly repaired.
14
Tidball, C., “Diminution of value: What’s your claim really worth?”, 2011, Retrieved on June 11,
2011 from http://findingmillions.wordpress.com/2011/06/02/diminution-of-value-whats-your-claim-
really-worth/ 15 Ibid. 16 Diminution in value law & Legal Definition retrieved on May 29, 2011 from http://definitions.uslegal.com/d/diminution-in-value/ 17 Sanders, M. V., “ Value Diminution as a Measure for Property Damages.”, 2000, Retrieved on May 28, 2011 from www.realestatedamages.com/pdf/ValueDiminution.pdf 18 Sweet, J., “ Legal Aspect of Architecture, Engineering and the Construction Process”, USA: Brooks/ Cole Publishing, 2000, pp.532
40
3.3 Diminution in Value and Depreciation
Diminution in value is not the same with depreciation. Both have a different
meaning and application. Depreciation is defined as an anticipated decrease or loss in
value sustained over time due to age, wear, or market conditions.19 On the other
hand, the diminution in value is a result of a sudden and unexpected loss in economic
value resulting from a sudden and unexpected loss or occurrence.
Depreciation has the following characteristics:
a) Depreciation is charged in case of fixed assets only. e.g., building, plant and
machinery, furniture etc.
b) Depreciation causes perpetual, gradual and continual fall in the value of
assets.
c) Depreciation occurs till the last day of the estimated working life of the asset.
d) Depreciation occurs on account of use of asset. In certain cases, however,
depreciation may occur even if the assets are not used, e.g., leasehold,
property, patent, copyright etc.
e) Depreciation is a charge against revenue of an accounting period.
f) Depreciation does not depend on fluctuations in market value of assets
g) The amount of depreciation of an accounting year cannot be determined
precisely - it has to be estimated. In certain cases, however, it may be
ascertained exactly.
19
Murris, T. J., “ Cost of Completion or Diminution in Market Value: The Relevance of Subjective
Value.” The Journal of Legal Studies, Vol. 12, No. 2 (Jun., 1983), pp. 379-400
41
3.4 Types of Diminished Value
There are three types of diminished value can be considered. They are
inherent diminished value, insurance related diminished value and repair related
diminished value.20 The following explanations are provided to enable a better
understanding of each.
3.4.1 Inherent Diminished Value21
Inherent diminished value is based upon a widespread belief where once
damaged, it will never be the same again. This stigma is attributed to the common
instances over time where inherent appearance and operational deficiencies often
times remain, even after proper and thorough repairs have been performed.
Additionally, inherent diminution of value occurs at the precise time of the loss and
sustaining the resultant damages. The true measure of a damaged property’s inherent
loss in value can be measured as the difference in the value of the property before the
loss to that after the loss, prior to or after repair.
Repair activities (i.e. repair, replacement of parts, refinishing etc.) merely aid
in the recovery of a property's appearance, function and value, relative to the quality
and thoroughness of the performed repair.
Inherent diminished value is based on public awareness that even if a
damaged property is repaired to the best of human ability, it will still exhibit
20Howard, J. D., “Diminished Value Claims” Retrieved on June 11, 2011 from http://www.ican2000.com/dvfaqs.html 21 Ibid
42
remaining deficiencies and inconsistencies from the pre-loss condition of the
property. These deficiencies include, but are not limited to:
a) Weaker structural components that appear cosmetically sound
b) Impossible to duplicate factory seams, sealers, and finishes
c) Telltale signs of repair, such as paint missing off the heads of bolts etc
3.4.2 Insurance Related Diminished Value22
Insurance related diminished value is based upon and resultant from
remaining flaws, defects, and damage, which, through their involvement, the insurer
had failed or neglected to fully and/or properly address. When an insurer negotiates
the settlement of a property damage claim they will typically provide an estimate of
repair which outlines the specific procedures, parts, and materials of which they are
willing to provide for to the claimant or insured.
For instance, an in-house appraiser, who is hired as a full time employee of
the insurer, then trained to assess collision damage in accordance with the company's
policies and procedures. An independent appraiser who is hired as a subcontractor to
assess the damage on behalf of the insurer and does so based upon the insurer's
mandates and/or guidelines.
This may cause the level of compensation to be based upon the estimator
with the least experience, inspecting the property for the shortest period of time,
22
Howard, J. D., “Diminished Value Claims” Retrieved on June 11, 2011 from http://www.ican2000.com/dvfaqs.html
43
using the poorest repair techniques, and/or overlooking the most damage.
Additionally, there are those less scrupulous repairers who may intentionally
underbid the repair to seize the keys only to submit a supplement for additional costs
during the actual performance of repairs.
3.4.3 Repair Related Diminished Value23
Repair related diminished value is based primarily upon remaining flaws and
defects resulting from improper and/or insufficient repairs for which the repairer had
agreed and provided consideration to complete in a workmanlike manner. Poorly
performed repairs would cause the property to be valued less than if it had been
properly and thoroughly repaired.
Repair related diminished value is a loss in market value due to remaining
flaws and defects caused by improper or substandard repairs. Items in this category
have been paid on the repair estimate, but have been repaired improperly or perhaps
overlooked completely.
3.5 Economic Waste Doctrine
The principle in which that the owner should not be direct the replacement of
work when the cost of correction is economically wasteful and the work is otherwise
adequate for its intended purpose and the diminution in value could be an appropriate
23
Howard, J. D., “Diminished Value Claims” Retrieved on June 11, 2011 from http://www.ican2000.com/dvfaqs.html
44
deduction is known as the doctrine of economic waste. In such cases, the employer is
entitled only to downward adjustment in the contract price.24 The economic waste as
stated by Abney:
‘Economic waste is primarily a result-oriented concept, not fiscal
one. Economic waste comes into play in those cases in which the
defective building is still serviceable and useful to society. If repairs
are possible but would completely destroy a substantial portion of
the work, damage or injure good parts of the building, impair the
building as a whole, or involve substantial tearing down and
rebuilding, then that is economic waste.’25
The concept of economic waste has long been recognized at common law.26
This concept has its roots in Jacob & Youngs v Kent27 a case in which the builder
erroneously failed to use the Reading Pipe specified in the contract although pipe of
equivalent quality was used. Judge Cordozo writing for the court found that the
building contract was indeed breached but that it would be economically wasteful to
replace perfectly good pipe with the promised Reading Pipe. Instead the owner’s
damages would be the difference in value between a house with Reading Pipe and
one with the other pipe, a modest amount in view of the essential equivalency of the
two types of pipe.
