The application of limitation periods when passing defects liability down the contractual chain

Edward Foyle
Fenwick Elliott, London
efoyle@fenwickelliott.com

In Lendlease Construction (Europe) Limited v AECOM Limited [2023] EWHC 2620 (TCC) the judge, Mr Justice Eyre, rejected Lendlease’s claims in respect of the provision of an allegedly defective design by Aecom, holding that the claims were statute barred as they were not brought within the applicable limitation period. The judgment demonstrates the difficulties that contractors that assume design responsibility may face in bringing claims against their design consultants when defects arise years after the completion of the works. As explained in this article, under English law, the limitation period in which a contractor must bring claims for defective design against its design consultant will expire earlier than the limitation period in which its employer must bring defects claims against the contractor. Careful drafting of the contracts’ terms is required in order to avoid a contractor becoming barred from passing on defects claims to its design consultants.

The facts of the dispute

Lendlease had been engaged to design and construct an oncology centre at a hospital in Leeds and achieved practical completion in December 2007. Aecom had provided mechanical and electrical consultancy services to Lendlease under a Consultancy Agreement and its designs were incorporated into the oncology centre. Concerns about possible defects in ‘Plant Room 2’ and elsewhere in the hospital were raised in November 2017 and proceedings were issued against Lendlease by the employer and maintenance contractor in respect of 25 defects in its works, some of which arose from mechanical, electrical and plumbing (MEP) design, including the fire safety strategy, and others that arose from poor workmanship. Following the judgment in those proceedings, and a settlement agreement that was reached in respect of some of the defects, Lendlease paid amounts to the employer and maintenance contractor in respect of the defects. Lendlease sought to recover the amounts paid in respect of the defects from Aecom. However, the Limitation Act 1980 requires that, under English law, claims be brought within six years of the accrual of a cause of action or 12 years of the accrual of a cause of action if the contract was executed as a deed.

As Lendelease’s court proceedings against Aecom were commenced on 30 May 2019, Aecom contended that the claims were brought outside the statutory limitation period.

Ensuring claims for defective design can be passed down the contractual chain

Under English law, limitation periods run from the date of accrual of a cause of action. The date of accrual of the cause of action will vary depending on the nature of the claim pursued (ie, whether it is a claim for breach of contract or a claim in negligence) and on the specific obligations assumed under a contract’s terms.

Where a consultant is engaged to carry out design work, the date on which the cause of action accrues for a breach of contract claim in respect of the defective design is the date on which the consultant completes its services by providing its design. However, for a contractor (in this case, Lendlease) the date on which the employer’s cause of action against it for defective design work accrues is likely to be the date of practical completion of the works, which may occur years after the consultant’s design was provided. As a result, when defects arise at the end of the limitation period under the contract with the employer (ie, six or 12 years after practical completion), the contractor may find itself out of time for bringing a breach of contract claim against its design consultant, as Lendlease did in this case.

In order to preserve the ability to pass claims on to their consultants, parties often include wording in their appointments providing for the consultants’ limitation period to match their own. The decision in Lendlease demonstrates that any attempt to extend a limitation period must be made with extreme care. Clause 14.06 of the Consultancy Agreement purported to extend the limitation period for Lendlease to bring a claim against Aecom to 12 years from the date of practical completion so as to match Lendlease’s own exposure to claims from its employer. It stated: ‘No action or proceedings under or in respect of this Agreement in contract or for breach of statutory duty shall be commenced against the Consultant after the expiry of 12 years after the Completion Date for the Works’.

