Defects "Liability" Periods

Construction

Australia

Defects "Liability" Periods

Why they shouldn't be called that!

1. Defects Liability Periods

1.1 A common feature of construction contracts is what is known as a defects liability period. The defects liability period is the period of time within which the contractor is contractually obliged to return to the construction site to repair defects which have appeared in the contractor's works. The defects liability period usually commences on practical or substantial completion and extends for a specified period, commonly 12 months. It is not uncommon for a further defects liability period, often equal to the original period, to apply to repaired works.

1.2 The major benefit to the client to be derived from a contractual defects liability period is that it provides a mechanism for the making good of defects which either do not need to be completed prior to practical completion or which become apparent after practical completion without the need for the parties to resort to dispute resolution.

1.3 Additionally, it would make practical sense for a client to have the contractor who performed the original work in which a defect has appeared return to rectify that defect (at least for a reasonable period, when the contractor's workforce are likely to still be the people who did the work originally). It is likely that a contractor who is unfamiliar with the original work would incur greater cost rectifying the same defect than the original contractor.

1.4 In addition to a contractor being contractually obliged to return to the construction site to repair defects which have become apparent during the defects liability period, depending on the wording of the relevant clause, the contractor may also have an exclusive right to repair defects during that period. From a contractor's perspective, such an exclusive right may be beneficial, as the cost of repairing defects with its own employees is likely to be less than the cost of the owner employing another contractor to repair the defects at the cost of the contractor. Where a contract confers an

exclusive right to repair defects on the contractor, an owner who engages another contractor to repair defects, without first offering the contractor the opportunity to repair the defects, will be in breach of contract.

1.5 Many industry standard contracts contain wording which gives the contractor an

exclusive right to repair defects for a defined period. For example, Standards Australia's standard form of contracts such as AS2124, AS4000 AS4902, and other

similar contracts, provide an exclusive right for the period stated in the direction given under the contract identifying the defect(s) requiring rectification. Similarly, GC21 requires the owner to nominate the period in which the contractor must rectify the identified defect(s). FIDIC contracts provide the contractor with an exclusive right to rectify defect(s) for a "reasonable period", after which the owner must fix the date by which the contractor must rectify the defect(s). In each case, where defects are not rectified by the contractor by the nominated date, the contractor loses their exclusive right to rectify defects and the owner is entitled to engage another contractor with costs incurred by the owner from the other contractor at the original contractor's account. 2. The extent of a contractor’s legal liability for defects

2.1 The end of the defects liability period is not, however, the end of the contractor's liability to their client for defects. It is merely the end of the period during which the contractor is contractually obliged to return to site and make good defects. Because of this fact, many contract draftsmen these days call the periods 'defects correction periods' instead of 'defects liability periods'.

2.2 Owners have a common law right to sue the contractor for breaches of contract,

relevantly here, for instances where the construction work does not meet the

specification. The Owner as claimant is entitled to an award of damages to put them back in the same financial position they would have been in but for the breach. This common law right exists notwithstanding the parties have contractually agreed a defects liability (or correction) period.

2.3 In certain circumstances, contractors have a legislative obligation to rectify defects. Section 72 of the Queensland Building and Services Authority Act 1991 provides that the Queensland Building and Services Authority (the QBSA) may, if it is of the opinion that building work is defective, direct the person who has carried out the building work to rectify the defective building work within the period stated in the direction. A direction under section 72 of that Act can be given within the period that is 6 years and 3 months after the building work to which the direction relates was completed or, if not

completed, left in an incomplete state. It is possible for the QBSA to apply to the Queensland Civil and Administrative Tribunal (QCAT) for the period in which a direction under section 72 can be given to be extended.

3. Limitation periods

3.1 A statutory limitation period is procedural rather than substantive in that it bars a remedy but does not extinguish the claim itself.

3.2 The limitation period for an action for breach of contract is 6 years (or 3 years in the Northern Territory) from the date on which the cause of action accrued1.

3.3 The limitation period for an action for breach of a deed is 12 years (or 15 years in Victoria and South Australia) from the date on which the cause of action accrued2.