The Rationale of Jacob & Young has found a substantial adherence.28 For
instance, in the Restatement (Second) of Contract Section 348 (2) endorses the
economic waste approach for calculating damages in certain instances when
24 Connell, L. R., & Callahan M. T., “Construction Defect Claims and Litigation. USA: John Wiley &
Sons, 1995, pp. 190 25 Abney, “Determining Damages for Breach of Implied Warranties in Construction Defect Cases.” 16 Real Est. L. J. 210., 1998. 26 Connell, L. R., & Callahan M. T., “Construction Defect Claims and Litigation. USA: John Wiley &
Sons, 1995, pp. 190 27 230 N.Y. 239, 129 N.E. 889 (N.Y. 1921) 28 Stempel. J. W.,“Law of insurance contract disputes”, Volume 2. New York: Aspen Publsiher.pp 14A-26.1
45
defective performance is rendered.29 It provides that an owner may recover the
reasonable cost of remedying defective work if that cost is not clearly
disproportionate to the owner’s loss in value. If the cost is disproportionate to the
loss in value, then damages are limited to the diminution in value of the property.
In addition, numerous state courts have utilized the economic waste rules.30
As shown in Granite Construction Co v United States31, this principle has also been
applied in cases involving government contracts. The economic waste doctrine
applies only when the nonconforming materials are acceptable for the purpose
intended, the mistake was unintentional and requiring the contractor to bring the
work into strict compliance with the contract documents would involve substantial
destruction of work in place.
3.6 Measuring Value Diminution
An appraiser is most often retained in real estate damage cases to assist in
measuring value diminution.32 Undamaged value is often a starting point for this
analysis, providing an upper limit to damage claims, and also a basis from which to
apply percentage deductions for diminution, if applicable.
Property value diminution is frequently measured using case studies, where
properties with a particular attribute (e.g., a history of geotechnical problems or
29
Connell, L. R., & Callahan M. T., “Construction Defect Claims and Litigation. USA: John Wiley &
Sons, 1995, pp. 190 30 Ibid 31 962 F.2d 998, 37 Cont.Cas.Fed. (CCH) P 76,290 32
Sanders, M. V., “ Value Diminution as a Measure for Property Damages.”, 2000, Retrieved on May 28, 2011 from www.realestatedamages.com/pdf/ValueDiminution.pdf
46
environmental contamination) are compared with otherwise similar properties
lacking such attribute.33
Significant differences relative to price and/or marketability would tend to
support the existence of a value impact, while lack of measurable differences might
suggest little or no diminution. While case study properties need not be directly
comparable to the subject, it is important that they bear some similarity with respect
to the attribute under study. In some cases, the subject itself may have sold or
experienced other market activity (or lack thereof) which would make it suitable for
study.34
Case studies may be individual properties, which are often analyzed using a
standard adjustment grid format. For example, a case study property with a history of
geotechnical problems that sold for $1,000,000 might be compared to three
otherwise similar properties without geotechnical disclosures which sold for,
adjusted prices of $1,200,000-1,300,000, suggesting a discount of approximately 17-
23%. Ideally, several such case studies would be used to provide conclusive
evidence of value diminution, or lack thereof.
Multiple property case studies involve the analysis of a group of relatively
homogeneous damaged properties, which are compared to other groups of
undamaged properties to evaluate possible differences in price, sales velocity or
other measures of market activity. This type of analysis is often useful in class
actions and residential construction defect cases involving large numbers of
plaintiffs, using statistical measures of central tendency and time trending.35
33 Sanders, M. V., “ Value Diminution as a Measure for Property Damages.”, 2000, Retrieved on May 28, 2011 from www.realestatedamages.com/pdf/ValueDiminution.pdf 34 Ibid 35 Ibid
47
Multiple property studies are particularly amenable to graphical analysis,
which is especially helpful in allowing a layman to see a visual picture of complex
mathematical relationships. Graphical time series analysis also allows the appraisal
expert to examine the subject's market behavior relative to critical events, such as
when alleged problems became known, suit was filed and disclosure became
mandatory, etc.
3.7 Conclusion
In conclusion, based on the discussion above, it is learnt that the diminution
in value is the difference in the market value of a property without a damage or
defect and the market value of the same property with the damage or defect. In the
context of contract law, it refers to a breach of contract causing the decrease in value
of property due to the failure to construct something exactly as specified in the
contract.
In construction or mining cases, courts frequently measure the damages of
the innocent party either by the diminution in market value at the time of breach
from less than a perfect performance or by the cost of rendering performance
contract. The diminution measure is objective that is observes external to the contract
such as the judge in a lawsuit can ascertain its amount with reasonable accuracy at an
acceptable cost.
CHAPTER 4
MEASURE OF DIMINUTION IN VALUE
4.1 Introduction
This chapter will be the core chapter for the study. The study is carried with
the analysis of court cases relating to the basis of how the courts measure the
diminution in value for the construction defects. The relevant court cases chosen in
this research are extracted from the database of Lexis Nexis website. The court cases
analysis will only focus on the selected court cases which deal with the diminution in
value in the construction defects.
4.2 Measure of Diminution in Value
To discuss the issue of the basis of measuring the diminution in value in
construction defects, the following cases had been selected and discussed in detail as
below:
49
No. Cases
1 McBlain v McCollum and Others
2 Grossman Holdings Ltd v Hourihan
3 Mahtani & Ors V Kiaw Aik Hang Land Pte Ltd
4 Heninger v Dunn
5 Orndorff v Christiana Community Builders
6 St. Louis LLC v. Final Touch Glass & Mirror, Inc
7 Aerospace Publishing Ltd and another v Thames Water Utilities Ltd
8 Bellgrove v Eldridge
9 Westpoint Management Ltd v Chocolate Factory Apartments Ltd
10 Ruxley Electronic And Construction Ltd v Forsyth
11 Heine v. Parent Construction, Inc
12 Liew Choy Hung v Shah Alam Properties Sdn Bhd
Table 4.1: List of Cases Related With the Measure of Diminution in Value
4.2.1 McBlain v McCollum and Others1
The plaintiffs were very attracted to 3 Strangford Gate and, in the course of
giving evidence, Gary McBlain described the premises as their dream home. They
moved into 3 Strangford Gate on 5 January 1996, but within about 4-5 weeks the
first defect became apparent when the main staircase started to become detached
from the wall. Arrangements were made for someone to attend in order to repair the
staircase, but when that person arrived he confirmed that the damage was so
extensive as to be beyond his capabilities.
1 (2000) NIHC 51
50
The plaintiffs' contacted Newtownards Building Control and, when the
inspectors attended, they informed the McBlains that no final Building Control
Approval Certificate had ever been obtained. Within a relatively short period of time
significant damp appeared in the front living room, the dining room and a child's
bedroom above the living room. In cross-examination Mr McBlain agreed that, by
November 1996, he appreciated that it would cost approximately L9,600 to carry out
the remedial work sought by Newtownards Borough Council before it would
consider granting the appropriate certificate, but he said that he would not have been
prepared to spend this money because there was no guarantee that, even if the work
was done, a Certificate would be forthcoming, he would not have been able to raise
the money and he and his wife believed that a great deal more work was necessary.
Both sides called expert chartered surveyors in relation to the defects which
have developed in the subject premises. Agreement was reached between the experts
that the cost of repairing the problems with the damp-proof course, the rain water
goods, the roof lead work, staircase, the external manholes and the ventilation in the
roof space would amount to L7, 600. There were two areas of disagreement which
related to repairs to the cavity walls, with the associated insulation, and the structure
of the ground floor.
Expert valuers were also called by both sides with regard to diminution in
value. The relevant differential in value at the time of purchase had been established
at L30, 000. The cost of necessary repairs assessed by the plaintiffs' witnesses, came
to L39, 350. Such a figure significantly exceeds the diminution in value at date of
purchase and to use it as a basis for compensation would provide the plaintiffs with a
bargain which would not have been available even if the defendants had properly
performed their contract and would permit recovery upon a warranty basis.
The plaintiff representative submitted that the plaintiffs should be
compensated by reference to the present day value of the house as it stands and the
present value of the comparable type of house which the plaintiffs would have
51
bought as an alternative if the contract had been properly performed by the
defendants. However, the judge referred to the decision of the Court of Appeal in
Perry v Sydney Phillips & Son2 thus rejected such submission.
The judge held that accordingly, it seems to the court that the proper basis
upon which to compensate the plaintiffs was the diminution in value at the date of
purchase, namely, L30, 000.
4.2.2 Grossman Holdings Ltd v Hourihan3
Late in October 1978 the owner contracted with contractor to purchase a
house to be built in a planned development. Both the model and the office drawings
showed the house with a southeast exposure, and the contract stated that the
contractor would construct the house "substantially the same" as in the plans and
specifications at the seller's office or as the seller's model. In December a new
drawing went on display in the contractor’s office. It showed, among others, the
owner’s lot and their soon-to-be-built house; unfortunately, the house in the new
drawing faced the opposite way from what they expected and wanted.
The owner brought this discrepancy to the attention of contractor's employees
and remonstrated against construction of a mirror image of the house they had
contracted for. In spite of the contractor's objections, the contractors refused to
change their plans and began constructing the house depicted in the December
drawing. The owner then sued in circuit court for breach of contract.
2 [1982] 3 All ER 705 3 414 So. 2d 1037 (Fla. 1982)
52
The trial court barred the owners from recovering any damages because the
repairs would had been economically wasteful and out of proportion to the good to
be attained and because the value of the house had increased since the date of the
contract. The court of appeals held that the economic waste doctrine did not apply to
residential construction and that the proper amount of damages would be the amount
necessary to make the house conform to the original plans and specifications.
The Florida Supreme Court reversed this ruling and held that he proper
damages for any defective residential or commercial construction is either the
diminution in market value or reasonable cost of repair so long as the repair costs do
not entail unreasonable economic waste.
The court held that the reconstruction of the particular structure would be
economic waste therefore the proper measure of damage was the difference in value
between the house contracted for and the house received. The fact that the house had
increased in value by the time of the suit did not bar the owner from recovering. The
owner was entitled to recover the difference in value on the date of the delivery of
the house.
4.2.3 Mahtani & Ors V Kiaw Aik Hang Land Pte Ltd4
In Mahtani, the plaintiffs bought a flat from the defendant developers where
by clause 8 of the sale and purchase agreement, it was provided that the developers
undertook to construct the flat itself, the building project and the common property
in a good and workmanlike manner. The purchase was financed through a mortgage
loan.
4 (1995) 1 SLR 168
53
Subsequently, the building which the plaintiffs’ unit was part of was declared
to be dangerous by the Building Authority which resulted in need to carry ou the
remedial works to the building. In the meanwhile, the plaintiff’s flat was sold in a
mortgage sale because the plaintiffs defaulted in the payment of the installments due
to the mortgage. The flat was sold in a sale by auction in August 1987. The remedial
work works were completed in August 1991 and the plaintiffs were no longer the
owners of the flat and accordingly did not incur any of the cost for the remedial
work.
It was noted by the court that the repairs were economically feasible and were
in fact carried out. However, the repairs were not carried out by the plaintiffs. After
the sale, the plaintiffs sued the developer for their failure to construct the flat and the
building in which it was contained in a good and workmanlike manner and claimed
for the diminution in the value of the flat.
The defendants on the other hand defended the action by arguing that the
plaintiffs were not entitled to any damages as they were no longer in ownership of
the property. The court found that the defendants were in breach to construct the flat
in a good and workmanlike manner and the plaintiffs need not be in the ownership of
the property in order to recover the damages.
The court found that in those circumstances it would not be correct for the
court to measure damages by using the cost of repair basis. The court then held that
the diminution of value basis is the appropriate basis. The defendants could not insist
that in order to entitle themselves to claim damages, the plaintiffs must hold on to
ownership of the house whatever the other pressures on them maybe.
The court held that the measure of damage should be the difference between
the value of the flat without the defects and the value of the flat with the defects as at
the date of when the plaintiff became aware of the defects.
54
4.2.4 Heninger v Dunn5
In this case, the defendants bulldozed a road over the plaintiffs' land. The
road damaged or killed 225 of plaintiffs' trees and destroyed much vegetative
undergrowth. However because of improved access the trial court found the road
actually increased the value of the land from $179,000 to $184,000. The trial court
also found it would cost $221,647 to replace the dead or dying trees and that the
undergrowth could be restored for $19,610. Because the value of the property had
been increased, the trial court denied the plaintiffs any award of damages.
However, the Court of Appeal reversed and remanded. In rejecting the trial
court's decision, the Court of Appeal stated:
‘The rule precluding recovery of restoration costs in excess of
diminution in value is, however, not of invariable application.
Restoration costs may be awarded even though they exceed the
decrease in market value if there is a reason personal to the owner
for restoring the original condition.’
