Defects Liability Periods explained: Part 1 – Defects liability periods in construction contracts

Defects Liability Periods explained

By Swati Johri and Gerald Arends

What is a defects liability period?

Most construction contracts contain a prescribed period of time within which the construction contractor has a contractual obligation to remedy any defects in the construction work it has performed.  Such ‘defects liability periods’ typically range from one to two years after practical completion has been reached.  Often, a further defects liability period will apply to defective works that have been remedied by the construction contractor within the defects liability period.

Benefits of a defects liability period

A defects liability period can help both the principal and the construction contractor in managing their respective risks under the construction contract. 

From the principal’s perspective, a defects liability period is useful for the following reasons:

  • even if minor defects in the works exist, a defects liability period can help the principal get comfortable with the grant of practical completion and taking over of the works in the knowledge that the construction contractor has an obligation to remedy any punch list items and any defects that come to light during the defects liability period;
  • it ensures that the construction contractor is incentivised to perform the works to the required standard as it will not be entirely off the hook once practical completion has been achieved; and
  • the principal does not have the added burden of managing the interface risk and added cost that would result from engaging a third party contractor for defects rectification work.  Any new contractor will be unfamiliar the original construction work and will need to devote time and resources to familiarising itself with these, the nature of the defect and the best method of rectification.

From the construction contractor’s perspective, a defects liability means:

  • that payment of any final milestone payment (which can often be sizeable) or final progress claim which it is entitled to be paid is not held up by minor defects in the works as it has the ability to rectify these post-practical completion; and
  • by carrying out any defects rectification work itself, the construction contractor can take comfort that the integrity of any fitness for purpose warranties or design life warranties it has given under the contract are maintained.

Common misconceptions about defects liability periods

It is important for both the principal and the construction contractor to be aware that under Australian law, the expiry of a defects liability period does necessarily mean that the construction contractor’s obligation with regard to the works also comes to an end.

A defects liability period creates a contractual obligation under which the construction contractor is required to return to the site and rectify any defects identified in the works it has performed.  However, the principal may still have a right at common law to pursue the construction contractor for damages for breach of contract if any defects in the works transpire. 

The period of time that the principal has to make a claim at common law for damages will depend on whether the construction contract is executed as a deed or an agreement and applicable state legislation.  If the construction contract is executed a deed, the principal will have up to 12 years from the date the defect occurs to bring a claim for damages against the construction contractor.  If the construction contract is executed as an agreement, this period is up to 6 years. 

A second misconception occasionally affects international parties that are less familiar with common law legal concepts as they apply in Australia.  The standard remedy under common law for defects in the works is a claim in damages.  Specific performance of a construction contract (namely defect rectification) may not be granted by the courts, unless exceptional circumstances apply.  Providing for defects rectification is critical in common law-based construction contracts to create a period during which the principal is entitled to require defects rectification and the construction contractor is given an opportunity to rectify.

For advice on construction law matters, please contact our Directors Swati Johri or Gerald Arends at Pegasus Legal. Find out more about Pegasus Legal and our experience in the construction and infrastructure sector, please visit www.pegasus-legal.com/experience.

To read Defects Liability Periods explained: Part 2 – Australian and English limitation periods, click here