The relationship between limitation periods and defects liability periods
Most construction contracts contain a defects liability period during which the construction contractor is required to remedy any defects that arise in the works. It is important to be aware that a defects liability period is only a contractual obligation to remedy a defect.
Expiry of a defects liability period, typically in the Australian market a period of 12 to 24 months, does not mean that the construction contractor is relieved of its liability as the principal still has the right to take action for defective work if the limitation period has not expired.
A limitation period is the period of time during which a party to a contract is entitled to bring an action against the other party. The limitation period that applies to a construction contract will differ depending on whether the contract has been executed as an agreement or deed. If the limitation period is longer than the defects liability period (which is usually the case), the principal will be entitled to make a claim against the construction contractor for any defects in the works, even if these transpire after the end of the defects liability period.
Some of our clients are familiar with the English law position on limitation periods in relation to construction contracts. It is important to note that the Australian position is less flexible than the English position when it comes to contractually modifying the limitation period.
The English position v the Australian position
Under English and Australian law, the following limitation periods apply:
Unlike in Australia, parties to a contract under English law may agree to shorten these limitation periods. When dealing with a construction contract that is governed by English law, it is not safe to simply assume that the usual statutory limitation periods will apply and the express terms of the contract must be considered.
It is also important to be aware that in some Australian jurisdictions, certain legislation imposes a 10 year longstop date on actions arising from ‘building work’.
Shortening a limitation period in an English construction contract
In order for a reduced limitation period to be enforceable, the construction contract must be clear and contain express wording to this effect. If the contract is not clear and express, the contractual limitation period may be subject to, or work alongside, the statutory limitation period. Shorter limitation periods may also be subject to the “reasonableness test” set out in the Unfair Contract Terms Act 1977 (UK).
While reduced limitation periods are beneficial to construction contractors, principals should exercise caution if contemplating these. Defects may take time to transpire and if a limitation period is too short, the principal risks losing the ability to bring an action against the construction contractor for defects altogether.