Although the Court of Appeal found that it would not be reasonable to award
the plaintiffs the $221,647 needed to entirely restore the land, ‘On retrial, the court's
determination whether a reasonable restoration is possible should focus on the
question whether an award of the cost of restoring the vegetative undergrowth (or
some other method of covering the scar on the land and preventing further erosion)
would achieve compensation within the overall limits of what the court determines to
be just and reasonable.’
5 (1980) 101 Cal.App. 3d 858
55
The court also discussed a number of cases from other jurisdictions which
allowed similar recoveries in cases involving destruction of shade or ornamental
trees which were of personal value to their owners.
‘Where such trees or shrubbery are destroyed by a trespasser, sound
principle and persuasive authority support the allowance to an
aggrieved landowner of the fair cost of restoring his land to a
reasonable approximation of its former condition, without necessary
limitation to the diminution in the market value of the land ....'
Here, the personal reason exception was adopted based on the plaintiff's simple
statement that ‘I think the land is beautiful, the natural forest beautiful, and I would
like to see it that way.’
If restoration of the land to a reasonable approximation of its former
condition is impossible or impracticable, the landowner may recover the value of the
trees or shrubbery, either as timber or for their aesthetic qualities, again without
regard to the diminution in the value of the land. The overall principles by which the
courts are to be guided are flexibility of approach and full compensation to the
owner, within the overall limitation of reasonableness.
Thus, the Court of Appeal held that:
"If the trial court determined that appellants had personal reasons
for restoring their land to its original condition, and that such a
restoration could be achieved at a cost that was not unreasonable in
relation to the damage inflicted and the value of the land prior to the
trespass, the court should have exercised its discretion to award
such restoration costs."
56
The rule precluding recovery of restoration costs in excess of diminution in
value is not of invariable application. Restoration costs may be awarded even though
they exceed the decrease in market value if there is a reason personal to the owner
for restoring the original condition. If the restoration of the land to a reasonable
approximation of its former condition is impossible or impracticable, the landowner
may only recover the reasonable costs of replacing destroyed trees with identical or
substantially similar trees.
4.2.5 Orndorff v Christiana Community Builders6
In this case, the home was found to be built on defectively compacted soil.
The plaintiffs presented evidence, and the trial court found, it would cost
$243,539.95 to repair the defects and relocate the plaintiffs while the necessary
repairs were being completed. Their appraiser testified that after their home was
repaired it will be worth $238,500. The trial court awarded the plaintiffs their repair
and relocation expenses as compensation for the damage caused by the defective
soil.
However, on appeal, the defendants, who stipulated the home was built on
defectively compacted soil, argued the trial court should have awarded the plaintiffs
only the amount by which the defects had diminished the value of the home. On
appeal, the defendants argued that the measure of damages in construction defect
cases was the lesser of the diminution in value caused by the defect or the cost of
repair. Since the plaintiffs’ appraiser testified the home was worth $67,500 without
repair and would be worth $238,500 following repairs, the defendants claim the trial
court had no power to award more than the $171,000 diminution in value established
by the plaintiffs’ appraiser.
6 (1990) 217 Cal.App. 3d 683
57
The defendants also argued the trial court erred because it gave the plaintiffs
an amount needed to repair the defect, rather than an amount needed to repair the
damage caused by the defect. However, the court found that the plaintiffs had a
personal reason to repair and the costs of repair were not unreasonable in light of the
damage to the property and the value after repair, costs of repair which exceed the
diminution in value may be awarded.
In this case, contrary to the defendants' argument, the personal reason
exception did not require that the plaintiffs to own a unique home. Rather all that
was required was some personal use by them and a bona fide desire to repair or
restore. There was no dispute the plaintiffs enjoyed the home they had occupied for
11 years and intended to repair it. To obtain reasonable repair costs they were not
required to make any further showing.
The court also found untenable the defendants' argument that by allowing
recovery in excess of diminution in value we would somehow distort the loss
distribution goals which the doctrine of strict liability in tort was designed to foster.
Therefore, the court awarded the repair costs in this case.
4.2.6 St. Louis LLC v. Final Touch Glass & Mirror, Inc7
In this case, the court examined the appropriate measure of damages for
defective construction. A husband and wife that was the plaintiff who were formed
by John Boulton and Prudence Boulton bought 48 acres of land in Franklin
Township, New Jersey. They hired an architect to design a two-story, 36,000 square
foot house with all of the exterior walls made of glass. The house was built on the
7 386 NJSuper.177, 899 A.2d 1018 (App.Div.2006)
58
property at a cost of $8.5 million. The plaintiff served as his own General Contractor,
and he hired defendant Final Touch to install the glass panels that would make up the
walls. There were numerous roof drains, vent pipes and other utilities, and these
were all designed to be contained within vertical steel columns which also supported
the house. The glass panels were to be attached to the steel columns with screws.
When the defendant attached the panels, it punctured nearly all of the pipes
contained within the columns. These pipes then leaked water into the house every
time it rained. Due to these defects, the plaintiffs could not live in the house, and
ultimately sold it during the litigation. The house was listed at $18 million, but after
more than a year, it was ultimately sold for $2.5 million, largely due to the existence
of construction defects.
At trial, Final Touch offered expert testimony that the house was only worth
$2.8 million, primarily because it was too big, and the local market would not
support a more expensive house. Plaintiff obtained a jury verdict it its favor of
$737,000. The defendant appealed, arguing that plaintiffs had not established
damages. On appeal, defendant raised the issue of;
a) This Court Should Vacate The Verdict And Dismiss St. Louis' Complaint
Because St. Louis Failed To Present Competent Evidence Of Damages As A
Matter Of Law.
b) The Law Division Should Not Have Permitted St. Louis to Use Cost of
Repair as a Measure of Diminution of Value.
c) Even if Cost of Repair was Used Properly as Evidence of Diminution of
Value, The Law Division Erred in Permitting Boulton to testify that the Cost
of Repair Was Equal to or less than the Diminution of Value.
59
Defendant argued that even if the cost of repair was an acceptable measure of
damages, the judge erred in permitting Boulton to offer lay opinion testimony on that
subject. Defendant asserted that homeowners were not permitted in New Jersey to
testify as to the value of their homes. It relied on Jacobitti v. Jacobitti8, and Torres v.
Schripps Inc9, In Jacobitti, supra, the court cautioned "trial judges against fixing
market value of real property without the benefit of expert appraisal evidence.
Nevertheless, in the absence of that evidence, the court declined to remand the matter
for proofs of the value of the marital dwelling and affirmed the trial judge's ruling
fixing the value.
The defendant’s position that plaintiff can only prove damages by showing a
decrease in market value was unduly rigid. The court then concluded that the cost if
repair was also an appropriate measure of damages. The judge ruled that the measure
of damages would be in diminution in value that could be established by cost of
repairs.
The court had before it evidence presented by plaintiff of the house’s
diminution in value as evidenced by the cost of repair $774 653 plus an additional
sum to repair or replace the roof. The judge stated that resorting solely to the
diminished market value standard would deny plaintiff adequate compensation for
defendant’s action.
Thus, the court concluded that for the defective construction, an acceptable
way of valuing the diminution was to look at the cost of repair the defects. The
appeal court held that the court did not err in ruling that the cost of repair was a
proper element to consider in ascertaining plaintiff's damages.
8 263 N.J. Super. 608 (App. Div. 1993) 9 342 N.J. Super. 419 (App. Div. 2001).
60
4.2.7 Aerospace Publishing Ltd and another v Thames Water Utilities Ltd10
This is an appeal on quantum. The question arose was how should one value
a private archive which has been damaged or destroyed. The archive was partly lost
and partly damaged. Although it is common ground that it is the diminution in value
of the archive that constitutes the amount of the claimants' loss, should that
diminution, on the facts of this case, be measured by reference to the difference in
the sale value of the archive before and after the loss or by reference to the cost of
reinstatement?
In this case, the Court of Appeal considered the appropriate measure of
damages where a flood for which the defendant was liable had damaged and
destroyed the claimants' valuable photographic archive (the Archive). The parties
agreed that the starting point was the diminution in value of the Archive, but
disagreed whether that should be assessed by reference to market value or
reinstatement cost.
The judge found that it was difficult to regard what may be called the strictly
economic value of the Archive as being the sole value of Archive. It was a labour of
dedication to build up and then catalogue the Archive in the first place. The fact that
it has an economic value in the sense of a commercial utility should not blind one to
the further fact that its value to the owner maybe greater than such sum as can be
obtained by selling it auctions. If the Archive was a famous and long established was
destroyed, it would be doubtful in the extreme to confine recovery to the resale value
of individual items.
The Court of Appeal held that the diminution in value of the Archive was the
reinstatement cost, confirming that, although a claimant did not have to prove that he
10 [2007] EWCA Civ; 110 ConLR 1
61
intended actually to reinstate in order to recover the cost of replacement, the cost of
replacement would rarely be awarded to a party who did not intend to reinstate in
fact. The Court awarded interest on the reinstatement sum from the date of the flood.
This case does not say anything new regarding the circumstances in which
the diminution in value of chattels is the replacement cost rather than the reduction in
market value, but it does resolve the apparent inconsistency regarding the question of
whether or not there has to be an intention actually to replace before the court will
award the cost of reinstatement.
Although this case follows the general rule that interest may be awarded from
the date of the loss, note that there is another Court of Appeal case (not referred to in
the judgment) on an analogous matter involving the conversion of a chattel in which
interest was awarded, not from the date on which the chattel was lost, but the date on
which it was replaced.
4.2.8 Bellgrove v Eldridge11
In this case, the builder had constructed a house with defective foundations,
using a lean concrete mix and lean mortar. The builder claimed that he could rectify
the works by underpinning and other methods, but the expert evidence inclined to
the view that complete demolition and reconstruction would be necessary to properly
rectify the works. Alternatively, the builder said that the owner could sell the house
"as is" for appreciably more than land value and others could then rectify it at a
lesser cost. The High Court awarded the owner the full cost of demolition and
11 (1954) 90 CLR 613
62
reconstruction, stating the following principles for assessing damages for breach of a
construction contract:
a) If it is necessary and reasonable to undertake the rectification work,
the true measure of loss is the cost of rectification;
b) In this circumstance the loss is not measured by comparing the value
of the building actually erected with the value it would have had if
erected in accordance with the contract;
c) If it is necessary to rectify to produce conformity with the contract,
but not reasonable to do so, the true measure of loss is any reduction
in value produced by the non conformity;
d) In any particular case, it is a question of fact whether rectification is
both necessary and reasonable.
The High Court determined that it was both necessary and reasonable that the
rectification work be performed. The expert evidence supported the conclusion that
the only satisfactory way of rectification was to demolish and rebuild the home. The
Court noted the owner might not demolish and rebuild the house and could end up
living in the defective house as well as receiving payment sufficient to demolish and
rebuild the home. The Court said that this was immaterial – the owner was entitled
to compensation for the breach of contract in accordance with the principles set out
above.
63
4.2.9 Westpoint Management Ltd v Chocolate Factory Apartments Ltd12
In this case, Apartments had purchased an old chocolate factory in Stanmore
NSW for redevelopment into 87 apartments with a view to selling the apartments on
completion. After the project was completed and sold, Apartments made a claim
against the builder for defective work. Other related claims were made that are not
dealt with in this update. The claim for damages arose from a failure by the builder
to comply with the plans and specifications by installing finishes of a lower standard
to those specified.
Apartments claimed the defects included the installation of a skirting board
with an incorrect profile, a reduced saleable mezzanine floor space and inadequate
mechanical ventilation. While there was debate as to whether some of the claimed
defects were proved, the Court proceeded to review the law on the assessment of
damages for defective work. Approximately 3,500 lineal metres of skirting board
had been installed in the apartments.
The material cost of the installed boards was $0.10 per metre less than the
board specified; a total of $350 difference in material cost for the whole project.
However, Apartments claimed the cost of rectification determined by the estimated
cost of removing the installed skirting boards and replacing them with the specified
boards - a sum of $112,815.
The NSW Court of Appeal considered the principles as in Bellgrove case
against the background of the Chocolate Factory Apartments and the claims for
compensation for defective work. The fourth principle in Bellgrove notes that it is an
issue of "fact" as to whether or not it is both necessary and reasonable to rectify
defects. The referee found as a matter of fact that it was not reasonable to carry out
12
(2007) NSWCA 253
64
the rectification works. For example, in the case of the skirting boards, there had
been no complaint by any purchaser as to the different profile and it would cause
massive disruption to the occupiers to remove and replace them.
There was no evidence that the sale of the apartments had been adversely
affected either as to time or price by the non conformance. The Court in considering
the appeal did not disturb this finding of the referee. Having concluded that it was
not reasonable to rectify the defects, the referee, following the principles set down in
Bellgrove, turned to consider whether evidence of diminution in value led to a
possible award of damages. However, the Apartments failed to lead evidence of any
diminution in value, it was not entitled to damages for the breach of contract. The
Court of Appeal declined to interfere with the finding of the referee and dismissed
the appeal.
