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Hurdles to recovering loss for latent defects in construction projects

07 July 2021

#Construction, Infrastructure & Projects

Published by:

Andrea Wilson

Hurdles to recovering loss for latent defects in construction projects

During a construction project, it is not unusual for disputes to arise over alleged defects in the works. Good project management, contract administration, and legal advice can often ensure that the dispute is efficiently resolved, the parties maintain a positive relationship and a successful project is delivered. However, if defects only become known significantly after the project is complete, disputes between the parties can often grow in complexity and seriousness.

The peril of defects that are undiscoverable for a period of time (i.e. latent defects) is that identifying not only the cause of the defect, but also the person responsible, can be fraught with difficulty. But once those hurdles are overcome, the next question turns towards the prospects of recovering any loss from those who are responsible.

Beyond merely considering the potential causes of action to recover this loss, the party who suffers the loss must consider the following issues:

Each of these issues could justify a paper of their own, but they are considered here in the context of latent defects.

Limitation periods

No matter the extent of the defect or the magnitude of the cost to rectify it, for a claim to be made either against you or by you, the commencement date of the legal proceedings must be within the relevant limitation period under the Limitation of Actions Act 1974 (Qld).

In Queensland, any action for a tort, such as negligence or an action for breach of contract, must be commenced within six years of the date the cause of action arose. This limitation period applies throughout other jurisdictions in Australia, in accordance with the equivalent legislation in those states and territories.

In a claim for breach of contract, the cause of action arises when the breach occurs. More often than not with latent defects, the defects only become apparent more than six years after the breach of the contract occurred, meaning that in such a situation, a claim for breach of contract will be statute-barred.

In a claim of negligence, however, the cause of action accrues when the damage is incurred. In cases involving a latent defect, that damage may not actually be incurred for some time after the defect has occurred. In those situations the cause of action accrues from when the defect was actually discovered or became manifest, in the sense of being discoverable by reasonable diligence. 

For a defect to be latent, there is no requirement that it is not visible, or that it must be concealed or hidden. For example, there may be a latent defect in the design of a building where a temporary external wall is too thin to carry a load, even though the thickness of the wall and the size of the roof it carries is plainly visible.

The level of knowledge required of a latent defect is either actual knowledge of the defect or constructive knowledge such that the latent defect can be discovered by reasonable diligence. What constitutes ‘reasonable diligence’ is generally a question of fact in each individual case. For instance, where the circumstances are such that there is reason to be suspicious about the existence of a defect, reasonable diligence may require an expert to examine the cause for the suspicion.

A claim against a person for misleading and deceptive conduct under section 18 of the Australian Consumer Law has the same six-year limitation period. It also operates similarly to a negligence claim in that the six-year limitation period starts to run from when the actual loss has been suffered rather than when the conduct occurred. This is particularly relevant to certifiers, who are finding themselves increasingly in the spotlight for not only alleged negligent certification, but for alleged misleading and deceptive conduct in the performance of their certification duties.

Assuming the aggrieved party can prove, on the balance of probabilities, who is responsible for the latent defects and they are not statute-barred from commencing proceedings, they must next consider the extent to which that culpable party is legally liable and whether that party has a statutory defence open to them. It will also be necessary to consider whether the culpable party has any other defences, but this article will focus on a statutory defence under the Civil Liability Act 2003 (Qld) (CLA), which we further discuss below.

Proportionate liability and concurrent wrongdoers

According to the CLA, where the aggrieved party’s loss is caused by two or more people, those people who caused the loss will be concurrent wrongdoers. The CLA apportions loss between the concurrent wrongdoers where the claim is for economic loss or damage to property, in an action for damage arising from a breach of duty of care (an ‘apportionable claim’).

The liability of a defendant who is a concurrent wrongdoer in relation to the claim is limited to an amount reflecting that proportion of the loss or damage claimed that the court considers just and equitable having regard to the extent of the defendant’s responsibility for the loss or damage.

