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When can payments be reduced?

LAW - The Multiplex v Cleveland Bridge case resulted in some useful rulings when it comes to withholding payment, writes Daniel Atkinson

CONTRACTORS rely on regular payments as work progresses and if for any reason the payments are reduced they can find themselves in serious financial difficulties.

The indiscriminate withholding of payments due was a common abuse for many years, until the arrival of the 1996 Construction Act introduced measures to prevent it.

But providing an employer complies with the Act he can still reduce the amount due to be paid if the contractor's performance is defective. This is referred to as a right to 'abatement of the price'.

But exercising this right can be difficult. First of all, it can be hard to identify clearly when the right of abatement can be exercised. Second, it is difficult to know how to measure the reduction in the price.

Some useful guidance was provided by Mr Justice Jackson in the high-profile case of Multiplex Constructions UK v Cleveland Bridge UK. The judge's decision provides guidance to contractors, employers and those involved in the administration of contracts.

Multiplex alleged various breaches of contract, which it said entitled it to a reduction in the price payable to CBUK and for which it also claimed damages.

The defects were denied, but the main issue was whether Multiplex's claim amounted to a claim for abatement. Judge Jackson decided that Multiplex had set out a conventional claim for damages for breach of contract but not for an abatement.

This might appear to be splitting hairs, since a claim for abatement of price is based on the breach of contract of defective performance. But it is established that a claim for abatement is different to a claim for damages: abatement is a defence to another party's claim to be entitled to payment.

Abatement is measured as a reduction in value of the 'thing itself' (for example the package of work, or the relevant part of the contract) due to the defective performance. This is not necessarily measured by the cost of remedying the defect.

The cost of repairing damage to any item other than the thing itself cannot be part of a claim for reduction in the price and neither can claims for delay and disruption.

In some cases the reduction in value is determined by comparing the current market value of the 'thing' with the market value it ought to have had.

In other cases reference is made to the cost of remedial works, but it is not the measure but only a factor to be used either in isolation or in conjunction with other factors for determining the reduction in value. The measure of abatement can never exceed the sum that would otherwise be due to the contractor as payment.

But in this case Mr Justice Jackson considered that the claim could readily be amended by Multiplex expressly setting out the reduction in value of the work caused by the various alleged breaches of contract.

He then identified those heads of cost that could be part of an abatement claim.

In an important observation the judge decided that the partially completed steelwork of a project under construction did not have a market value in the conventional sense.

The steelwork only had a value to the main contractor who was under an obligation to produce a completed project.

He considered that the best method of ascertaining the reduction in value was by reference to the cost of the works to remedy the defects.

He rejected a number of heads of claim as not properly being part of an abatement claim - such as claims for Multiplex's overheads and insurance. He also rejected the cost of employing consultants to identify defects.

One head of claim by Multiplex was for defective design work by CBUK, essentially for professional services. This part of the judgment is relevant to professionals such as architects and engineers as well as contractors involved in design work applying for payment.

The Court of Appeal in a 1978 case (Hutchinson v Harris) doubted that the price to be paid for professional services could properly be reduced on the grounds of defective performance. The logic for such a restriction is not clear but Mr Justice Jackson followed it.

He observed that Multiplex's only remedy for unsatisfactory drawings that required revisions or modifications was a claim for damages for professional negligence.

Mr Justice Jackson observed that if some drawings were so unsatisfactory that they were discarded altogether and no use was made of them, then Multiplex could refuse to make any payment whatsoever in respect of those drawings.

Mr Justice Jackson stated that the basis for such a reduction was not a claim for abatement but simply a contention that no payment should be made at all for professional services that were wor thless.

There is no reason in logic why the scale of the defect in relation to some drawings, which are part of the professional service, should allow a reduction in price and other less severe defects should not.

It appears therefore in construction contracts that the price to be paid on interim payments can be reduced by the cost required to repair the defect, where the defective thing has no general market value.

This will apply to components that are specifically designed and constructed for the structure. This method of valuation may not apply to defects after completion of the project, where it may be possible to assess the effect of the defect on the project's market value.

As to reduction of fees for professional services, the law seems less clear but the overall principle appears to be that no reduction in fees for defective performance is available and the remedy is an action for professional negligence.

KEY POINTS

If work is defective, the employer may be entitled to 'abatement' of the price.

It can be difficult deciding when the abatement can be exercised and calculating the reduction in the price.

A claim for breach of contract is not the same as a claim for abatement of the price.

The measure of abatement can never exceed the sum that would otherwise be due to the contractor as payment.

The law is unclear on the reduction of fees for professional services in relation to defective works.