Liability after take-over: the English position

November 2009

1. Describe the system of liability after take-over according to the rules used most often
Under English law, upon take-over of a project, the relevant statutory provisions governing liability of a contractor, subcontractor or consultant are found primarily in the Limitation Act 1980 (the Act). There is no statutory defects liability period whereby the contractor has a positive obligation to rectify defects. Rather, it is usual practice for the parties to agree a defects liability period as a matter of contract. The period is typically 12 to 24months for general construction contracts. In the absence of an agreed defects liability period, or if the contractor refuses to rectify a defect notwithstanding an agreed defects liability period, the aggrieved party will have to commence legal proceedings in order to recover any damages or losses occurring after take-over. There is no guarantee that the aggrieved party will succeed, as it will need to prove that the other party was at fault and that it suffered damage or loss as a result. Thetime for the aggrieved party to commence legal proceedings is limited by the Act so that if the time has expired, the aggrieved party is time-barred from pursuing its claim.

The limitation time periods most relevant to construction projects are: a. Contract claims - 6 years from the date the cause of action accrued,2 which is the date of the breach of contract complained of. In construction contracts, if the contractor is responsible for completing the works under an entire contract, the limitation period for defective work generally runs from the date of completion. As to liability for defective design, the English courts have held that while the cause of action accrues generally on practical completion (at the latest), the designer may have a duty to reconsider the design as a result of defects arising after completion. Such duty could arise either under the existing contract or the terms 3 of a new retainer; b. Tort actions - 6 years from the date the cause of action accrued,4 which is the date the physical damage occurs; and c. Deed claims - 12 years from the date the cause of action accrued,5 which is the date of the breach of the obligation in thedeed. It is possible for the parties to reduce or increase the limitation periods prescribed by the Act in their contracts.6 Generally, the courts will not interfere with the parties contractual agreement, especially if the parties are experienced commercial entities

Christopher Wong1 White & Case

A version of this article was first published by Instituut voor Bouwrecht (Institute of Construction Law - Netherlands) in Tijdschrift voor Bouwrecht, nr. 9 - September 2009

1 Senior Associate at the London office of White & Case LLP and a member of the UK Society of Construction Law. 2 Section 5 of the Act. 3 See New Islington & Hackney Housing Association v Pollard Thomas & Edwards [2001] BLR 74. 4 Section 2 of the Act. 5 Section 8 of the Act. 6 See for example Oxford Architects Partnership v Cheltenham Ladies College [2006] EWHC 3156.

Liability after take-over: the English position

with equal bargaining power. However, the modified limitation period may be deemed unreasonable under the Unfair Contract Terms Act 1977 if the period appears unfair, the contract parties are of unequal bargaining power and the dominant party insisted on the unreasonable period. Where a limitation period is about to expire, a party may: i. commence legal proceedings straightaway, even if it does not have the full facts to support its case. As a minimum, the party must be able to formulate its claim properly according to the procedural rules of the English courts. If the party wishes to add a new claim to its pleading subsequently (even after expiry of the limitation period), it will generally have to show that the new claim arises out of the same facts or substantially the same 7 facts as the existing claim; or ii. enter into a standstill agreement to temporarily suspend the running of the limitation period. The agreement of the other party is required in this case. In relation to residential property, the Defective Premises Act 1972 provides that a developer or contractor doing work in connection with the provision of a dwelling owes a duty of care to any person acquiring an interest in the dwelling to ensure the work is done in a workmanlike or professional manner with proper materials so that the dwelling will be fit for habitation.8 A claimant has 6 years from the time the dwelling was completed to bring an action for a breach of the duty. If further work to rectify the completed dwelling was done, the 6 years shall run from the time the further work was finished.9 ii. that the damage was attributable to the act or omission which is alleged to constitute negligence; and iii. the identity of the defendant,10 subject to an overall long-stop period of 15 years from the date ofthe defendants negligent act or omission to which the damage isattributable.11 The issue of the defendants knowledge in (b) above has been the subject of various case law and the English courts have held that constructive knowledge as well as actual knowledge is relevant. In Haward v Fawcetts (a firm) [2006] UKHL 9, the House of Lords (Englands highest court) held that the 3 year period starts to run from the time the claimant had knowledge of the factual essence of the alleged negligent acts or omissions, namely the material facts supporting the substance of the claimants case and that there was a real possibility that the damage was caused by such acts or omissions. The claimant did not need to be certain or show conclusively that the defendants acts or omissions had caused the losses alleged. Haward involved a case on negligent financial advice and a recent construction case is Harris SpringsLtd v Howes [2007] EWHC 327 , which applied Haward and found that the owner was not time barred from making a claim for latent defects against its engineers. It is important to note that the limitation periods for latent defects as above apply only to actions for negligence in tort, and not to contractual claims. In practice, parties often attempt to negotiate liability for latent defects in their contracts.

2. How are hidden or latent defects dealtwith?

A party may bring an action in tort for negligence in relation to latent defects on the later of: a. 6 years from the date the cause of action accrued, which is the date the damage or loss is suffered; or b. 3 years from the date the party knows or ought to haveknown: i. the material facts about the damage or loss suffered;
7 Section 35(5) of the Act and Civil Procedure Rules 17 .4(2). 8 Section 1(1) Defective Premises Act 1972. 9 Section 1(5) Defective Premises Act 1972.

2.1. Does it make a difference if prior to take-over or during take-over, the employer was assisted by professionals (like an architect or civil engineer)?
If the contract is a construct-only contract, the contractor will generally not be liable for a defect in design, whether before, during or after take-over. As between the employer and the contractor, the responsibility for a design defect lies with the employer. As between the employer and its professional consultants (eg. architect or civil engineer), the responsibility lies with the consultant who bears the risk of the design. The employer will look to the relevant consultant for relief and the considerations mentioned in paragraph 1 above apply.