This wording was not sufficient to displace the usual statutory limitation period. The judge’s analysis was that Clause 14.06 was simply an agreement that claims would not be brought outside a particular period of time, noting that disapplying the statutory limitation period would be a ‘significant departure from the norm’ and therefore presumed unlikely to have been the parties’ intention. In light of this conclusion, it is clear that it is not sufficient for parties seeking to extend the limitation period to state a longer period for bringing claims; they must also expressly state that the Limitation Act shall not apply. While this is not new law, the judge followed Oxford Architects Partnership v Cheltenham Ladies College [2006] EWHC 3156 (TCC), [2007] BLR 293. Such a decision provides a reminder of the care needed to disapply the Limitation Act, even in light of Supreme Court decisions on contractual interpretation since Oxford Architects (eg, Wood v Capita Insurance Services Ltd [2017] UKSC 24, [2017] AC 1173), which the judge took into account.

The limited options for claimants facing limitation issues

The consequences of not extending the period for bringing claims are serious. When defects claims are brought against the contractor at the end of its limitation period, it may be left without a route to recover its losses from its design consultant. Contractors bringing claims for defective design against their consultants and facing potential limitation issues commonly look to extend their consultants’ limitation period by bringing claims in negligence (rather than for breach of contract) and/or claims that their designer was subject to an ongoing duty to review its design. In each case, the cause of action accrues slightly later than in the case of a breach of contract claim. The judge’s guidance in Lendlease highlights the limited utility of such claims.

The cause of action for a claim in negligence accrues on the date the contractor builds following the defective design issued to it, as this is considered the date the damage is caused. This will be a later date than the date a cause of action for breach of contract accrues (ie, the date the design is provided), such that the period in which a claim must be brought is extended. However, as was the case in Lendlease, the limitation period for a claim in negligence against a design consultant will still expire before the limitation period for a claim by the employer against the contractor as practical completion (the date on which a cause of action for a claim against the contractor accrues) could still be months or years after the design was built.

Claims for a breach of an ongoing duty to review a design and warn of any issues with the design rely on a fresh breach of contract, and a new accrual of a cause of action, on the date that the review should have been made. However, an ongoing duty to review a design is unlikely to extend beyond the date that the design is constructed. As there can be no accrual of a cause of action for such a claim after the design is constructed, basing a claim on a breach of a duty to warn will not extend the limitation period beyond the expiry of the period for claims in negligence.

The judge also stressed the limited value of a claim for breach of duty to warn. Claimants often overlook that only losses arising from the loss of opportunity to correct the defects in the design are recoverable and that losses arising from the original failure to provide an adequate design are not recoverable. This is because the fact that a designer may be under an ongoing duty to review its design does not change the date of accrual of a breach of contract claim, which remains the date the defective design was provided. Claims for breach of a duty to warn are only likely to lead to a recovery in limited circumstances; for example, if a failure to correct the inadequacy in a design caused the contractor to incur liabilities that could have been avoided if the contractor had been warned that the design required changing. Frequently, a contractor’s only loss is the cost of remediating defects in the original inadequate design; these costs cannot be recovered through a claim for a breach of the duty to review and warn.

The judge also noted the limited circumstances in which an obligation to review and warn of any issue with a design will arise. Absent an express contract obligation, a duty to review and/or warn will only arise when the contract imposes duties that extend beyond the provision of the design and will require a ‘trigger event’ so as to make the review necessary or put the designer on notice that a review is required. In Lendlease, Aecom’s Consultancy Agreement included review and coordination obligations. The judge concluded these obligations did not require Aecom to review the work of others, such that there was no ‘trigger event’ requiring Aecom to review its own design after it had been provided.

Concluding remarks

Contracts frequently appear to impose liabilities on parties far into the future, for example, assets are often said to have a 25-year, 50-year or even longer design life. However, unless the Limitation Act has been expressly disapplied and replaced with a longer period, it is highly likely that any claims must be brought within six years of the accrual of a cause of action (or 12 years for agreements executed as a deed). Lendlease is a reminder that parties must take real care when looking to disapply the usual statutory limitation period.

It is of course vital that parties looking to pass liabilities down the contractual chain understand whether the Limitation Act applies, when their possible causes of action accrue and that they closely monitor potential claims as limitation periods approach expiry. If necessary, parties should look to agree a stay to the limitation period well in advance of the limitation period expiring.