Articles

A.  Introduction

1. The Singapore Court of Appeal's recent decision in Sandy Island Pte Ltd v Thio Keng Thay [2020] SGCA 86 provides clarity on the nature and operation of defects liability clauses in building and construction contracts.
2. Importantly, the SGCA held that, (i) in the absence of express and clear language to the contrary, defects liability clauses do not operate to exclude an employer’s common law rights to recover damages for defects as a result of a contractor’s breach of contract and (ii) an employer's refusal to allow a contractor access to the site to perform rectification works does not operate to extinguish the employer’s common law rights to recover damages for defects, although this would be a relevant consideration in assessing the quantum of those damages in light of the employer's duty to mitigate the damage.

B.  Background Facts

3. The dispute in Sandy Island Pte Ltd v Thio Keng Thay [2020] SGCA 86 arose in relation to an sale and purchase agreement (the "Contract") for the construction and sale of a $14 million four-storey Sentosa Cove waterfront bungalow (the "Property") between a developer, Sandy Island Pte Ltd (the “Developer”) and a purchaser, Thio Keng Thay (the “Homeowner”).¹
4. The Contract was in the standard form prescribed by Reg. 12(1) of the Housing Developers Rules (Cap 130, R1, 2008 Rev Ed) and contained a defects liability clause ("Defects Liability Clause") which provided for a 12 month defects liability period from the date the Homeowner received vacant possession of the Property from the Developer ("DLP"). During the DLP, the Developer was obliged to rectify, at its own cost and expense, any defects notified by the Homeowner within one month of receipt of such notice. Failure to carry out such rectification works within the stipulated time meant that the Homeowner had the right to cause the rectification works to be done and to recover the costs of such works from the Developer.²
5. Soon after the Homeowner took possession of the Property, the Homeowner notified the Developer of multiple defects in the Property and requested that the Developer carry out rectification works.³
6. Parties subsequently engaged in prolonged discussions over the scope of the defects that required rectification and the appropriate method of rectification, but were unable to reach any agreement. During this time, the Homeowner also refused to grant access to the Developer to carry out its proposed rectification works on the basis that the works proposed were unsatisfactory and insufficient.⁴
7. Given this impasse, the Homeowner engaged a third party contractor to carry out the rectification works and, soon thereafter, commenced High Court proceedings seeking common law damages from the Developer for the costs of engaging a third party contractor and for loss of use of the Property.⁵
8.  During the High Court proceedings, the Developer admitted to 222 defects in full and 85 defects in part out of a total of 492 defects alleged by the Homeowner. However, the Developer emphasised that it had been prevented from accessing the Property to carry out the rectification works.⁶
9. At the end of the High Court proceedings in relation to the Developer's liability for defects⁷, the High Court Judge found in favour of the Homeowner and held that^8: 

1. Both parties had breached the Contract (the Developer by providing defective work and the Homeowner by refusing to grant access for the performance of rectification works);
2. The Defects Liability Clause in the Contract did not exclude the Homeowner’s right in common law to damages for costs arising out of the rectification of defects; and
3. The Homeowner's departure from the Defects Liability Clause would affect the quantum of damages the Homeowner was entitled to recover pursuant to his duty to mitigate.

 C.   The SGCA's Decision

10. The Developer appealed the High Court Judge's decision to the SGCA arguing that:

1. The Defects Liability Clause is a “complete code” and a self-contained clause that, once invoked, results in the Homeowner losing his right to claim common law damages for admitted defects. The Developer argued that the Homeowner's only remedy in such circumstances was to comply with the procedure in the Defects Liability Clause and that this was a condition precedent before the Homeowner could recover any costs for the rectification of defects from the Developer. Having failed to have complied with this condition precedent, the Developer argued that the Homeowner was barred from bringing its common law action for damages⁹ 
2. The Homeowner’s breach of the Defects Liability Clause (by failing to grant access to the Developer to rectify the defects) broke the chain of causation between the Developer’s defective work, and the costs incurred by the Homeowner in rectifying them (the "Causation Argument")¹⁰;

3.  By seeking common law damages after refusing to give the Developer an opportunity to rectify the admitted defects, the Homeowner's actions constituted a breach of the "prevention principle" (i.e. the general legal rule that a party cannot profit from its own wrongdoing) (the "Prevention Argument")¹¹ ; and

4. Allowing the Homeowner to sue the Developer would result in a circuity of action (the "Circuity Argument").¹² 

11. The SGCA dismissed the Developer's appeal in its entirety and upheld the High Court Judge's decision. In dong so, the SGCA made the following observations and findings:

1. The SGCA noted that in general, defects liability clauses are for the benefit of both the employer and contractor. Prior to the introduction of these kinds of clauses, contractors had no right to return to site to rectify defects; by the same token, an employer had no right to require the contractor to return to site to rectify defects.¹³
2. Additionally, the SGCA noted that defects liability clauses do not and cannot cater for all of the types of defects that can arise in building and construction cases and that unless there were clear words to the contrary, a defects liability clause does not deprive an owner or employer from his concomitant common law rights and remedies.¹⁴
3. In the context of the present case, the SGCA held that the Defects Liability Clause was merely an option for the Homeowner to invoke to require the Developer to return to site, and did not operate as a “complete code”. Additionally, there were no words in the Defects Liability Clause suggesting that, upon notification of defects to the Developer, a condition precedent, based upon the right of the Developer to be given an opportunity to rectify defects, had to be fulfilled before the Homeowner had a right to claim common law damages. The SGCA therefore held that the Defects Liability Clause did not preclude the Homeowner from commencing a common law claim for damages against the Developer. ¹⁵
4. In relation to the Causation Argument, the SGCA held that while the Homeowner may have acted unreasonably by failing to grant access to the Developer, the Developer's defective work remained the underlying cause of the costs incurred by the Homeowner. There was therefore no break in the chain of causation.¹⁶
5. Similarly, the SGCA held that as the Homeowner's claim for the costs of rectification was a direct result of the Developer's defective work and did not directly result from the Homeowner's refusal to grant access, the Prevention Argument fell apart.¹⁷
6. In relation to the Circuity Argument, the SGCA held that the Homeowner’s breach of the Defects Liability Clause (by failing to grant access) did not give rise to an independent action by the Developer. For this reason, the Developer could not counterclaim from the Homeowner the sums otherwise payable as damages to the Homeowner and, accordingly, there would be no circuity of action. ¹⁸
7. However, the SGCA noted that the Homeowner's act of denying access to or preventing the Developer from carrying out rectification works would be relevant to the quantum of damages recoverable from the Developer pursuant to the Homeowner’s duty to mitigate his loss. ¹⁹

 D.   Conclusion

12. The SGCA's decision in Sandy Island Pte Ltd v Thio Keng Thay [2020] SGCA 86 provides useful and in-depth commentary on the nature of defects liability clauses and provides much needed clarity on the interplay between such clauses and parties' common law rights and remedies.
13. The key takeaways contractor's should note from this case are that:

1. Defects liability clauses are intended to benefit both the employer and the contractor.
2. In the absence of express and clear language, defects liability clauses are in addition to and not in substitution for the employer’s common law rights and do not operate to exclude the contractor’s liability for breach of contract.
3. An employer’s refusal to allow the contractor access to perform rectification works does not operate to extinguish the employer’s common law rights to recover damages for defects.
4. However, such actions would be relevant for the quantum damages recoverable pursuant to the employer’s duty to mitigate damage. 

Contributed by:

Rakesh Nelson - Associate, MPillay