10 Section 14A of the Act, which was introduced into the Act by the enactment of the Latent Damage Act 1986. This was prompted by the House of Lords decision in PirelliGeneral Cable Works Ltd v Oscar Faber & Partners [1983] 2 AC 1 which held that the claimant was time barred from bringing a claim against its architect for damage to its chimney, which first occurred in 1970, even though the claimant only found out about the damage in 1977 . More than 6 years had passed from the date the cause of action arose in 1970 when the claimant commenced proceedings in 1978. 11 Section 14B of the Act, which was also introduced into the Act by the enactment of the Latent Damage Act 1986 following the Pirelli case.

White & Case

Liability after take-over: the English position

If the contract is a design and build contract, the contractor will generally be responsible for a defect in design and construction. In principle, there should be no difference to a contractors liability for any defects in the works prior to, during or after take-over evenif the employer was assisted by professional consultants (eg.architect or civil engineer) who carry out inspection of the works prior to issue of the take-over certificate. A defendant who wishes to seek a contribution from anyone else who is liable to the claimant for the same damage (such as asub-contractor), must bring the contribution claim within 2 years from the date the defendant is held liable under a judgment, or thedate on which the amount of damages payable to the claimant is agreed.12 If the defect is a latent defect discovered after take-over, the position as discussed in paragraph 2.1(b) applies.

4. How long can the employer take action against the contractor after take-over?
This question has been addressed in paragraphs 1 and 2.1 above.

5. Is the liability limited to a certain amount? If so, describe how.

There is no statutory limitation of a partys liability under Englishlaw. A party claiming damages still needs to prove the quantum of its loss. Contracting parties frequently impose a limitation of the contractors liability in construction contracts, including caps for liquidated damages. If the liquidated damages provision in a contract is unenforceable (for example, because it is considered a penalty), the courts in England have found that the contractorsliability for general damages may be limited to the capon the liquidated damages payable agreed by the parties intheir contract.

2.2. Does it make a difference if the employer himself is considered to be a professional?

In principle, it should not make a difference if the employer is considered to be a professional if it is clear between the parties as to who is responsible for the design and construction aspects of the project. However, the English courts may treat an employer who is a qualified building professional differently from a lay person in relation to the knowledge required for a limitation period to run. For example, an employer who is an experienced architect could be more readily said to know, or ought to have known, of the material facts about the loss or damage suffered arising from a latent design defect compared to an ordinary lay person. Similarly, an employer who is an experienced engineer and who chooses an inferior material being fully aware of the risks involved is unlikely to get much sympathy from the court if the material subsequently fails to a greater extent than if better material were used.

6. How do you compare the Dutch position?

There are clear differences in the English position and the Dutchposition as regards liability after take-over, the main ones being that: a. unlike Dutch law, there is no statutory provision in England equivalent to the Dutch Uniform Administrative Conditions of 1989 or the Uniform Administrative Conditions for Integrated Contracts 2005 whereby the contractor ceases to be liable for defective work on take-over, save for specified exceptions; b. English law does not contain an express limitation of the contractors maximum liability (10% of the contract price for design and construction work under Dutch law); and c. the limitation periods for claims against the contractor under English law are different from the Dutch position. There is benefit in regulating liability after take-over as in the Dutch position. This must be balanced against the right of the parties to enter into their own bargain as appropriate (such as limitations of liability). Statutory requirements prescribe a one size fits all regime which may not always work. A halfway house between the Dutch and English positions may be to make statutory requirements the default position where the parties do not expressly provide for liability after take-over in their contracts.

3. Does it make a difference to the liability of the design and build contractor if a defect was or could have been discovered (a) prior to, or (b) at the time of take-over; or (c) after take-over? If so, describe the difference.
Generally, there is no difference to the liability of the design and build contractor as stated in paragraphs 1 and 2 if the defect was discovered prior to or at the time of takeover, or after take-over. A defect discovered prior to or at the time of take-over will be a patent defect. It may be a patent defect after take-over if it fallsoutside the latent defect provisions discussed in paragraph2.1(b). In any of these cases, the limitation periods set out in paragraph 1 apply.

12 Section 10(4) Civil Liability (Contribution) Act 1978

White & Case

36 Offices. 25 Countries.
7. Which specific legal problems play a role in your system concerning liability after takeover when the contractor is responsible for the designing and building?
This is merely an observation and not a problem as such but the obvious comment is that unlike other jurisdictions, there is no statutory obligation on a contractor (whether responsible for design and build, or just construction) to positively rectify defects after take-over, and it is up to the claimant to ensure that this is covered in the construction contract or pursue legal proceedings for breach of contract or negligence. The knowledge required of the factual essence of negligence in the case of latent defects can be problematic, and indeed, in the Haward case itself, the judges differed on whether the essence was the giving of deficient advice, or the giving of advice per se. In the first, the claimant is said to know that something had gone wrong so that he had a justifiable complaint against his advisers, while in the second, he need only know that he had invested money in reliance on the advice and had made losses. Whether a claimant is successful ultimately depends on the courts interpretation of the rules against the facts in question.

www.whitecase.com
In this publication, White&Case means the international legal practice comprising White&CaseLLP, a NewYorkState registered limitedliabilitypartnership, White&CaseLLP, a limited liability partnership incorporated under Englishlaw and all other affiliatedpartnerships, corporations and undertakings.

LON1009072