3.4 Naturally, therefore, owners (and their financiers) will prefer the construction

agreement to be in the form of a deed, while contractors will prefer it to be in the form of a simple contract!

3.5 The longer period for an action for breach of a deed, however, may be reduced in

certain circumstances by the legislative "long stop" provisions in various states which apply to building actions. Refer to 5 below. These "long stop" provisions are an example of where the right to a claim itself is extinguished.

3.6 In contract, the cause of action accrues upon breach, irrespective of whether or not

damage has been suffered (Battley v Faulkner (1820) 106 ER 668; Sheldon v McBeath

(1993) Aust Torts Reports 81-209).

3.7 This is in contrast to actions in tort for negligence, where the usual date of accrual is when damage has been suffered. Exactly when the breach occurs depends on the nature of the breach and the terms of the contract.

4. Head contract deed/subcontract simple contract

4.1 There is little difference between a contract and a deed in terms of their construction, performance and enforcement. As noted above, there is however a very significant difference in the limitation periods under each, with parties to a contract having a

1

Limitation Act 1969 (NSW), s 14(1)(a); Limitation of Actions Act 1958 (Vic), s 5(1)(a); Limitation of Actions Act 1974 (Qld), s10(1); Limitation Act 1985 (ACT), s11; Limitation Act (NT), s12; Limitation of Actions Act 1936 (SA), s 35; Limitation Act 1974 (Tas), s4(1); Limitation Act 2005 (WA), s 13.

2

Limitation Act 1969 (NSW), s 16; Limitation of Actions Act 1958 (Vic), s 5(3); Limitation of Actions Act 1974 (Qld), s10(3); Limitation Act 1985 (ACT), s13; Limitation Act (NT), s14(1); Limitation of Actions Act 1936 (SA), s 34; Limitation Act 1974 (Tas), s4(3); Limitation Act 2005 (WA), s 18.

period of 6 years within which to commence an action for breach while parties to a deed have a period of 12 (or 15) years within which to commence an action for breach. 4.2 Due to these different limitation periods, a contactor who is a party to a deed with his

principal who enters downstream only a simple contract with a subcontractor in which they seek to pass on certain of their obligations would open themself to claims under their upstream deed which, in certain circumstances, they are not able to pass to their downstream subcontractor.

4.3 To illustrate the point, consider the construction contractor who enters a deed with a principal pursuant to which they are to construct a building. The contractor then subcontracts specialist packages using simple contracts. Should any breach of the upstream deed come to light more than 6 years after completion which is attributable, either in whole or in part, to one of the subcontractors, the contractor could well find themselves liable upstream without recourse downstream.

5. Legislative "long stop" provisions

5.1 In NSW, section 109ZK of the Environmental Planning and Assessment Act 1979

(NSW) (EPA Act) and its associated provisions commenced on 1 July 1998 and were

introduced by the Environmental Planning and Assessment Amendment Act

1997(NSW) (Amending Act). It is largely accepted that section 109ZK imposes a 10 year limitation, "long stop", period for bringing any building action.3 This is supported by the wording in subsection 109ZK(1) "Despite any Act or law to the contrary" and

subsection 109ZK(2), which explicitly states that the provision does not operate to extend any period of limitation under the Limitation Act 1969 (NSW).4

3 _{"The purpose of a long-stop period is to fix a date on which an action will become statute-barred, irrespective of whether the} date of discoverability has occurred. […] a claim will become statute-barred on the expiry of the limitation period or the long-stop period, whichever is the earlier", Panel for Review of the Law of Negligence, Review of the Law of Negligence: Final Report (2002), para. 6.32.

