Out-Law Guide | 02 Aug 2011 | 3:35 pm | 5 min. read
A limitation period is the period of time within which a party to a contract must bring a claim. In construction contracts, limitation periods are often relevant in relation to defects claims brought against contractors.
Most construction contracts provide for a 'defects liability period', which may run from 12 to 24 months after completion. Typically the contractor will be responsible for any defects which arise during this period. The contract will provide details of what will happen if any defects do arise. The normal arrangement is that the contractor will be asked to rectify the defects at its own cost. If it does not, and the contracting company takes on another contractor to carry out this work, the contracting company may be able to recover this cost from the original contractor. In these situations, a dispute can arise about whether the original contractor was responsible for the defect.
However, the end of the defects liability period does not mean that the contractor is released from all liability as the 'statutory limitation period' may still be running. This is the period during which, according to the law, the contractor may be liable for defects.
This Guide explains how this statutory limitation may be reduced, releasing contractors from potential liability for defects claims sooner than would otherwise be the case.
The Limitation Act, passed in 1980, specifies the limitation periods which apply in relation to what it terms 'simple contracts' and deeds. The Limitation Act allows actions for breach of contract and tort, such as negligence, to be brought within a period of six years under a simple contract and twelve years if the contract is executed as a more formal deed. Under English law, a 'simple' contract is one which is executed with one signature only. A deed is a contract or document executed with higher formalities than a single signature - for example, a contract that must be signed by two directors on behalf of a company.
Unless otherwise stipulated, these time periods begin either on the date on which the breach of contract occurred, or the date the negligent act or omission occurred. This is known as the date of accrual. The limitation period does not run from the date of the contract itself. It is common to refer to actions which fall outside of these statutory time limits as being 'time barred'.
In 1986, the Latent Damage Act introduced an extension to the ordinary six-year statutory limitation period. This extension is available for negligence claims for latent defects – a defect in a property, caused by a fault in design, materials or workmanship, that existed at the time construction was completed but was not apparent at the time of completion. It does not apply to personal injury claims.
Where there is a latent defect, the time limit is the later of:
subject to an overall limit of fifteen years from the accrual of damage.
In other words, the Latent Damage Act introduces an element of 'discoverability' which provides for a further period of three years from the discovery of the latent defect, and yet still provides some element of certainty to construction contractors with the creation of a final claim date of fifteen years from the accrual of damage.
However, the Latent Damage Act is of limited application to some construction claims. Many construction contracts restrict the scope of liability to the types of liability that are expressly set out in the original contract - such restrictions are introduced through what are sometimes called 'exclusive remedy' or 'entire agreement' clauses – and do not include liability for negligence, other than for negligence causing death or personal injury as this cannot be excluded under English law. In these cases, the Latent Damages Act will not apply.
If a contract which is governed by English law makes no mention of limitation periods, then the statutory periods provided for by the Limitation Act will apply - usually, six years from the date on which the cause of action accrued for simple contracts, or twelve years if the contract was executed as a deed - to bring an action for breach of contract or tort. A longer period may apply in relation to negligent latent defects, although as explained above these tend to be of limited application to construction contracts.
Limitation periods are considered as a defence, rather than as a statutory requirement. The court will not take the initiative of time-barring a claim. It is up to the contractor to plead that the time limit has passed as a defence to an action that has been brought after the relevant limitation period has passed.
The general view taken is that parties may agree to reduce the limitation periods for breach of contract and negligence claims from those stipulated in the Limitation Act. Such an approach is very common in construction contracts. Shorter limitation periods will be subject to a reasonableness test under the legal provisions preventing unfair contract terms, however when the parties agreeing to the shorter limitation period are sophisticated commercial entities of equal bargaining strength then the courts are less likely to hold that the shorter limitation period is unreasonable.
In contrast with the English position, some legal systems – such as those in France or the UAE – do not allow contractors to shorten the limitation period in relation to claims for defects that affect the stability of the building or plant. In these systems decennial liability may make the contractor liable for a period of ten years for such defects regardless of any contractual terms.
If the parties to a contract agree to reduce the limitation period, in order for that reduction to be enforceable it is very important that such an agreement is clear and contains express wording. For example: