Chapter 10 Defects liability period

Typically, a defects liability period (DLP) is 12 months from the date of practical completion.

In some construction contracts, where a particular defect has been rectified within the DLP, a new DLP for that item will start from the time of the repair and continue for the same period as the original DLP. This means that for some items of work the DLP may continue to run until the item exhibits no further post-repair defect, even though the DLP has expired for the remainder of the works.

In some service or supply contracts, the DLP may commence from the date of commissioning of the plant and equipment or may be replaced entirely by a specific warranty (usually a service warranty from the manufacturer).

Generally, on expiry of the DLP the principal will be required to return any remaining security or retention monies to the contractor, if there are no outstanding defects.

The DLP is a contractual mechanism and does not remove or change the statutory limitation periods for breach of contract unless there is a specific exclusion.

Right to common law damages

As a defect is a breach of contract it would normally give rise to a common law right to damages.

A number of cases have considered whether the presence of a contractual mechanism for dealing with defects (ie a DLP) negates or varies the common law right to damages.

CASE STUDY

Turner Corporation Ltd (Receiver and Manager appointed) v Austotel Pty Ltd (1994) 13 BCL 378

Facts
  • Turner (the contractor) sought leave to appeal against an arbitrators’ award in favour of Austotel (the principal) for the recovery of the cost of engaging third parties to rectify defects in Turner’s work.
  • Austotel engaged the third parties to rectify the defects without having first required the superintendent to provide a notice to Turner under the contract giving Turner the opportunity to rectify defects.
  • The contract did not provide that the superintendent had to advise of defects when they become aware of them, only that the superintendent may notify.
Result
  • The court held that the contract represents a code which establishes the rights, obligations and liabilities of the parties.
  • It follows that if the contractual mechanism for rectifying defects is not followed, Austotel has no additional common law right to recover damages for breach of contract.
  • By not following the contractual mechanism for rectifying defects, Austotel lost its right to common law damages.

However, a contrary position was taken in the English case of Pearce and High Limited v Baxter [1999] EWCA Civ 789.

CASE STUDY

Pearce and High Limited v Baxter [1999] EWCA Civ 789

Principle

A principal will have the common law right to damages where there is a breach of contract by a contractor which results in defects, unless that right is expressly excluded, or by strong implication from the express words used, excluded.

Facts
  • The contractor, Pearce, undertook construction work at Baxter’s home.
  • Baxter (the principal) became aware of defects before the expiry of the defects liability period but only raised the defects when Pearce brought a claim for the outstanding contract sum, 5 months after the expiry of the defects liability period.
Result
  • Baxter was able to recover damages for breach of contract, in respect of the defect.
  • However, Baxter’s failure to comply with the contractual mechanism limited the amount of damages Baxter could recover. Baxter could not recover more than it would have cost for Pearce to rectify the defect.
  • The court held that only an explicit clause in the contract can override a principal’s common law right to damages.

An English Court of Appeal decision suggests that, even if the contract does not require the principal to give the contractor an opportunity to rectify the defect, the principal may be better off in doing so. The principal may be limited in what common law damages can be recovered if it would have been reasonable for the principal to request that the contractor remedy the defect, and the principal failed to do so.

CASE STUDY

Woodlands Oak Limited v Conwell & Anor [2011] EWCA Civ 254

Facts
  • The Conwells (owners), engaged Woodlands Oak (contractor) to carry out works on their property.
  • No mechanism was agreed for dealing with defects after completion.
  • After completion, the Conwells discovered defects in the work. The Conwells employed a third party to correct the problems and sought to recover the cost of doing so from Woodlands Oak.
Result
  • The court held that, while there was no express defects liability mechanism, the Conwells had failed to take reasonable steps to mitigate the loss.
  • In this case, it would have been reasonable for the Conwells to ask Woodlands to rectify the defects. If they had done so, the works could have been completed by Woodlands’ subcontractors at no extra charge. Therefore, the Conwells were not entitled to damages.
  • The court noted that there may be some circumstances in which it would be reasonable not to give the contractor the opportunity to fix the defects, but that this was not the case here.

Damages claims must be brought within the statutory limitation period for bringing a claim, which vary from state to state. All states and territories other than Queensland and Western Australia have long (10-year) statutory limitation periods for ‘building actions’. There has been some debate as to whether this extended limitation period applies only to actions in negligence, or whether it also applies to breach of contract actions. The limitation period may also vary depending on whether the construction contract is a deed or an agreement.

Generally, the limitation period runs from when the breach of contract occurred, that is, when the defective work was performed and not the time the actual loss is suffered. Further, it has been suggested that for defective work the limitation period will run from the date of practical completion as this is when the breach of contract occurs. In some jurisdictions, such as New South Wales and Victoria, there is a 10-year limitation periods for ‘building actions’ which commences on the date.

Consideration should also be given to whether an action may be available against a builder, engineer or architect that has acted negligently. The limitation period for such actions may extend further than breach of contract claims, depending on the circumstances.

The commencement of the limitation period is particularly relevant for latent defects. Latent defects occur where the damage only becomes evident a number of years after the work is completed. In the case of latent defects, an immediate assessment of the defect should be conducted to determine the date when the limitation period will expire. This will ensure that the principal does not lose their right to claim damages for the defective work.

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