4

Cf. section 134 Building Act 1993 (VIC): "Despite any thing to the contrary in the Limitation of Actions Act 1958 or in any other Act or law, a building action cannot be brought more than 10 years after the date of issue of the occupancy permit in respect of the building work (whether or not the occupancy permit is subsequently cancelled or varied) or, if an occupancy permit is not issued, the date of issue under Part 4 of the certificate of final inspection of the building work", noting that there is no Victorian equivalent to subsection 109ZK(2) of the NSW Act. Consequently, the debate in Victoria has focused largely on whether section 134 Building Act 1993 (VIC) imposes a "long stop" period or replaces the ordinary 6 year limitation period provided under the Limitation of Actions Act 1958 (VIC); see e.g. Brirek Industries Pty Ltd v McKenzie Group Consulting (Vic) Pty Ltd [2011] VCC 294, which adopts the "long stop" approach c.f.Thurston v Campbell [2007] VCAT 340, which

adopts the "replacement" view; see also C. Harrison & J. Greentree, "Limitations periods - Building Act 1993 (Vic), s 134" (2006) 22 Building and Construction Law Journal 243. The decision in Brirek Industries also interestingly restricts section 134 to building actions brought in negligence and excludes contractual claims. (Note that this case is currently being appealed).

5.2 Indeed, the explanatory note to the Amending Act states that one of its objectives was to provide for "a maximum limitation period of 10 years, for actions relating to building work and subdivision".5 The rationale for this 10 year limitation period is also dealt with in the explanatory note:

The imposition of a limitation period of 10 years for any person’s liability for damage arising from defective building work or subdivision work is designed to address the law concerning latent defects in which the current limitation period begins to run only when the defect becomes apparent. The approach taken in the proposed provisions is to limit the period within which proceedings can be commenced to the period of 10 years running from the date on which the relevant occupation certificate or subdivision certificate is issued or, in the case of subdivision work that is carried out after a subdivision certificate is issued, from the date on which a compliance certificate is issued with respect to the completion of that work. The new rule will not extend any period of limitation under the Limitation Act 1969, so that the period during which proceedings may be brought may, under that Act, be shorter than the 10 years proposed. [Emphasis added].6

5.3 Consistent with this, the Courts have interpreted section 109ZK as a 10 year long stop period. In Owners Strata Plan 56963 v Australand7 (Australand) , McDougall J stated that "[t]he purpose of s 109ZK was to provide a 'drop dead' date after which actions might not be brought if they fell within the definition of 'building action' … All that s 109ZK(1) did was impose a time limit for the enforcement of those rights".8 Similarly, in The Owners Corporation of Strata Plan 61390 v Multiplex Corporate Agency Pty Ltd (No 1),9 the Court held that "[s]ection 109ZK relevantly provides that a building action may not be brought in relation to any building work more than 10 years after the date on which the relevant final occupation certificate was issued".10 Thus, it has been rather uncontroversial that section 109ZK imposes a 10 year long stop period for bringing building actions.

5

Explanatory Note accompanying the Environmental Planning and Assessment Amendment Bill 1997 at p. 2. 6 Explanatory Note at p. 11. 7 [2011] NSWSC 710. 8 [2011] NSWSC 710 at [18]. 9 [2012] NSWSC 298. 10 [2012] NSWSC 298 at [3] (Pembroke J).

5.4 It is relevant to note that in all jurisdictions other than Queensland and Western Australia, there are equivalent 10 year limitation periods for actions for damages arising from building work. Notably, the definition of "building work" varies across jurisdictions. Some jurisdictions have confined the definition to the more "physical" aspects, while other jurisdictions have adopted a broader definition similar to that in NSW.11 A table summarising these differences is provided below:

Table of 'long stop' provisions across Australian jurisdictions Equivalent

provision

10 years runs from: "building work" includes design? NSW Section 109ZK Environmental Planning and Assessment Act 1979

See below table Yes

See below table

ACT Section 142

Building Act 2004

date certificate of completion given, or if no certificate, date of last inspection on completion, or if no inspection, date of first occupation);

No

See section 6

NT Sections 159, 160

Building Act 1993

date of issue of occupancy permit in respect of the work, or if an occupancy permit is not issued, on the date of first occupation of the building after completion of the work

Possible "building work" means work for or in connection with the construction, demolition or removal of a building or plumbing or drainage services See section 4 SA Section 73 Development Act 1993

date of completion of the building work No

See section 4

TAS Sections 255, 266

Building Act 2000

date certificate of occupancy issued, or if no certificate, date of first occupation, or if not occupied, two years after issue of building permit

Possible "building work" means work relating to - erecting,

11

See e.g. section 4 of the EPA Act (NSW): "building work" includes the design, inspection and issuing of a Part 4A certificate or complying development certificate in respect of building work.; section 3 Building Act 2000 (Tas): "building work" means "(a) erecting, re-erecting, constructing, altering, repairing, underpinning, demolishing or removing a building; or (b) adding to a building; or (c) excavating or filling incidental to an activity referred to in paragraph (a) or (b); or (d) any other prescribed work"; cf. section 129 Building Act 1993 (Vic): "building work includes the design, inspection and issuing of a permit in respect of building work".

