The defects liability period (or 'DLP') is a fixed period of time, starting from the date of practical completion, during which the contractor has an express contractual right to return to the site to rectify defects.
During the defects liability period, typically:
- the contractor has the right to return to the site to rectify defects or complete unfinished work;
- the principal is entitled to continue holding security, to secure the contractor’s obligations in respect of incomplete or defective work; and
- the superintendent continues to remain involved in the project.
Under some contracts, if the contractor rectifies a defect during the defects liability period, there will be a new defects liability period in respect of that rectification work.
Why do defects liability periods exist?
Defects liability periods (and the concept of ‘practical completion’) exist for the benefit of both the principal and the contractor.
Most principals would prefer to occupy and start using the works as soon as the works are capable of being used, even if there are minor defects or incomplete works. Hence the concept of ‘practical completion’. You can read more about the date of practical completion here.
Conversely, most contractors would prefer to have the opportunity to rectify defects or finish any incomplete items of work themselves, rather than having to pay the principal’s costs of engaging someone else to do that work (potentially at a higher cost).
The concept of practical completion and the existence of a contractual defects liability period provide a compromise. This means that the principal is able to occupy the works even though they may not be 100% complete, but on the basis that the contractor will have an express right to come back to the site to address any defects themselves, rather than immediately being at risk of having to pay the principal’s costs of engaging others to do so.
How long is the defects liability period?
Although there are exceptions, most building contracts in Australia prescribe a 12 month defects liability period.
Again, this period represents a compromise.
On the one hand, not all defects will be reasonably capable of detection at the time of practical completion. Consequently, most principals would expect that as they become aware of defects, they will be able to call on the contractor to address them. Practically speaking, it usually takes a period of time before all defects have been identified.
On the other hand, while most contractors are willing to allow the principal to retain security in respect of the contractor’s defect obligations, they will not agree to that security being held by the principal indefinitely.
In most cases, 12 months is seen as a period of time that appropriately balances the interests of both parties.
Can the contractor be liable for defects after the defects liability period?
The answer is ‘yes’.
There is a common misconception that the defects liability period marks the end of the contractor’s liability for defects. In this sense, the expression ‘defects liability period’ is misleading.
In most cases, the defects liability period is merely the minimum amount of time the contractor will remain exposed to the risk and cost of rectifying defects. You can read more about this here.
Does a certificate of practical completion affect the contractor’s defect obligations?
Generally speaking, ‘no’.
A certificate of practical completion is not evidence of the works being complete. Rather, it is merely evidence of the superintendent’s view that the works have reached the stage of practical completion.
The concept of ‘practical completion’ expressly recognises that there may be minor defects or items of incomplete work when the principal takes possession.
What is the procedure for dealing with defects during the defects liability period?
Although the process will be similar under most agreements, the exact process will depend on the terms of the contract concerned.
Clause 35 of AS 4000 is fairly typical. It contemplates the following process:
1. The principal discovers a defect and brings it to the superintendent’s attention.
2. The superintendent directs the contractor to address the defect. The superintendent’s direction must be in writing, provide sufficient particulars of the defect and state a completion date (and ideally a completion time) for the rectification work. A direction that does not satisfy these requirements may not be effective.
3. The contractor must rectify the defect in accordance with the superintendent’s direction, causing as little inconvenience as possible.
4. The superintendent’s direction may provide that there will be a further defects liability period in respect of the rectification work. If a further defect appears during this extended period, this process may be repeated until the defect has been satisfactorily rectified.
5. If the contractor does not comply with the superintendent’s direction, the principal can have another contractor carry out the rectification works and can recover the costs of doing so from the contractor. The superintendent will certify these costs, and the principal can have recourse to the contractor’s security if the contractor fails to pay them.
What happens at the end of the defects liability period?
Once the defects liability period has expired, the contractor is typically entitled to make a ‘final claim’ for any outstanding monies that may be owing to it, and to request the return of its security.
After the final claim has been received or the period for making a final claim has expired, the superintendent will issue a ‘final certificate’ identifying the final amount to be paid by the principal to the contractor (or vice versa).
If there is no money owing to the principal and there are no outstanding defects or unresolved disputes, the principal will then be required to release and return the balance of the contractor’s security.
How does a final certificate affect the contractor’s defects obligations?
For defects that were not identified, and were not reasonably capable of being identified before the end of the defects liability period, a final certificate is unlikely to have any effect on the contractor’s obligations.
For defects that should have been identified and brought to the contractor’s attention during the defects liability period, a final certificate may make it difficult for a principal to bring a claim against the contractor. You can read more about this issue here.