Case Digest: Singapore High Court upholds common law right to damages despite failure to follow defects liability provisions

In Thio Keng Thay v Sandy Island Pte Ltd [2019] SGHC 175, the High Court of Singapore upheld a plaintiff’s common law right to recover damages for the cost of remedying defects, as this right had not been expressly excluded in the contract. This decision is consistent with the English law position, which allows an employer to recover damages when the defective works amount to a breach of contract and there is no express term in the contract excluding the right to damages. It is therefore a useful reminder to contractors and employers alike that clear and express contractual language is needed in order to exclude common law rights to damages.

For employers, the judgment provides clarity over the financial consequences of instructing another contractor to remedy defective works. For contractors, the decision confirms that they are only liable for the costs that would have been incurred had they undertaken the work, rather than the actual cost incurred by a replacement contractor.

Background

By way of a contract, the plaintiff purchased a property from the defendant, who had been the property developer. The plaintiff claimed the property had been constructed with defects and sought to recover the costs of rectifying the defects.

The defendant argued that it had a contractual right to rectify any defects within the defects notification period, but that the plaintiff had prevented it from doing so. Therefore, the defendant submitted that the plaintiff was not entitled to recover damages in respect of defects which it would have rectified, had the plaintiff allowed it to.

Decision

The High Court found that the plaintiff’s breach of the defects liability clause in the contract did not preclude it from recovering damages for defective works. This was on the basis that the plaintiff’s common law right to damages should not be extinguished due to a failure to follow the requirements of the defects liability clause, unless this was a consequence expressly stated in the contract.

The High Court also found that where the defendant had admitted to the existence of general defects, there had been a failure to construct the property in a good and workmanlike manner, which amounted to a breach of the contract. However, the precise quantum of the damages was not decided upon and a second tranche of the trial will follow. It was indicated that the plaintiff’s breach, by failing to follow the requirements in the defects liability clause, would result in a reduction in the damages awarded. This reduction would reflect the possibility that the defendant could have completed the remedial works at a lower cost than the plaintiff’s contractor.

Key takeaways

Even where the employer retains its common law right to recover damages, in practice, there may be little financial benefit in pursuing the claim if subcontracts have been drafted in such a way that most, if not all, rectification costs are flowed down to the subcontractors.

For contractors, this decision confirms that their liability is limited to the cost of remedying the defects had they been granted the opportunity to undertake the work, rather than the actual cost incurred by a replacement contractor. It would be prudent for contractors to retain good records, potentially even after having left a project, in case they are in a position where an employer makes a claim for damages and they are required to substantiate the costs they would have incurred.

The Singapore High Court’s decision is consistent with two Court of Appeal authorities on damages for defects, (Management Corporation Strata Title Plan No.1933 v Liang Huat Aluminium Ltd [2001] 2 SLR(R) 91 and Pearce and High Ltd v Baxter [1999] CLC 749), which confirm that, unless a contract expressly excludes the common law right to damages, the courts will uphold an employer’s right to recovery.

James Doe
James Doe
Partner and UK Head of Construction & Infrastructure Disputes, London
+44 20 7466 2583
Elissa Patel
Elissa Patel
Associate, London
+44 20 7466 7586

Singapore Convention on mediated settlements a welcome development for the construction sector

On 7 August 2019, Singapore hosted the signing ceremony for the United Nations Convention on International Settlement Agreements Resulting from Mediation. Now known as the Singapore Convention, 46 countries have signed the convention to date.

The Singapore Convention applies to settlement agreements resulting from mediations resolving cross-border commercial disputes. It provides a standardised framework for enforcement within signatory states, in a manner analogous to the New York Convention for the recognition and enforcement of arbitration awards.  You can read our commentary on the Singapore Convention here and here.

The introduction of the Singapore Convention should come as a welcome development for the construction sector.

Construction disputes are often complex, fact and document intensive and require various fields of expert evidence when pursued through to a full and binding determination by an arbitral tribunal or court.  This can result in the parties expending significant time and costs to obtain a final determination.

However, many construction disputes may be ideally suited to mediation at an early stage, thereby avoiding the time, cost and risk of proceeding through an entire formal dispute resolution procedure.  That is particularly the case where a construction contract requires the parties to provide detailed particulars of their claims at an early stage of the dispute resolution process, so that the parties can be in a position to understand the merits and risks of each party’s position early on in the lifecycle of a dispute.

Mediation can also provide a useful tool for resolving related disputes at different levels of a project in a single forum by bringing together the owner, contractor, sub-contractors, professionals and insurers in a cost-effective environment.

The mediation process is usually short, and cost effective.  Mediation sessions usually take no more than a day or two and can be arranged as soon as the parties are ready. Not only does mediation in this way preserve the momentum of a project (particularly where claims arise during the course of construction), but it also ensures the continuity of positive commercial relations between the parties.

For this reason, construction contracts (particularly for larger projects) also sometimes contain multi-tiered dispute resolution frameworks. Such frameworks ordinarily provide that parties must first use more cooperative dispute resolution processes (e.g. negotiation and/or mediation) before escalating to more adversarial alternatives (e.g adjudication, arbitration or litigation).

Mediation is a common tier in multi-tiered dispute resolution frameworks and some standard form industry contracts also contemplate the use of mediation as a part of such a multi-tiered framework.  For example, certain JCT forms and the AIAC Main Contract include mediation provisions.  However, care should be taken when drafting these frameworks into a construction contract.  You can find our guidance on multi-tiered dispute resolution clauses and dispute avoidance here.

A further feature of construction disputes is that they often involve a cross-border element. Whether this is the procurement of equipment or services from outside the country where the project is being developed, or where a contractor is foreign to the place of the project owner.  A good example of such projects are those arising from China’s Belt and Road initiative.  We have previously discussed the suitability of mediation to disputes specifically arising under China’s Belt and Road Initiative here and, more recently, here.

In these cross-border scenarios, the settlement of disputes by mediation may give rise to issues of enforceability.  This is where the introduction of the Singapore Convention may have its greatest impact, by improving the enforceability of mediated settlement agreements without the need to re-litigate or arbitrate the dispute.

The initial signatories include China, India and the U.S.A., as well as many other countries that are significant for international construction projects and activity.  The complete list of initial signatories can be found here.  It does not include any EU countries, but this was said to be only a procedural matter of whether the Convention should be signed by individual EU nations or by the EU on their behalf. While it remains to be seen how many states will sign up to the Singapore Convention and how its principles will be enacted in domestic legislation and applied by domestic courts, it is hoped that the Singapore Convention will in time encourage parties to engage in mediation as a useful tool for the time and cost effective resolution of cross-border construction disputes.

For more information please contact Alastair Henderson, Partner, Dan Waldek, Of Counsel, or your usual Herbert Smith Freehills contact.

Alastair Henderson
Alastair Henderson
Managing Partner, Southeast Asia
+65 686 88058
Daniel Waldek
Daniel Waldek
Of Counsel, Singapore
+65 686 88068