Equivalent provision

10 years runs from: "building work" includes design? erecting, constructing, altering, repairing, underpinning, demolishing or removing a building or adding to a building or excavating or filling incidental to an activity referred to above See section 3 VIC Section 134 Building Act 1993

date of issue of occupancy permit, or if permit not issued, date of issue of certificate of final inspection

Yes

See section 129

QLD Not applicable

WA Not applicable

5.5 Section 109ZK appears in Division 2 of Part 4C entitled "Liability" and provides: (1) Despite any Act or law to the contrary, a building action may not be brought in relation to any building work:

(a) more than 10 years after the date on which the relevant final occupation certificate is issued, or

(b) in a case where no final occupation certificate is issued, more than 10 years after:

(i) the last date on which the building work was inspected by a certifying authority, or

(ii) if no such inspection has been conducted, the date on which that part of the building in relation to which the building work was carried out is first occupied or used.

5.6 Section 109ZI provides the relevant definitions: In this Part:

"building action" means an action (including a counter-claim) for loss or damage arising out of or concerning defective building work.

"building work" includes the design, inspection and issuing of a Part 4A certificate or complying development certificate in respect of building work. [Emphasis added].

5.7 This should be read together with section 4 of the EPA Act dealing with definitions of the EPA Act generally:

"building work" means any physical activity involved in the erection of a building.

"building" includes part of a building, and also includes any structure or part of a structure (including any temporary structure or part of a temporary structure), but does not include a manufactured home, moveable dwelling or associated structure or part of a manufactured home, moveable dwelling or associated structure.

6. Actions for damages arising from defective design

6.1 Generally, a proprietor who suffers loss as a result of defective design may recover damages from the designer for breach of contract or negligence.12 Under the EPA Act, the 10 year limitation period is applicable only to actions relating to "building work" and section 109ZI expands the general definition of "building work" provided in section 4 of the EPA Act to explicitly include "design".13 Therefore, an action claiming defective design is likely to fall within the ambit of section 109ZK.

6.2 Indeed, in Australand, the NSW Supreme Court held that section 109ZK did apply to

an action arising out of defective design. The Court in Australand dealt with a negligence claim in respect of the waterproofing of a roof:

The question is therefore whether this is a “building action”. On and from

1 July 1998, the combined effect of the definition of “building work” in s 4(1) of the EPA Act and the definition of “building work” in s 109ZI is, I think, that building work means any physical activity involved in the erection of a building and

12

Voli v Inglewood Shire Council (1963) 110 CLR 74; Halsbury's Laws of Australia, Building and Construction, "Breach of Contract by Designer or Consultant" at [65-2140].

13

Lym International Pty Ltd v Marcolongo[2011] NSWCA 303at [18] (Campbell JA): "[b]ecause the definition of "building work" in s 109ZI was an inclusive one, it had the effect of expanding, for the purposes of Part 4C, the definition contained in s 4 EPA Act".

includes the design of that building, and the other matters referred to in the extended definition in s 109ZI. That is to say, it includes the design “in

respect of building work".

It seems to me to follow that the subject matter of the claim against Australand, at least insofar as it relates to the design and construction of the building, is “building work”. As to construction: it is obviously enough physical activity involved in the erection of the building. It is thus within the definition in s 4(1) of the EPA Act.