Example

‘A’ has an apportionable claim against ‘B’ and ‘C’ because:

  • ‘B’ and ‘C’ each committed an act or omission independent of the other party which also attributed to the loss (making them ‘concurrent wrongdoers’)
  • those acts or omissions gave rise to a claim by ‘A’ against each of them for economic loss, or damage to property, in an action for damage, arising from a breach of duty of care
  • ‘A’s’ entire loss is in the value of $1 million
  • ‘A’ only pursues a claim against ‘B’
  • the court considers that it is just and equitable having regard to the extent of ‘B’s’ responsibility for the loss or damage, that ‘B’s’ liability is limited to $200,000.

‘A’ will not be able to recover the remainder of its loss from ‘B’. To have recovered the remainder of that loss, the other concurrent wrongdoer, ‘C’, needed to have been a defendant to the proceedings. Alternatively, ‘A’ needs to commence proceedings subsequently against ‘C’.

There may be cases where ‘A’ has no knowledge or means of knowing that there is another person who is responsible for their loss, but this is within ‘B’s knowledge. In that scenario, ‘B’ should give this information to ‘A’ or risk being held severally liable for the entirety of ‘A’s loss under the CLA.

If proceedings had already been commenced by ‘A’ against ‘B’, either party could apply to the court for ‘C’ to be joined as a defendant in the proceeding.

Unlike some other states and territories, Queensland does not allow contracting out of the CLA. However, this is limited to the extent that the claim is an apportionable claim and it is therefore prudent for consultants to keep an exclusion of liability or indemnity clause in their contracts.

The application of the CLA potentially puts plaintiffs at a disadvantage where one of the concurrent wrongdoers is in liquidation. In the example above, there would be no point in ‘A’ pursuing ‘C’ if they were in liquidation, and ‘A’ would have no prospect of recovering any more than $200,000 from ‘B’, unless it had some other claim against ‘B’ that was not apportionable, such as a claim for breach of contract.

A claim for misleading and deceptive conduct under section 18 of the Australian Consumer Law can also be an apportionable claim and will be subject to the same rules as above.

The result of this proportionate liability scheme is that plaintiff’s need to assess the potential defendants and whether, practically, the loss can be recovered from them.

What if the defendant is no longer insured?

In Queensland, where you cannot contract out of the CLA, a plaintiff will be at a disadvantage if one or more of the concurrent wrongdoers have neither the financial means nor the insurance that will satisfy a judgment against them.

This risk can be greater in latent defect cases, where the latent defect has manifested long past the delivery of the project or the works.

An example is where the negligent conduct in question was performed by an engineer who has retired by the time the defect has manifested. A plaintiff would have limited means of finding out if the engineer has either the insurance to respond to that claim or any financial means to satisfy a judgement.

Using the example given above, it may be the case that a retired engineer no longer has any active professional indemnity (PI) insurance. Many PI policies operate on a “claims made” basis, meaning that they will only respond to a claim if the claim is made at the time when the insurance policy was still in operation. This can be a problem when the defect is latent for a long time. By contrast, a policy that operates on an occurrence basis will respond based on whether the policy was in place at the time the negligent conduct occurred.

The type of claim under which someone is held liable may also be relevant to whether the loss will be insured. For instance, some policies may not respond to liability on account of misleading and deceptive conduct under the Australian Consumer Law.

Defence under the CLA –  professional practice

The CLA also provides a defence to a potential concurrent wrongdoer. If the defendant can show that they acted in a way that was widely accepted (at the time) by peer professional opinion as competent professional practice, they will not have breached their duty. This statement acts not only as a defence, but as a defining standard by which professionals will be benchmarked to satisfy the court that they acted with reasonable care and skill. The defence cannot be maintained, however, where the conduct is irrational or contrary to written law.

The conduct must also be widely accepted. This can be determined broadly, as what might be accepted in one part of Australia may not be reasonable in another. For example, even if the professional practice is Australia wide, if that practice is specific to the region in which the act took place (for example, something may be done differently where the temperature is very hot compared to where it is very cold), the place where the act took place will be the relevant benchmark to consider.

Another statutory defence is that of contributory negligence. Under the CLA, if a defendant can show that the plaintiff contributed to the loss by way of its own negligence, the defendant’s liability will be reduced accordingly.

Authors: Kirsty Smith & Andrea Wilson

Disclaimer
The information in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, we do not guarantee that the information in this article is accurate at the date it is received or that it will continue to be accurate in the future.

Published by:

Andrea Wilson

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