When you enter into any commercial relationship and sign up to contractual obligations, it will be important to understand how long you will be on the hook and owe a potential liability to the other party, including how long that party may have to pursue claims against you, should you breach your obligations.
Limitations on the claims that a party can pursue and within what time periods can arise in different ways. This article seeks to summarise some of the key aspects to be aware of and issues to look out for.
So, is the period of liability under this contract six years or twelve years?
This is often the extent of the consideration given to this issue. If you have a simple contract, the period of liability for any breach of contract will be 6 years from the date of the breach, and 12 years if the contract is executed as a deed. The reality is much more nuanced and there are a range of choices and considerations to take into account when negotiating what may be an appropriate period of liability for the particular contract or, indeed, for the breach of specific provisions of that contract. In some sectors, the period can be much shorter, and suppliers of complex equipment will often insist on a period of liability of no longer than 2 or 3 years. Conversely, if a 12 year period of liability is proving hard to secure, there is no reason why compromise might not be reached at 9 years, say.
However, the questions to consider should not stop there. For claims that might be brought for breach of contract, time will run (whether it is 6 or 9 or 12 years!) from the date of the breach. In construction contracts, this is typically taken to be the date of practical completion, as up until that point, the works have not yet been handed over and any defects or deficiencies can still be remedied. For design appointments, the period of liability will generally run from the date on which the services were completed which, depending upon the consultant, may occur before or after practical completion of the works. A question to be considered, therefore, is whether you should seek to align, as far as possible, the period of liability of all the parties engaged on a project. This avoids a situation where, at the time a defect emerges, you only have a right to pursue some of the responsible parties because the period of limitation has expired for others. This issue is of particular importance where, for example, you are the recipient of collateral warranties from various parties involved in a development, particularly where some or all of these warranties contain net contribution clauses.
A challenge can sometimes arise with subcontractors, however, who may resist extending their period of liability to run from a date (namely practical completion of the entire works) which may fall a year or more after the subcontract works have been completed.
What about claims for negligence?
The time for bringing a claim in negligence will end 6 years from the date on which the cause of action accrues. A cause of action in negligence accrues once damage has occurred. There have been a number of cases over the years that have explored what this might mean in the context of building defects, and it was generally understood that in claims of negligence for defective workmanship or deficient design, time would begin to run from when damage due to the defect occurred, even if no damage was evident or discovered. A recent Supreme Court decision has ‘eased’ the application of this principle, and found that time will run from when damage is “manifest”. In the unanimous decision in Brandley & WBJ Development –v- Hubert Dean & Associates and John Lohan Groundworks Contractor, the key question before the court was whether the plaintiffs were still able to pursue claims for defects in the foundations of two houses constructed in Galway, where proceedings were issued more than 6 years after the dates on which both the contractor had completed the works, (in March 2004) and the engineer had certified the works (in September 2004). Each of these dates would have been the latest date on which it could be said defective workmanship and deficient design / services, respectively, had been performed.
Cracks appeared in the walls of the houses in December 2005 and proceedings were issued in November 2010, which would have been too late if time ran from either of the dates in 2004. Whilst the Supreme Court clearly recognised the difficulties that might arise in some instances in determining when damage could be said to be manifest, Mr Justice McKechnie noted that “manifest” means the date on which damage is capable of being discovered. He went on to say: “I accept that there is a definite distinction between a ‘defect’ and the subsequent damage which it causes. Time runs from the manifestation of damage rather than of the underlying defect. Thus, it is not the latent defect which needs to be capable of discovery: it is the subsequent damage caused by that latent defect.”
This decision certainly does not mean that potential plaintiffs can rest on their laurels to wait for damage to materialise, but it does perhaps provide some reassurance for those concerned about potential latent defects in buildings which have not yet materialised.
Stopping the clock!
For claims for both breach of contract and for negligence, the significance of the period of limitation, whatever it may be, is that proceedings must be commenced before the end of this period, or the entitlement to pursue the claim will be lost. ‘Proceedings’ which will operate to ‘stop the clock’ are either the issue of court proceedings (but these do not need to be immediately served) or the service of a notice of arbitration. Clearly, where the limitation period is about to run out, it is imperative that the correct dispute resolution procedure included in the contract be followed. Other dispute resolution procedures which your contract may contain, such as conciliation, or adjudication, will not operate to stop the limitation clock running and if you are contractually required to conciliate before you can arbitrate, this may need to be taken into account!
But there’s more!
The time for bringing claims can also be limited at a much earlier stage and entitlements to pursue claims can simply expire due to the effluxion of time. Where construction contracts provide for conciliation as the first dispute resolution procedure, for example, it is usually provided that in the event of a recommendation of the conciliator being made, that recommendation will become final and binding on the parties if not rejected within a certain period. In practical terms, the right to pursue the claim further will be lost once this happens. Other contracts may provide that any disputes regarding the final account and the issue of the final certificate must be referred onto arbitration within a stated period. If not, again, the entitlement to challenge the final certificate will be lost. Earlier still in the process, in some instances claims made under the contract may be deemed rejected even if there is no response or there is a late response from the contract administrator. That deemed rejection may then become final and binding upon the parties if it is not referred on to the appropriate dispute resolution procedure under the contract within the stated period. In such a case, all further entitlements to pursue the claim will be lost. This arises under both the PWC main forms of contract and the claims and dispute resolution procedures under the new FIDIC 2017 edition. It is important to always check and understand how your contract will operate in this regard as once it’s gone, it’s gone!
Knowing how long you have to articulate and pursue claims, whether during the performance of the contract, or a later stage, is important. Understanding where those claims will ultimately be determined is equally important as this can also play into the ability to ensure any proceedings are initiated in time to stop the limitation clock that may be ticking against you. Everyone thinks about this, but perhaps just not quite enough!
1 The decision was handed down on 15 November 2017
Niav O’Higgins is a Partner in the Infrastructure, Construction & Utilities Group at Arthur Cox