As to design: it is within the extended definition of building work in s 109ZI, being design in respect of the building work that was subsequently carried out.[Emphasis added].14

7. Actions for damages arising from breach of "design life" warranties 7.1 An example of a contractual design life warranty is as follows:

"The minimum design life of the Tunnel shall be:-

(i) for the structure, 100 years;

(ii) for major mechanical & electrical items, pavement (except as noted below) and tunnel finishes, 20 years;

(iii) road surface, 10 years

All renewable items will be required to have a reasonable life at the time of expiry of the Lease. A schedule of such items, with life at handover, is to be agreed with the owner."

7.2 It is not clear from the explanatory note or drafting history of the provisions detailed in Section 5 above whether the legislature had in mind how section 109ZK would affect "design life" or "fitness for purpose" warranties in building contracts. If actions arising from breach of "design life" warranties were captured by section 109ZK, it would render "design life" warranties effectively meaningless to the extent that they provide

warranties for a period greater than 10 years from the date a final occupation certificate is issued, such as in the example clause given in 7.1 above. Rather, they would simply be providing an unenforceable right. To date, there does not appear to be any case law on this specific point.

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7.3 However, guidance can be drawn from a South Australian case dealing with a breach of contractual warranty as to approvals and consents. In Huepauff & Ors v Inter-Continental Travels P/L No. SCCIV-01-70,15 the Supreme Court of South Australia rejected the application of the 10 year limitation period to an action for breach of contractual warranty. In Huepauff, the Plaintiff had purchased a house from the Defendants. Following the discovery of defective plumbing work, the Plaintiff sued for damages based on an alleged breach of warranty in the contract for sale. The relevant warranty stated:

"The Vendor warrants that to the Vendor's knowledge, no building work has been carried out on the Land without all necessary consents and approvals having been obtained, except as set out in Item R of the Schedule".

Item R of the Schedule stated "nil".

7.4 At first instance, the Magistrate found in favour of the Plaintiff. On appeal, the

Defendants claimed that the action was statute barred by the operation of section 73 Development Act 1993 (SA) (the South Australian equivalent of section 109ZK). The question for the Court was whether section 73 Development Act 1993 (SA) applied to a claim for damages resulting from a breach of contractual warranty as to approvals:

[quoting Perry J on this issue from earlier proceedings] "If a warranty had been given which expressly referred to the soundness of a building, in my opinion the section is hardly likely to apply so as to put a plaintiff out of court, even if the alleged breach of warranty is as a result of defective building work which had been completed more than ten years before the action was brought.

To give the section such a construction would result in quite bizarre consequences. It would mean on Mr Manetta's argument that if an express warranty was given as to the soundness of a building as part of a contract of sale, the warranty could not be relied upon as a basis for the award of damages, if the unsoundness was as a result of building work which was more than ten years old.

In my opinion, much clearer words in the section would be necessary before it could have such a strange result."

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I agree. I also agree that s 73 operates to bar the remedy, but not the right. Section 73 has no application to a claim for damages resulting from a breach of a contractual warranty as to approvals and consents or for damages for

misrepresentation as to approvals and consents." [Emphasis added]16

Accordingly, the Court held the action was not statute barred and the appeal was dismissed.

7.5 Although Hueppauff deals with a warranty as to consents and approvals and in the context of a contract for the sale of land rather than building and construction, similar

arguments by analogy could be made for NSW. The reasoning in Hueppauff draws

attention to a possible distinction which could be raised in NSW to bring an action outside the scope of section 109ZK. Arguably, an action for damages arising from a breach of warranty of design life or fitness for purpose could be distinguished from an action for damages for "defective design". By characterising the claim as one for "breach of warranty" rather than "defective design", the claim would not be caught by the definition of "building action" and thus fall outside the scope of section 109ZK. Yet, depending on the facts of the situation, it could be that there would actually be no substantive difference in a claim for damage arising out of a "breach of warranty" as opposed to "defective design" and a Court may reject such a superficial delineation.

7.6 The argument would be that the contractor has contractually promised, on a continual

or repeating basis, that the warranted works will remain fit for their intended purpose for a period of, say, 100 years and that breach of that promise occurs only when there is knowledge of a failure of such structures to survive for the contracted design life, as distinct from when the (inadequate) design is prepared. The argument would then be that having provided the contractual promise of a 100 year life, it would be unlawful for legislation to override the contractual promise by restricting the promisee’s right to rely on that contractual promise to 6 / 12 years from the time of design as this would effectively mean that all such contractual “design life” provisions are not worth the paper on which they are written.

