Defects in construction can pose significant challenges both during a project and long after its completion. This issue is particularly important for those involved in government projects due to its impact on public safety, consumer protection, the projects budget and use of public funds, and the overall integrity of the built environment.
To help you understand some of the concepts around construction defects, this article briefly explains the defects liability period, a contractor's right to remedy defects, maintaining privilege during defect investigations and the common law right to claim damages for defective works. Watch our on-demand seminar for a more detailed discussion on these topics.
Defects liability period
The defects liability period (DLP) is a specific timeframe, typically 12 months from the date of practical completion, during which contractors are responsible for rectifying any defects that arise. This period is often shorter in relation to contracts for civil works. This allows the contractor an opportunity to repair defects which may not have been apparent before completion without the principal having to resort to dispute resolution. Having the contractor handle the repairs is usually cheaper and more efficient than the principal organising for a third party perform the repairs.
A defects liability clause will require the contractor to repair or make good defects which are, generally, the result of the contractor's default. Ultimately, this will come down to the drafting of the clause. Some contracts may require the contractor to remedy defects irrespective of the cause, with appropriate reimbursement if the contractor is not at fault.
Contractor's right to remedy the works
Determining whether the contractor has an exclusive right to remedy defects during the DLP is important. If the contractor holds this exclusive right, a principal could be in breach of the contract if they engage another contractor to remedy the works without offering the contractor the opportunity to do so first.
A principal may also have the right to recourse to the security under the contract. In Queensland, the applicability of section 67J of the Queensland Building and Construction Commission Act 1991 (Qld) (QBCC Act) must be considered for any such recourse, noting that if the work qualifies as "building work" under the QBCC Act, the principal or head contractor may only have recourse to the security if:
- it is to obtain an amount owed (as a debt due) under the contract
- if they have given written notice to the other party advising them of their intention to have recourse to the security and of the amount owed, within 28 days after becoming aware, or ought reasonably to have become aware of their right to obtain the amount owed.
Work performed for the State or an instrumentality or agency of the State by an independent contractor is not excluded from the ambit of "building work" under the QBCC Act.
Australian courts appear to favour an approach that places a heavy burden on the principal or head contractor to comply with contract procedures for notifying identified defects and allowing the contractor to rectify those defects. Failure to do so could substantially reduce the damages that the owner or principal can recover.
Common law rights to claim damages
Despite provisions concerning defects in the contract a contractor can, in some instances, still be liable for damages for defective work through a claim for breach of contract.
In Turner Corporation Ltd (Receiver and Manager Appointed) v Austotel Pty Ltd (Unreported Judgement, Supreme Court of New South Wales, Cole J, 55093 of 1993, 2 June 1994), the NSW Supreme Court considered a standard form building contract with provisions concerning defects. The Court held that there was an established code which defined the rights, obligations and liabilities of the parties and the mechanisms for achieving practical completion and addressing defects during the DLP.
Although the contract did not expressly state that either party agreed to waive their common law rights in relation to defects, the Court held that there was no room for damages at common law because the parties had, by contract, agreed on the consequences for the proprietor and the contractor in the event of a breach regarding defective building works.
The extent to which a contract excludes the common law right to damages for breach of contract concerning defective works depends on the contract terms.
Briefing experts
During or after a construction project a defect in the works may become apparent. When the cause or impact of the defect is unclear, engaging an expert to investigate may be necessary.
Depending on the nature of the defect, you may require multiple experts who specialise in the specific type of defect and can assess the cost to rectify that defect. It is important to ensure these experts are suitably qualified to provide their opinions on the defect.
The process of engaging experts can be lengthy and may require searching for the expertise beyond Australia.
If you plan to rely on your expert to support a legal case, it is worth investing early in an independent expert who typically carry more credibility than a consultant involved in the original construction work or design.
Maintaining privilege during defect investigations
It is often practical to instruct your solicitors to engage your expert, manage any written communication and ensure that legal privilege applies where possible.
If expert opinion is sought to settle a dispute, it and any related communications may be subject to 'without prejudice' privilege. This principle safeguards documents from being relied upon by the other party to your detriment. Therefore, all documents should be marked as 'without prejudice' where possible.
Expert reports obtained for settlement negotiations are generally considered to be 'without prejudice' and are not disclosable outside of that setting. However, their confidentiality can be challenged if the link to settlement is not properly established.
If litigation is anticipated, communications with experts can be subject to legal professional privilege if they are confidential and primarily intended for the purposes of seeking legal advice for actual or anticipated litigation. However, once an expert report is finalised and exchanged between the parties, previously privileged documents, such as the instruction letter or brief sent to the expert, are no longer privileged.
In Queensland, expert statements or reports are not privileged from disclosure. To minimise your disclosure obligations, you could:
- request the expert not to prepare any working documents, including draft reports
- if a draft report must be prepared, ensure that this is issued to your solicitor only and exclusively for a review to provide you advice
- to the extent possible, keep communications with the expert verbal.
To maintain privilege, label all correspondence with the expert as confidential and privileged. If a document is not treated as confidential and privileged, privilege will likely be waived.
Latent defects
Latent defects are defects that are hidden or not apparent until long after a project's completion. Disputes between parties during this phase can become complex and serious.
Beyond merely considering the potential causes of action to recover this loss, the party who suffers the loss must consider limitation periods, proportionate liability and statutory defences. We consider each of these in our previous article on hurdles to recovering loss for latent defects in construction projects.
Takeaways
This article underscores the critical aspects of construction defects and liability management. Firstly, the DLP typically 12 months post-practical completion, obligates contractors to rectify defects. This period facilitates efficient and cost-effective defect resolution without formal disputes, emphasising contractual obligations that may require contractors to remedy defects regardless of fault. Concurrently, contractors often hold an exclusive right during this period to rectify defects, compelling principals to adhere strictly to contract terms before engaging other parties.
Secondly, legal considerations highlight common law rights where contractors may face liability for defective work despite contract provisions. Expert involvement is pivotal in defect investigations, safeguarded by legal privilege, crucial for protecting communications and documents marked 'without prejudice.'
This publication does not deal with every important topic or change in law and is not intended to be relied upon as a substitute for legal or other advice that may be relevant to the reader's specific circumstances. If you have found this publication of interest and would like to know more or wish to obtain legal advice relevant to your circumstances please contact one of the named individuals listed.