Beware of contractual clauses extending liability

In the recent case, Larkfleet Ltd v Allison Homes Eastern Ltd [2016] EWHC 195 (TCC), England’s Technology and Construction Court had to decide a preliminary issue concerning limitation periods in a building contract. The case is a good reminder to contractors to carefully consider any contractual clauses that may extend their liability beyond the usual 6 year time period from the date of practical completion.

The Contract

On 1 September 2001, Larkfleet (the Claimant) entered into a contract with Swallow Homes for the design and construction by Swallow Homes of three residential properties. The contract was a “JCT Standard Form of Building Contract With Contractor's Design, 1998 Edition”, with some bespoke amendments.

In England, if a “builder” is registered with the National Homes Building Council (NHBC), the property it builds will have the benefit of NHBC cover, enabling the purchaser to claim from the NHBC if certain defects appear in the property within 10 years of completion.

Bespoke amendments to Contract

Unusually, in this case, the Employer (Larkfleet) rather than the Contractor (Swallow) was registered as the "builder" for the purposes of NHBC cover, but one of the bespoke amendments to the Building Contract (2.5.5) dealt with that by stating :“The Employer [i.e. Larkfleet] will register the site with NHBC under the Employer's registration and the contractor [i.e. Swallow] warrants to accept responsibility for any defect and any expense incurred due to defective work for the period of 10 Years for the NHBC warranty."

Defects emerged in the foundations of the properties and the three homeowners made claims against the NHBC within the 10 year period of NHBC cover. The NHBC paid for the remedial work and notified Larkfleet to seek reimbursement.

Time-Bar Argument

Larkfleet issued proceedings against Allison Homes Eastern Ltd (who had since acquired the business of Swallow, including its liabilities). Larkfleet’s claim was both in contract and negligence in respect of the defective design of the properties. In response, Allison Homes argued that the claim was time-barred, since the limitation period for claims in contract and tort is 6 years from when the cause of action arose and here more than 6 years had passed since practical completion of the properties. Further, Allison Homes argued that the properties had been registered with the NHBC more than 10 years prior to issue of the proceedings.

Central to the resolution of the time bar dispute was the interpretation of Clause 2.5.5 of the Building Contract (set out above).

Court’s Ruling

The Court held that the claim was not time-barred because:

1. Clause 2.5.5 operated as a contractual assumption of responsibility by Swallow to Larkfleet, for Larkfleet’s responsibilities to the NHBC. It did not operate as a limitation period between Larkfleet and Swallow.
2. The cause of action for breach of clause 2.5.5 would occur either when the Contractor was asked to comply with its obligation and refused to do so or, alternatively, if the Contractor did not respond at all, a reasonable time after the Contractor was asked to take responsibility.

The Court’s ruling makes perfect sense. The effect of clause 2.5.5 is to extend the limitation period even longer than 10 years from practical completion since the reimbursement of payment by Larkfleet to NHBC must be some time after the practical completion. In fact, the usual limitation period of 6 years may arguably run later than the date of practical completion since the contractor may still rectify any defects which become apparent during the defects liability period (which is usually 1 year after practical completion) and therefore the cause of action does not arise until the expiry of the defects liability period.

Key Contacts

Joseph Chung

Partner | Litigation and Dispute Resolution

Email or call +852 2825 9647