7.7 Any argument that upon completion of the works the contractor handed over control for

the protection, use and maintenance of the works would be countered by alleging that

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there would be a reduction or extinguishment of the design life promise only where the failure of the works to survive is due to an external event (or the plaintiff's own actions) as opposed to inherent failure.

7.8 In the context of a breach of warranty, to ascertain when the limitation period begins to run, it is necessary to consider whether the warranty gives rise to a continuing

obligation. The distinction between two types of contractual promises was discussed by Dixon J in Larking v Great Western (Nepean) Gravel Ltd (1940) 64 CLR 221, 236-8. Dixon J observed:

If a covenantor undertakes that he will do a definite act and omits to do it within the time allowed for the purpose, he has broken his covenant finally and his continued failure to do the act is nothing but a failure to remedy his past breach and not the commission of any further breach of his covenant. His duty is not considered as persisting and, so to speak, being forever renewed until he actually does that which he promised. On the other hand if his covenant is to maintain a state or condition of affairs, as, for instance maintaining a building in repair, … then a further breach arises in every successive moment of time during which the state or condition is not as promised… If the covenant names a time for the doing or completion of a definite act, it is clear that failure to do the act within the time involves a breach once and for all… the same conclusion will follow where no time is limited but a specified thing is to be done and a reasonable time elapses for the performance of the covenant.

7.9 This distinction is relevant when considering the types of warranties which are often provided. For example, in Swan Pools Ltd v Baker (1980) 25 SASR 103, the defendant agreed to supply and install a fibre glass swimming pool for the plaintiff and warranted that it would rectify and make good any defect caused by faulty workmanship or materials, which should appear in the fibre glass tank within three years of the

commencement of filtration. The pool was installed in late 1971, and defects were first notified to the defendant by the plaintiff in 1972. Proceedings against the defendant were brought in August 1978. The defendant claimed that the breach of warranty occurred on the date of delivery of the defective tank in 1971, and therefore the claim was statute-barred. The Court rejected this argument, holding that the obligation was of

the latter kind as described by Dixon J in Larking (Mitchell J, at 108). Mitchell J (Walters J agreeing), held that “the breach of warranty occurred when the reasonable time [to rectify the damage] expired” (Mitchell J, at 108). Cox J held that “it is implicit in the warranty that the [defendant] would not be in breach of it, in the event of any such defect occurring, before it had been notified of the defect and a reasonable time for doing the repairs had elapsed” (at 110). On the facts, the majority held that the reasonable time to rectify the defects elapsed at the beginning of 1978, and so that was the relevant date from which the limitation period would begin to run (at 108). Cox J held that the reasonable time for rectification elapsed in September 1972, though even on this earlier date, the action was still brought within time (at 111). 7.10 To contrast, where a warranty is given simply that a product will be free from defects

for a stated period of time, and defective goods have been supplied, it appears that the warranty does not impose a continuing obligation for the period of warranty (see VAI Industries (UK) Ltd v Bostock & Bramley [2003] EWCA Civ 1069; Tranquility Pools v Huntsman Chemical Co Australia Pty Ltd [2011] NSWSC 75). Rather, where

defective goods are supplied, the date of breach is taken to occur on the date of

supply, and that is the relevant date of accrual for the purposes of the limitation period. 8. VAI Industries (UK) Ltd v Bostock & Bramley [2003] EWCA Civ 1069

8.1 In the English case, VAI Industries (UK) Ltd v Bostock & Bramley [2003] EWCA Civ 1069, the plaintiff entered into an agreement for the supply of equipment from the defendant. The contract provided a warranty that:-

All equipment is to be warranted as free from defects in Design Materials and Workmanship and must conform to the specification and drawings.

The warranty period is for no longer than 24 months from F.O.B provided that delay in equipment acceptance is not attributable to equipment of your supply.

