Institution of Civil Engineers

ICE Legal Note Liability for Latent Defects

1
1.1

Introduction
Construction should not contain defects. Where it does, and the defects are attributable to poor design or supervision, the professional responsible may be liable for them. This liability may arise in contract, tort or both. (There can also be criminal liability, but that is outside the scope of this note). It is frequently important to distinguish between contractual and tortuous liability as the differences may affect:

the standard of care by which the professionals work will be tested, the type of damage for which the professional is liable, and the duration of the professionals liability.

1.2

Defects can be of two types:

patent here the client or his professional advisers can see the defect and are able to take action immediately following construction, or latent where the defect is hidden and may not come to light for many years.

1.3

This brief note focuses on latent defects. The issues are:

for which types of latent defect is a professional liable? what is the last date when a client can sue a professional? can a client assign a right to sue for latent defects? what insurance is available to protect the professional?

2
2.1

Liability in contract
Most formal relationships between organisations in the construction industry are governed by contracts, for example:

consultancy agreements, the various types of construction contract, contracts for the sale of goods and materials, joint venture agreements, and insurance policies.

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2.2

The rights and obligations of the parties to a contract are, in principle, those set out in the contract itself (but see 2.4 below). However further obligation may be implied by law. Liability in contract for defects arises as a result of breach of these express or implied terms. For historical reasons the law imposes very different standards on those providing services compared with sellers of goods:a) those under contracts for the provision of services are required to use reasonable skill and care, whereas, sellers of goods must ensure that the goods are of satisfactory quality and fit for their intended purpose.

2.2

b)

2.3

A consultant who designs works for others to construct must use reasonable skill and care, whereas a contractor, carrying out the same design but also constructing it, is regarded as in a similar position to a seller of goods, and is under an obligation to ensure that the works are fit for their intended purpose. Thus (unless the contract otherwise provides) a contractor who undertakes a design and construct project will be liable to the employer for breach of contract if the works turn out to be unfit for their intended purpose, however much skill and care he used. But when he comes to sue the consultant he employed to do the design, the test will be whether the consultant used reasonable skill and care. In England and Wales only parties to a contract can, in general, sue for breach of its terms. However the Contracts (Rights of Third Parties) Bill currently before Parliament, seeks to allow third parties to enforce the terms of a contract if the contract expressly provides that they may or if the term purports to confer a benefit on them. This will bring us into line with the current practice in Scotland (see section 5 below)

2.4

3
3.1

Liability in tort (delict in Scotland)

The terms of a contract only apply to those who are parties to the contract, (the position is slightly different in Scotland, as explained below). However liability to other persons can arise under the law of tort which is that branch of the law that imposes on us a duty of care towards those who we can reasonably foresee might be affected by our acts or omissions. Tortious liability can result from trespass to land, to goods or to the person, from nuisance, from dangerous premises or chattels, from the escape of fire or other noxious things and in many other ways. However, the tort most likely to lead to legal action against the professional engineer for defects, is that of negligence.

3.2

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3.3

The concept of negligence is based on the inflicting of injury or loss upon another person by failure to take such care as the law requires. The onus is on the injured person (the claimant) to prove: a) b) that the person sued (the defendant) owed him a duty of care, that the defendants conduct fell short of the standard of care required of him, and, that, as a result, the claimant has been injured or suffered loss.

c) 3.4

The duty of care is based on foreseeability - one must take reasonable care to avoid acts, omissions or statements which could reasonably be foreseen to be likely to result in injury or loss to other people. The standard of care to be exercised is that of the ordinary, prudent person and will depend on the particular circumstances of each case.

3.5

The degree of skill required of professional people has been defined on many occasions by the courts. The following direction to the jury in Bolam v Friern Hospital Management Committee [1957], has been adopted by the House of Lords and is frequently cited:Where you get a situation which involves some special skill or competence ... the test is the standard of the ordinary skilled man exercising and professing to have that special skill. A man need not possess the highest expert skill it is sufficient if he exercises the ordinary skill of the ordinary competent man exercising that particular art.

3.6

The concept of negligent acts or omissions was extended to negligent misstatements in Hedley Byrne & Co. v Heller & Partners [1964]. In that case the plaintiffs extended credit to a company in reliance on assurances given by their bankers which turned out to be unjustified. The principle has since been applied in many other areas and could include technical reports and designs.