4.2.10 Ruxley Electronic and Construction Ltd V Forsyth13
In this case, the contract was between the defendant employer and the
plaintiff the builder to build the swimming pool and a building. The contract
expressly provided that the maximum depth of the water in the pool should be 7 ft 6
in. after the work had been completed, the employer discovered that the maximum
depth was only 6 ft 9 in. The employer counterclaimed for breach of contract. The
trial judge found that the shortfall in depth had not decreased the value of the pool
and gave judgement for the plaintiffs on their claims but awarded the defendant
£2,500 for general damages for loss of amenity on his counterclaim. The defendant
appealed.
13 (1994) 3 All ER 801, (1994) 1 WLR 650, 36 ConLR 103
65
In the court of appeal, the court established that in the case of damages to a
building or a chattel, or breach of a contract whereby it does not have the
characteristic specified, there are potentially two available methods of measuring the
loss. The two methods are (i) the difference in value and (ii) the cost of rectification.
The court stated that the difference in value method is available and will
often be appropriate when the building or chattel which has been damaged or which
does not answer to the contract, is of a kind that commonly available. By contrast,
the difference in value may be inadequate when the loser’s building or chattel has
some unique quality and so cannot be replaced. In this condition, the cost
reinstatement would be awarded which is more than the difference in value.
Based on this case, the court found that no evidence to show that the
employer’s house was unique, nor was the evidence that employer had a particular
need to live at Cranbrook rather than anywhere else that a similar house can be found
with a proper swimming pool. So it might be thought that his claim was for the
difference in value. However it was accepted by the counsel for the employer that the
cost of moving house alone must exceed the sum £21, 560 which would be to replace
the swimming pool by the time the employer had paid estate agents, furniture movers
and solicitors and his furniture suffered the wear and tear that a move inevitably
entails.
The court therefore awarded £21, 560 as damages to the employer, to be
deducted from the balance of the price. The court held:
‘… on the facts, it would not be unreasonable to award as damages
as the cost of replacing the swimming pool in order to make good the
breach of contract even though the shortfall in the depth of the pool
had not decreased its value. The appeal would therefore be allowed
and the defendant would be awarded the sum £21, 560 as damages
against R, to be deducted from the balance of the contract price.
66
4.2.11 Heine v. Parent Construction, Inc.14
In this case, the defects consisted of improper elevation and potential
exposure to flood damage. The Heines contracted with Parent Construction, Inc. for
the construction of a home on John’s Island. The contract price was $840,825.58.
After the contractor brought suit against them, alleging they had failed to make the
final payment due under the construction contract, the homeowners counterclaimed,
alleging, among other defects, that their home had been built at an elevation of 7.5
feet instead of the contracted-for 8.5 feet.
The Heines insisted that, as damages for the elevation defect, they were
entitled to recover the cost to tear down the home and to rebuild it at the correct
elevation—$930,000 according to the Heines’ civil engineer. The contractor, on the
other hand, insisted that the cost to cure the elevation defect was unreasonable and
that under the economic waste doctrine, the proper measure of damages was the
diminution in the value of the home as a result of the lower elevation. According to
Parent Construction’ s real estate expert, the primary concerns for buyers in the
John’s Island area—where the home was built—are the view, the home’s flood
history, and the home’s insurability.
The Heines admitted the home had not suffered any flooding during
Hurricanes Frances, Jeanne, and Wilma. There was no evidence that the Heines had
any difficulty obtaining insurance. The Heines’ real estate expert opined that the
home’s lower elevation resulted in only a nuisance diminution in value of $25,000.
Following a bench trial, the judge found that the economic waste doctrine was
properly applied to the elevation defect and awarded $25,000 in damages for the
same.
14 2009 WL 763534 (Fla. 4th DCA 2009)
67
4.2.12 Liew Choy Hung v Shah Alam Properties Sdn Bhd15
In this case, the appellant owned a luxury home in Ukay Heights, Kuala
Lumpur. It is however seriously damaged by severe flooding and water-logging
which happen between the months of August to November 1981, and again between
February to March 1982. The damage was triggered by acts of nuisance and
negligence on the part of the respondent, Shah Alam Properties Sdn Bhd .
The appellant subsequently brought an action against Shah Alam Properties
Sdn Bhd in the Kuala Lumpur High Court for recovery of damages. Shah Alam
Properties Sdn Bhd did admit their liability in this very case. In respect to this, the
learned trial judge award RM 42,000 as special damages to the appellant to cover
cost of repair. However, the appellant’s another aspect of claim, which is RM 90,000
diminution in value of his home due to the nuisance and constant threat of
continuing flooding, was rejected by the court.
Consequently, for this decision, the appellant now appeals. In Supreme Court
of Kuala Lumpur, Judge Edgar Joseph JR FCJ had asserted that the learned trial
judge approach to measure of damages was extremely rigid. He did not agree with
the leaned trial judge that diminution in value was the true measure of damages only
if the appellant was selling or reasonably intending to sell the property in its
damaged state or where it can be established that the appellant was holding on the
property merely for investment purpose.
The judge had later affirmed that the sum of RM90, 000 which was estimated
by the expert engaged by appellant to recover diminution in value of his home was
not excessive and was correct in principle. He subsequently holding that the appeal
was allowed but only to the extent that the quantum of damages awarded by the
15 [1997] 2 MLJ 309
68
learned trial judge is increased by the addition of an award of RM90,000 by way of
diminution in value of the appellant’s home by reason with the stigma of flood that
attaching to it.
The judge further noted that learned trial judge has failed to take into the
consideration that land has a reputation. He stressed that because the appellant home
was prone to flooding, it caused the land of where the appellant’s house situated had
a bad reputation. Therefore, he hold that the appellant was entitled to diminution in
value as a form of recovery of damages and it was not important whether the
appellant was in occupation of it, because the appellant would eventually sell it.
4.3 Summary of the Case Analysis
Item Cases Measure of Diminution in Value
1 McBlain v McCollum and
Others
• The judge held that accordingly the proper
basis upon which to compensate the
plaintiffs was the diminution in value at
the date of purchase and not to the present
day value of the house as it stands.
2 Grossman Holdings Ltd v
Hourihan
• The reconstruction of the particular
structure would be economic waste
therefore the proper measure of damage
was the difference in value between the
house contracted for and the house
received.
• The owner was entitled to recover the
difference in value on the date of the
delivery of the house.
69
• The court stated that the measurement was
to be determined at the date of breach.
• Fluctuations in value after breach did not
affect the measure recovery.
3 Mahtani & Ors v Kiaw Aik
Hang Land Pte Ltd
• The defects were latent rather than the
patent and it took time for them to appear
and a result the plaintiff did not and could
not have discovered the breach at the time
or shortly after they purchased the flat.