8.2 On the facts, the delivery FOB took place on 28 July 1995, and accordingly, the 24 month warranty period expired on 28 July 1997 ([7]). On 31 August 1998, the equipment failed as a result of a defect. Proceedings were brought on

in design occurred on the date of delivery, 28 July 1995, and hence the limitation period expired on 27 July 2001 (s 5 Limitation Act 1980 (UK) providing a 6 year limitation period for action in simple contract), and the plaintiff’s action was statute barred. The trial Judge held in favour of the defendant.

8.3 On appeal, the plaintiff submitted that the warranty imposed on the defendant a continuous obligation to have the equipment free from defect throughout every day of the twenty-four month period, so that the failure to do so was a breach which occurred on each day, including the last day. Thus, time should run from the date of the last breach, that is, 28 July 1997, allowing the plaintiff to bring a claim within 6 years of that date, expiring 27 July 2003. The majority of the Court of Appeal rejected the plaintiff’s submission.

8.4 Carnwath LJ considered the warranty did not provide an ongoing obligation that the

equipment would be free from defects, but rather placed a limitation on the extent of the supplier’s obligation. [49]

8.5 Carnwarth LJ stated:

a clause of this kind is generally to be interpreted as giving rise to a single breach at the time of delivery, even though the obligation at that point is to ensure that the goods are in a condition which will remain fit for the purpose for a reasonable time thereafter … I believe that clearer words would be needed, certainly in a form of contract provided by the purchaser, to create a continuing obligation such as relied on the appellant. ([51])

8.6 Similarly, Newman J held that the warranty amounted to a promise that at the date of delivery the equipment would be free from defects and would conform to the

specifications, and that “it was not a promise that went to the future performance of the equipment but to its condition and state at the date of delivery”.

8.7 Ward LJ, dissenting, considered that the words of the warranty were those of a “promissory warranty that each day for up to 24 months the equipment would be free from defects in design and in conformity with the specification” ([48]). Ward LJ found that:

If the warranty continues for two years it seems to me inevitable that it is a promise that for each day of the two year period the equipment will be free from defect. For every day it continues to have a defect there is a breach… ([35])

and thus concluded that the claimants could rely on a breach of warranty up to 27 July 1997, and the claim would not be statute barred.

8.8 In reaching the above conclusion, Ward LJ determined that there were three possible

interpretations of the warranty in this case:

1. as concluded above, that the warranty is a promissory warranty that each day the

equipment would be free from defects in design and be in conformation with the specification;

2. that, as argued by the defence, the equipment is warranted free from defects in design and in conformation with the specification at the time of delivery and that the reasonable period during which the equipment would remain so was the period of "up to 24 months"; or

3. that the stated time period of 24 months was the period in which the parties had contractually agreed the purchaser of the equipment was required to make its claim under the warranty.

8.9 Carnworth LJ, with whom Newman J concurred, held that the words " The warranty period is for no longer than 24 months" could not "change the nature of the warranty, nor in particular … extend the obligations imposed on the supplier. In context, as I read it, it is intended to place a limitation on the extent of the supplier's obligations." [49]

8.10 Such a conclusion may seem possible in light of the warranty considered in this case (24 months, clearly less than the statutory limit on a claim for breach of contract) but it would not seem logical had the warranty under consideration have been a 100 year design life. Could the Court have held that 100 years "place[d] a limitation on the extent of the supplier's obligations"? It seems that the opposite is the only possible

interpretation and that the parties' agreement is not an attempt to fix the period of time within which a claim can be made but rather an agreement of the type at 1 above.

9. Tranquility Pools & Spas Pty Ltd v Huntsman Chemical Co Australia Pty Ltd [2011] NSWSC 75

9.1 VAI Industries was considered by the NSW Supreme Court in Tranquility Pools & Spas Pty Ltd v Huntsman Chemical Co Australia Pty Ltd [2011] NSWSC 75. There,

Einstein J agreed with the majority in VAI Industries.

9.2 The plaintiffs manufactured pools using a product supplied by the defendant and then

sold those pools to customers. The plaintiffs claimed that the defendant’s product was defective which resulted in blistering and black spots in the pools. The plaintiffs brought an action for breach of contract on the basis the product was not of merchantable quality and was in contravention of ss 52 and 53 Trade Practices Act. It should be noted that the issue of limitation periods was raised, not as a defence by the defendant, but being relevant to assess damages and the extent of the plaintiffs’ liability to its customers as a result of the fault of the defendant.