4
4.1

The measure (quantum) of damages

Damages are assessed differently for breach of contract and tort: a) in contract damages are intended to put the claimant back in the position he would have been in if the breach had not occurred, in tort damages are intended to compensate the claimant for the losses that could reasonably have been foreseen as likely consequences of the act or omission.

b)

4.2

In contract the recoverable damages are those flowing naturally from the breach, provided that it may reasonably be supposed that at the time they made the contract the parties would have been aware that such damages would be the likely consequence of such a breach. Special damages are only recoverable if the other party was made aware of them prior to contract.

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4.3

In negligence the cost of making good damage caused by the defect, or loss of market value, may be recoverable depending on the circumstances, but there must be actual, physical damage to property or injury to people. A claimant cannot recover for what is known as economic loss, that is the cost of putting right a defect where there has been no damage to property or injury to people, and other consequential loss. A claimant is required to mitigate potential loss and the costs of so doing are what is meant by the term economic loss. Thus if you find a defect in the plaster in your house and realise that it will inevitably fall off and cause consequential damage, you must mitigate this potential loss by replacing it and cannot claim against the builder in the tort of negligence (though you may be able to claim from him for breach of contract, which is also sometimes rather confusingly referred to as negligence). On the other hand, if you proceed with a building development on the basis of advice about its potential sale value and, when completed, find that you can only sell it for a lesser sum, you may be able to claim in tort for the difference from the person who gave the advice, if he gave it negligently. You have suffered actual, financial loss which you cannot prevent. This is not what the law means by economic loss, which is the cost to you of putting something right in order to prevent injury to people or property. The principal applies equally to engineering advice where it is known that reliance will be placed on that advice.

4.4

4.5

5
5.1

Differences in Scotland
The concept of privity of contract, that only parties to a contract can sue under it, is not as strong in Scotland as in England and Wales, and contractual rights can be acquired by third parties under what is known as the principle of jus quaesitum tertio (rights on account of third parties). If there is a provision in a contract that benefits a third party, the third party may sue for that benefit even though there is no direct contractual link. As there is no need to demonstrate fault the possibility of success is greater than in delict. The Law Reform (Miscellaneous Provisions) Act (Scotland) 1985, provides that there is a delictual liability for pre-contractual misrepresentations. Hence engineers carrying out surveys and making reports could be liable to third parties with whom they do not have any direct contractual relationship. The same act amended the Unfair Contract Terms Act 1977, making disclaimers only permissible when they are fair and reasonable.

5.2

6
6.1

Limitation of actions
For reasons of fairness, certainty and evidence all jurisdictions limit the time within which actions can be brought. The cause of action is not extinguished but except in cases of fraud, the plaintiff is barred from bringing it after the relevant period has expired. The desire to achieve a balance between the rights of defendants to know where they stand and the rights of plaintiffs to seek remedies for legitimate complaints has resulted in a somewhat confusing array of rules.

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6.2

In England and Wales the limitation periods are set down in the Limitation Act 1980, as amended by the Latent Damage Act 1986. The basic periods are: a) For simple contracts, six years from the date when the cause of action accrued. (Simple contracts include oral contracts, those formed by an exchange of correspondence and those contained in a document signed by the parties.) For so called specialty contracts (those executed under seal or as a deed), the basic period is twelve years. For actions in tort the period is generally six years from the damage, but three years for personal injury actions.

b)

c)

6.3

The Latent Damage Act 1986 introduced special provisions to deal with the problem of latent damage. Obviously there is a balance to be struck here between the need to allow claimants to pursue claims in negligence in circumstances where they have no means of knowing of the problem until many years after the event, and the need of defendants (and their insurers) to be able to know when the risk is at an end. For actions in negligence the act provides:a) a limitation period of three years from the date that the claimant had the knowledge required, or might reasonably have acquired such knowledge, a right to bringing such an action, even if that is after the normal six or twelve year period, and an overall limit of fifteen years from the original act or omission.

b)

c)

6.4

In Scotland time periods within which actions must be brought are governed by the Prescription and Limitation (Scotland) Act 1973, which applies to both contract and delict and introduces the concepts of short and long negative prescriptions:a) The short negative prescription provides that if there has been a period of five years from the date of the obligation without a claim being made, the obligation becomes extinct. The date of the obligation is defined in the act as being the date when the loss, damage or injury occurred or, where the creditor was not aware, the date when he first became, or should reasonably have become, aware. It is therefore not the actual wrongful act or breach that is the starting date but the date of the loss, injury or damage. For example, the starting date would be when an owner found cracks in a house, not when the cracks first occurred. The long negative prescription provides for the obligation to become extinct after a period of twenty years from the date when the damage occurs, omitting the concept of discoverability. Hence, in the case of the cracks, the obligation will become extinct twenty years after they occurred irrespective of whether or not the

b)

c)

