A recent judgment of the High Court of Fiji has discussed and clarified the operation and legal effect of defect liability clauses in construction contracts.

This Judgment adds to Fiji's jurisprudence for construction law and emphasizes the importance of construction law contracts particularly when things don't go to plan.

We provide a short update in relation to important legal points that have arisen from the High Court's Judgment. The Judgement was also reported in Fiji's national press here

Brief Background

Dr and Mrs Seidman contracted Pacific Building Solutions (PBS) a Fiji based construction company to construct a substantial residence for them on a plot of land on the beautiful Island of Taveuni, Fiji. PBS agreed to design and build the residence and the parties signed a design and build contract.

Concerns and dispute

The parties disagreed on a number of building issues in relation to the construction of the residence, and in the case of Seidman v Pacific Building Solutions Ltd [2021] FJHC 114; HBC78.2017 (12 February 2021),  Dr and Mrs Seidman brought legal action for breach of contract, alleging fundamentally defective construction of a residence, in particular, the pole foundations.

The issues with the pole foundations was notified to PBS after the expiry of the defects liability period and this gave rise to a question involving apparent and latent (hidden) defects.

Apparent and Latent Defects

By way of background, most construction contracts provide for a defects liability period. This is a period, beginning after the completion of the construction works, where the owner can notify the builder of any defects in the works and the builder then has an opportunity to remedy those defects at the builder's own costs. It is usually to the advantage to both parties to have a defects liability clause in their construction contract to enable the amicable completion of the construction to the expected standard.

Due to the nature of construction, some defects are immediately apparent, such as broken windows, or broken tiles or poor painting at the conclusion of the construction and these can be notified to the builder. These are known as "Apparent Defects".

However, other defects in the construction won't be immediately apparent, and present themselves at a later date. For example, this could include foundation construction issues that leads to cracks in the building or issues with damp. These types of defects in the construction are harder to detect and usually only become apparent after some time, and in some cases after a few years. These are known as "Latent Defects". Latent Defects may become apparent after the expiry of the defects liability period in the Construction Contract.

The Seidman V Pacific Building Solutions Ltd case turned on a point of "Latent Defect". This is because cracks in the residence only became apparent following the expiry of the defects liability period and these cracks were caused by defective construction of foundation pillars of the residence.

PBS provided in defence that:

1. the defects in the foundation were only notified to PBS after the expiry of the defects liability period; and

2. the owners were limited in their remedy to allow PBS to remediate the defects.

PBS further counterclaimed for its expenses incurred in its attempts to remediate the defects in the residence.

The High Court Judgment

After hearing all the facts, evidence and arguments on both sides, the High Court allowed Dr and Mrs Seidman's claim for damages. The Court ruled that the defects liability clause gave the owners an additional remedy but did not extinguish their right to recover damages under common law unless there is an express provision in the contract to the contrary.

The Court concluded that the defects liability clause only applied to defects that were "apparent" and did not apply to "latent structural defects, which do not emerge during the short defect liability period." 

The High Court further held that PBS had no right to insist on remediating the defects in the residence at its cost because:

1. Its remediation plan was inadequate and the evidence established that the entire structure of the residence would need to be dismantled;

2. The right of PBS to return to the site to remedy defects "was extinguished on the expiry of the defect liability period"; and

3. The owners were not comfortable with and did not trust PBS to carry out the remediation.

In the Judgment, the Court discussed the different measures of damages for defective construction and concluded that, due to the fundamental defects requiring the residence to be dismantled:

1. Remediation was not feasible; and

2. The cost of repair was not an appropriate measure of damages.

Finding that the owners had been deprived of the residence that they had contracted for, the Court awarded the entire cost of construction of the residence as damages.

PBS's counterclaim was dismissed as the Court found that the remediation plan was inadequate and PBS had failed to lead evidence to support the counterclaim.

Important Legal Points emerging from the High Court Judgment

The Judgment is important for Fiji Construction law jurisprudence as it reinforces a number of important common law points, including:

1. That the owner retains the common law cause of action for damages for breach of contract in the the event of construction defects (including Latent Defects), unless the contract expressly provides for that right to be waived or extinguished;

2. While a contractor or builder may insist on fixing defects itself during the defects liability period, it remains liable for defects that are only discoverable after the expiry of the defects liability period and cannot insist on repairing those defects itself; and

3. While the owner has a general duty to mitigate damages, which ordinarily might call for giving the contractor an opportunity to fix the defects, that does not necessarily apply where the defects are substantial/fundamental.

Conclusions

When entering into a construction contract, it is important for both the owner and the contractor to review the defects liability clause in a proposed construction contract, and to understand the scope of that clause and the other remedies retained by the owner. Any person who is entering into a construction contract with a contractor should seek legal advice on the contract that should include but is not limited to ensuring that his or her rights are protected in the event of Latent Defects.

From a risk management point of view, we also caution that the parties consider appointing an independent qualified third party to carry out construction progress inspections.

A full copy of the High Court's Judgment in Seidman v Pacific Building Solutions Ltd [2021] FJHC 114; HBC78.2017 (12 February 2021) can be found here

Please note:

• This bulletin is provided form information purposes only and it is not legal advice and should not be relied on as such.
• The Judgment reported may be subject to an appeal [Additional note: an appeal of the Judgment has been filed with the Court of Appeal on 19 March 2021]