9.3 The plaintiffs had provided customers with warranties that:-

 the pool shell had been fabricated to the highest standards of manufacture and raw materials; and

 the pool shell was to be free from defects caused by workmanship or raw materials used in the fabrication process for ten years from the date the pool shell is first filled with water. [467]

9.4 The plaintiffs claimed that pool owners would have a 16 year maximum claims period.

The plaintiffs relied on reasoning similar to Ward LJ’s reasoning in VAI Industries. The plaintiffs claimed that the warranty constituted a promise that pools would be free from defects for the whole of the 10 years, and that if a breach of that warranty manifested on the last day in the tenth year, the normal 6 year limitation period would begin to run from that date, thus producing a 16 year maximum claims period ([579], [586]). 9.5 Einstein J rejected this submission, and held:

[588] In my view, the proper interpretation is that if a pool was supplied with a latent defect, such that it would eventually develop osmosis, the express warranty would be breached upon supply, since the shell would not be free of defects caused by workmanship and/or raw materials. That is … at the time of delivery the

customer’s cause of action for breach of the express warranty would have accrued. In my view, the words “for 10 years when the Shell is first filled with water”, define the period in which a claim for breach of the express warranty, based on the fact that defects had become manifest, could be made against Tranquility.

9.6 These cases illustrate how the wording and nature of a warranty will dictate when a breach is taken to have occurred, and accordingly, the date of accrual for the purposes of the limitation period. Generally, where there is a warranty to rectify a defect, so long as the defect has been notified within the warranty period, then the date of breach will occur upon the expiration of the reasonable time to rectify the defect. Therefore, depending on the facts and the reasonable time to rectify a defect, the expiry of the limitation period may be well outside the warranty period, as seen in Swan Pools.

10. Summary

10.1 The principle remains that the date of accrual for a cause of action in contract is the date of breach. The date of breach does very much depend on the nature of the warranty provided and the factual scenario. The results in both VAI Industries and Tranquility Pools, that the date of supply was considered the date of breach of

warranty, turn particularly on the facts and the wording of the warranties given. Notably in those cases, the equipment was defective from the very start.

10.2 On the face of it, these cases do seem to create a strange situation, where a claim for a breach of warranty that equipment will be free of defects for a particular period of time (say 15 years) can only be brought within the first 6 years, and so where a defect manifests after the sixth year, a claimant will be statute barred, despite having paid for a longer period of warranty. Applying this reasoning, warranty periods for longer than 6 years would be meaningless and a waste of money if a premium had been paid for the longer warranty period. Such a scenario was not raised before the courts in either VAI Industries or Tranquility Pools. However, the dissenting judgment of Ward LJ in VAI Industries makes a very persuasive argument in favour of such warranties being read as a continuing promise to have the equipment free from defect for every day of the warranty period; and that there is a breach of that warranty every day the equipment is defective. This reading would resolve the strange consequence noted above.

10.3 Moreover, there is little case law on this particular issue, as the majority of cases have been brought as actions in tort or under the Trade Practices Act (now the Australian Consumer Law). Given that Tranquility Pools did not deal with the limitation issue as a defence, but as a subsidiary issue on the liability of the Plaintiff to its customers, and there is a strong dissenting judgment in VAI Industries, it may be likely that if such a question was brought before a Court today, it would be decided along the lines of Ward LJ’s judgment. Thus, it would be not be advisable to proceed on the basis that a warranty against defects would only be enforceable for the first 6 years of the warranty period.

For further information

Geoff Wood

Partner

Baker & McKenzie Level 27, AMP Centre 50 Bridge Street Sydney NSW 2000 Tel: +61 2 8922 5123 Fax: +61 2 9225 7595 geoff.wood@bakermckenzie.com Fiona Elliot Senior Associate

Baker & McKenzie Level 27, AMP Centre 50 Bridge Street Sydney NSW 2000

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