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owner could reasonably have discovered them by then. The Scottish Law Commission have proposed amendments to these periods but they have not yet been enacted. 6.5 Claims under indemnity clauses can be brought long after these limitation periods. The starting point for calculating limitation periods for breach of contract is the date the cause of action accrues. If a client is sued, his cause of action against the consultant or contractor under an indemnity clause only accrues when judgement is entered against him. This may be many years after the end of the normal limitation period. If the claim relates to negligence arising out of latent defects the action on the indemnity (if it covers negligence) must be brought within the three year period (in England and Wales) from the date the client had, or ought to have had, the requisite knowledge. Where there has been fraud, deliberate concealment or mistake the various limitation periods are postponed until after discovery of the fraud, deliberate concealment or mistake by the plaintiff. Quite what is meant by deliberate concealment in the context of construction contracts is not entirely clear. Many operations in a construction project necessarily involve deliberate concealment: foundation construction conceals the formation; pouring concrete conceals the reinforcement; plaster conceals brickwork - the examples are infinite. Or does deliberate here require proof that the defendant knew of the breach of contract at the time of the concealment? That could be hard on claimants as it would involve considering the state of mind of those who did the concealing, many years after the event.

6.6

6.7

7
7.1

Insurance to cover liability for latent defects

There are three types of insurance policy that may cover the cost of remedying defects: a) Professional indemnity policies covering legal liability for negligence in the performance of professional duties. So called All Risks policies covering loss or damage during construction. These can be taken out either by the contractor or the client. Public liability policies covering legal liability for loss or damage, usually after the works are handed over.

b)

c) 7.2

Most consultants and contractors carry professional indemnity insurance to protect them against actions for negligence in the performance of their professional activities. Such insurance operates on a claims made basis. In other words the relevant policy is the one in force at the time the claim is made and not that for the year in which the error was committed. Professional indemnity policies often only cover legal liability for damage arising from negligence. Thus contractors may have a legal liability for a failure due to a design defect but not be able to recover under their professional indemnity policy because they

7.3

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have used reasonable skill and care in carrying out the design and have not been negligent. 7.4 During construction the contractors, or clients, all risks policy should cover all parties to the project, although different policies vary. Policies usually cover the cost of repairing damage caused by defects in design, plan, specification, workmanship or materials. Often, though, the cost of repairing the defective part itself is excluded, and invariably policies will not cover the cost of rectifying a defect where no physical damage has occurred. After the works have been handed over certain risks may be covered by a contractors or clients public liability policy. Insurance policies are governed by the principle of utmost good faith (or, as the lawyers refer to it, uberimae fidei). This means that the insured is under an obligation to disclose all circumstances that might affect the risk and, if he fails to do so, underwriters may be able to return the premium and avoid the policy. There are moves to introduce the Continental concept of decennial insurance. These are policies to insure buildings against latent defects irrespective of who was at fault. In the French version they usually cover a ten year period following completion - thus the name decennial. However they are only available for buildings, not other civil engineering works, and at present are extremely expensive. Those responsible for setting up projects should ensure that all potential liabilities and risks are covered.

7.5

7.6

7.7

7.8

8
8.1

Europe
An attempt has been made to harmonise European laws on defective construction and related insurance. However the different systems are difficult to reconcile and progress has been slow. It seems unlikely that there will be any significant change for the time being. This pamphlet has been written in the light of the law as it stands in June 1999 and is liable to change.

Titles in this series

Engineers and Auditors Liability for Latent Defects (formally Liability for Latent Damage) Collateral Warranties Expert Witness Guidelines (formally Expert Witnesses and their Clients)

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Forthcoming titles
Direct professional access to Council Good professional practice Reviewing the Work of another Engineer After the event Legal Expenses Insurance Limited Liability Partnerships

Health and Safety in Construction to be published as a Design and Practice Guide The Management of Health and Safety in Construction.

Published for the Institution of Civil Engineers by Thomas Telford Services Ltd, I Heron Quay, London E144JD Liability for Latent Damage First published 1991 The Institution of Civil Engineers 2001 The information, suggestions and/or advice contained in this publication are intended for use as a general statement and guide only. Neither the Institution nor any committee of the Institution can accept any liability for any loss or damage which may be suffered by any person as a result of the use in any way of the information contained herein and any person using such information or drafting contracts, specifications or other documents based thereon must in all cases take appropriate professional advice on the matters referred to in this publication and are themselves solely responsible for ensuring that any wording taken from this document is consistent with and appropriate to the remainder of their material.

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