Usually, yes. A contractor will normally remain liable for defects after the defects liability period has expired. This article addresses a common misconception about the defects liability period under a construction contract.
The purpose of the defects liability period
The name ‘defects liability period’ is misleading, in that it implies that the contractor’s liability for defects will expire when the defects liability period comes to an end. However, for the vast majority of contractors in Australia, that is simply not the case.
The purpose of the defects liability period is threefold. It fixes the period of time when:
- the superintendent’s role under the contract formally comes to an end;
- the parties are intended to make a final reconciliation of the contract sum; and
- the unused balance of the contractor’s security (if any) will be returned to the contractor, subject to the satisfactory resolution of all known defects and disputes.
However, a contractor’s liability for defects does not automatically end on the expiry of this period.
In some cases, a contractor’s liability may extend many years beyond. The only practical difference is that, after the expiry of the defects liability period, the principal will no longer hold any security.
Why is the contractor still liable?
In most cases, the contractor’s liability in respect of a defect can be characterised as a breach of contract. For example, under AS 4000, the contractor is required to:
- complete work under the contract (WUC) in accordance with the contract (clause 2.1), which will include all drawings, specifications and other documents forming part of the contract; and
- use suitable new materials and proper tradesmanlike workmanship (clause 29.1).
If the contractor fails to do either of these things, it will have breached the contract. The principal will have rights in relation to the breach, including a claim for damages.
Under most contracts, the contractor’s liability for a breach of contract does not automatically end when the defects liability expires.
There are also other ways in which a contractor could be held liable for a defect. These include:
- breaches of the consumer guarantees contained in the Australian Consumer Law (provided the contract is with a consumer or for a value of less than $40,000);
- breaches of statutory warranties in home building legislation, such as those contained in section 18B of the Home Building Act (NSW) or section 8 of the Domestic Building Act (Vic);
- breaches of the misleading and deceptive conduct provisions of the Australian Consumer Law;
- breach of an express warranty provided by the contractor under the contract;
- liability under an indemnity contained in the contract; and
- liability for negligence or negligent misrepresentation.
When does the contractor’s liability end?
A contractor’s liability may not come to an end until years after the work has been completed and the defects liability period has expired.
In some cases, the exact date can be difficult to determine. The date will be determined by applying the relevant statute(s) of limitations, and will be a function of a number of considerations, including:
- the terms of the contract and the extent to which any exclusions or limitations of liability might be effective as a matter of law;
- the legal basis of the claim. There are different limitation periods for different causes of action (ie breach of contract, negligence, breach of the Australian Consumer Law, etc);
- the date the breach occurred;
- the date the breach was or could have been discovered (although this may be less relevant in some circumstances); and
- the place where the breach occurred or the works were performed (as some limitation periods are State-specific).
If court proceedings have not been commenced before the limitation period expires, the contractor responsible for the defect will be exempted from liability.
If you are a principal or head contractor seeking redress for defective work performed by someone else, there are a number of reasons why you should take action earlier rather than later.
For example, usually you will have an obligation to mitigate any losses that arise as a result of the defect. If the passage of time results in additional losses being incurred (for example, because the defect gets worse), you may not be able to recover those losses from those responsible.