• Thus, the measure of damage should be
the difference between the value of the flat
without the defects and the value of the
flat with defects as at the date when the
plaintiff became aware of the defects.
4 Heninger v Dunn • The personal reason exception was
adopted based on the plaintiff's simple
statement that ‘I think the land is beautiful,
the natural forest beautiful, and I would
like to see it that way.’
• Restoration costs may be awarded even
though they exceed the decrease in market
value if there is a reason personal to the
owner for restoring the original condition.
• If the restoration of the land to a
reasonable approximation of its former
condition is impossible or impracticable,
the landowner may only recover the
reasonable costs of replacing destroyed
trees with identical or substantially similar
trees.
5 Orndorff v Christiana
Community Builders
• The court found that the plaintiffs had a
personal reason to repair and the costs of
repair were not unreasonable in light of the
70
damage to the property and the value after
repair, costs of repair which exceed the
diminution in value may be awarded.
• Therefore, the court awarded the repair
costs.
6 St. Louis LLC v Final
Touch Glass & Mirror, Inc
• Resorting solely to the diminished market
value standard would deny plaintiff
adequate compensation for defendant’s
action.
• The cost of repair was also an appropriate
measure of damages and could be used as
a measure of diminution in value.
• Thus, the judge ruled that the diminution
in value could be established by the cost of
repairs.
7 Aerospace Publishing Ltd
and another v Thames
Water Utilities Ltd
• The diminution in value of the Archive
was the reinstatement cost, confirming
that, although a claimant did not have to
prove that he intended actually to reinstate
in order to recover the cost of replacement.
• The rarity and interest of the item in the
Archive itself gave it a value in damages
greater than its market value and created
the right to damages on a reinstatement
basis.
• The Court awarded interest on the
reinstatement sum from the date of the
loss, not the date of repair.
8 Bellgrove v Eldridge • The High Court determined that it was
both necessary and reasonable that the
rectification work to be performed.
• The court states the principles in assessing
the damages based on:
71
‘If it is necessary and reasonable to
undertake the rectification work, the true
measure of loss is the cost of rectification’
• The High Court then awarded the owner
the full cost of demolition and
rectification.
9 Westpoint Management Ltd
v Chocolate Factory
Apartments Ltd
• The Court of Appeal has affirmed the
principle in Bellgrove v Eldridge that an
owner is entitled to the costs of
rectification of building defects provided
that such a course is a necessary and
reasonable one to adopt.
10 Ruxley Electronic And
Construction Ltd v Forsyth
• No evidence to show that the employer’s
house neither was unique, nor was the
evidence that employer had a particular
need to live at Cranbrook rather than
anywhere else that a similar house can be
found with a proper swimming pool.
• The court therefore awarded the cost of
rectification as damages to the employer,
to be deducted from the balance of the
price.
11 Heine v. Parent
Construction, Inc.
• The court held that the homeowner was
entitled the diminution in value was based
on the difference between the house if it
had been built correctly and the house as-
built.
• The difference was measured based on the
primary concerns for buyers in the area
where the home was built, which are the
view, the home’s flood history, and the
home’s insurability.
• Therefore, the diminution in value was
72
only based on the nuisance principle that
was, resulted from home’s lower elevation.
12 Liew Choy Hung v Shah
Alam Properties Sdn Bhd
• Diminution in value of the appellant’s
home was measured based on the reason
of nuisance and the stigma of flood that
attaching to it.
Table 4.2: Summary of the Case Analysis
4.4 Findings Analysis
4.4.1 Difference in Value of the Building as a Measure of Diminution in Value
From the cases analyzed above, it shows that from twelve (12) cases, there
are three (3) cases which the courts measured the diminution in value based on the
difference between the value of the buildings that without the defects and the value
with the defects or the difference in value between the buildings contracted for and
the buildings received.
Prima facie rule is to assess the damages at the date of the breach unless there
is a good reason to postpone to a later date. One of the reasons the prima facie rule
should be displaced is where the defects were latent rather than patent and it took
time for them to appear. Such example was held in the case Mahtini where the court
held that the plaintiffs did not and could not have discovered the breach at the time
or shortly after they purchased the flat thus, the date to assess is when the plaintiffs
became aware of the defects.
73
The court will award the difference in value of the building as a measure of
diminution in value if;
a) The building is of a kind that is commonly available.
b) The repair cost would involve unreasonable economic waste.
4.4.2 Cost of Repair/ Cost of Rectification/ Cost of Reinstatement / Cost of
Restoration as a Measure of Diminution in Value
For the other seven (7) cases, the courts measured the diminution in value
based on the cost of repair, cost of rectification and cost of reinstatement. Among the
reasons of such basis are;
a) For certain cases and circumstances, resorting solely to the diminished
market value standard would deny plaintiff adequate compensation for
defendant’s action.
b) The rarity and interest of the item in the building itself gave it a value in
damages greater than its market value and created the right to damages on a
reinstatement basis.
c) The building has a unique quality and could not be replaced.
d) Restoration or reinstatement costs may be awarded even though they exceed
the decrease in market value if there is a reason personal to the owner for
restoring the original condition.
e) If it is necessary and reasonable to undertake the rectification work, the true
measure of loss is the cost of rectification
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4.4.3 Potential Loss Due to Nuisance as a Measure of Diminution in Value
Besides measuring the diminution in value based on the measure above, two
(2) cases from the analysis shows that the court also may award the owner or
employer the diminution in value based on the potential loss due to nuisance
principle. This related in the case where when there is defect resulted from the
incorrect elevation and potential exposure to the flood damage.
Thus, regarding to Clause 48.3 PWD 203A 2007, the diminution in value of
the works due to the defects can be measured or ascertained by the superintending
officer based on the measure held by court as analyzed above. The amount of such
diminution may then be deducted from the money remaining to be paid to the
contractor or from performance bond.
4.5 Conclusion
From the analysis above, it shows that several measures are determined by
court in assessing the diminution in value. The different facts in each case are the
factor for the different judgment by the court. The employer or owner entitles to cost
of rectification or cost of reinstatement of defective work based on certain
circumstances. For example, the rarity and interest of the item in the building itself
gave it a value in damages greater than its market value and created the right to
damages on a reinstatement basis.
The diminution in value also can be measured based on the difference of the
value of the buildings without the defects and the value with the defects, based on
circumstances that would be determined by the judge. Besides that, the valuation on
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diminution in value also can be based on the potential loss due to nuisance in which,
such condition may result the owner or the employer to an uncomfortable condition
for example, the wrong elevation of the house contracted for.
The circumstances in the cases above then may be the guideline for the
contract administrator or the employer to ascertain the diminution in value of the
works due to the defects. In conclusion, based on all the cases analysis, the objective
of this study to identify the measure of diminution in value determined by the court
is achieved.
CHAPTER 5
CONCLUSION AND RECOMMENDATIONS
5.1 Introduction
This chapter is the last chapter that highlights the finding of the research
according to the research objective. In addition, this chapter also contains the
problems encountered during the research as well as the recommendations for future
researches.
5.2 Findings
The objective of this study to identify the measure of diminution in value for
construction defects is achieved in Chapter 4. The findings of this research suggested
that there are several measures of diminution in value determined by the court as
follows;
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a) Difference in Value of the Building as a Measure of Diminution in Value
There are circumstances in which the court will determine the
diminution in value based on the difference between the value of the
buildings that without the defects and the value with the defects.
Prima facie rule is to assess the damages at the date of the breach
unless there is a good reason to postpone to a later date.
One of the reasons the prima facie rule should be displaced is where
the defects were latent rather than patent and it took time for them to
appear. In this case the court held that the plaintiffs did not and could
not have discovered the breach at the time or shortly after they
purchased the flat thus, the date to assess is when the plaintiffs
became aware of the defects.
The court will award the difference in value of the building as a
measure of diminution in value if;
i. The building is of a kind that is commonly available.
ii. The repair cost would involve unreasonable economic waste.
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b) Cost of Repair/ Cost of Rectification/ Cost of Reinstatement as a
Measure of Diminution in Value
For the cost of repair and cost of rectification or cost of reinstatement
as a measure of diminution in value, it would be granted to the
employer in which if resorting only to the diminished market value
standard would deny the employer or owner the adequate
compensation for defendant’s action.
The court will grant such costs if;
i. The rarity and interest of the item in the building itself gave it
a value in damages greater than its market value.
ii. The building has a unique quality and could not be replaced.
iii. Restoration or reinstatement costs may be awarded even
though they exceed the decrease in market value if there is a
reason personal to the owner for restoring the original
condition.
iv. If it is necessary and reasonable to undertake the rectification
work, the true measure of loss is the cost of rectification
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c) Potential Loss Due to Nuisance as a Measure of Diminution in Value
The court also may measure the diminution in value based on the nuisance
principle that such condition may result the owner or the employer to an
uncomfortable condition for example, the wrong elevation of the house
contracted for. In this condition, the diminution in value of the building will
be valued based on the potential loss due to the nuisance resulted from the
defects.
5.3 Problem Encountered During Research
The main problem of this study is the time constraint. It is insufficient of time
with the only eight weeks of duration provided for this research to be done. Thus,
everything needs to be done rapidly, from the data collection process up to the data
analysis process. It is thus beyond the capacity of this research to consider in detail
of each measure of diminution in value for construction defects. This limitation has
led to less cases being discovered to support the findings, especially those cases
decided in Malaysia courts.
Thus, only leading cases with salient points were included to support the
findings. If there were extra time given, perhaps the measure of diminution in value
for construction defects could be illustrated in a more comprehensive and thorough
way.
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5.4 Recommendation
It is suggested that the principle to ascertain the diminution in value of the
works due to the defects should be provided in the standard form of contract. The
purpose is to provide the guideline on how to measure the diminution in value for the
defective works.
5.5 Future Research
Besides having the right in to ascertain diminution in value of the works due
to the defects, the employer also has the right to employ other contractors to rectify
the defect if the original contractor fails or refuses to remedy the defects and the cost
which incurred by employer is recovered from the original contractor by making
appropriate deduction from contract sum.
However, the same issue arises in this situation. There is also no definition of
an appropriate deduction. It is often contended by the employer that it is the cost to
the employer of having the defect rectified by the others. The contractor on the other
hand will argue that the deduction should be the cost which the contractor would
have expanded on making good. Thus, a further study can be executed on how does
the appropriate deduction to be determined.
Besides that, a further study on the circumstances that allow the employer to
choose the diminution in value rather than to choose to rectify the defects also may
be executed.
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5.6 Conclusion
In construction, defect is defined as a component supplied or constructed
which is in some respect not in accordance with the contract or as some action
having consequences not authorized by the contract. It is the failure of the building
or any building component to be erected in a reasonably workmanlike manner or to
perform in the manner intended by the manufacturer or reasonably expected by the
buyer which proximately causes damage to the structure.
It is very nature that the standard form of contract to include defects liability
provision. The clause will impose the obligations upon the Contractor to make good
defects. This would ordinarily be to the Contractor’s advantage given that this is
likely to be less costly than providing an indemnity to the Employer against the cost
of having another contractor to remedy the defective work. The defects liability
period clause is inserted for the benefit of both parties. It allows period of time for
defects to be remedied with the minimum fuss.
This provision provides the action that can be taken by the employer in the
event of contractor’s default in rectifying the defects. There seems a little doubt that
if the contractor refuses to make good the defects on the schedule or if it does not
expressly refuses but simply does not make good, the employer would be able to
instruct the contractor not to make good and the appropriate deduction is to be made
from contract sum. Alternatively, the employer may ascertain the diminution in value
of the works if in his opinion that the defects should not be inconvenient to be
rectified. The amount of such diminution then shall be deducted also from the
contract sum or amount due to the contractor.
The calculation of diminution in value will vary from case to case sometimes
they will pegged to the cost of remedying the defects while at other times they will
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be pegged to the difference in market value resulting from the defects occur. As long
as the defects can be remedied without unreasonable economic waste, the owner or
the employer will be entitled for the diminution in value measured by the cost of
such remedial work. If, on the other hand, the defects are so hard to rectify that the
cost of rectification would be much greater that the increase in value resulting from
the rectification for instance that would involve unreasonable economic waste, then
the owner will be entitled for the difference in market value of the work.
Based on the cases analysis, it suggested that there are several measures that
taken by the court to determine the diminution in value. The measures are; the
difference between the value of the buildings that without the defects and the value
with the defects, cost of repair, cost of rectification, cost of reinstatement and the
potential loss due to the nuisance and constant threat of continuing flooding or other
damages result to an uncomfortable condition.
Perhaps, there are other measures of diminution in value are available in law.
However, due to insufficient of time, it is impossible to search and detail one by one
here. In short, this study is done to identify the common measure of diminution in
value that available in respect of breach of contract of defective building work and
hope it may assist the industry players, particularly building owner to realize the
legal measure adopted for claim upon breach of contract for defective building work.
83
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