Know your limits

As you will be aware, the question of reforming the Construction Act continues to be discussed in Whitehall and Westminster. But what you may have missed is an announcement made on 23 October last year by Bridget Prentice MP. She informed the house that the consultation on the Law Commission’s proposals to reform the law of limitations would take place in 2008, the government having accepted the proposals in principle.

The Law Commission’s idea is to have a core limitation regime, based on a primary three-year limitation period, from the date the claimant had actual or constructive knowledge of (a) the facts giving rise to the cause of action, (b) the identity of the defendant and (c) that any loss, injury or damage (or benefit) was significant. This would be subject to a 10-year long-stop limitation period from the date of the accrual of the cause of action. The new regime will apply to all contractual claims and most tort claims but could be varied by agreement.

What do the proposals mean?

At present, claims under a construction contract can be brought within six years (12 years for deeds) from the date of a breach. This can operate harshly in the case of latent defects but it does provide certainty as to when the risk of any claims stops.

The new regime is more suited to an environment where latent defects are common, but it will now be necessary to have insurance cover for the full 10-year period. This will affect the form of insurance taken and will no doubt see a rise in the popularity of decennial latent defects insurance policies.

Overall, however, it is possible that the benefit of a shorter limitation period will be balanced by the 10 year long-stop period – the final date on which something, such as a legal right, expires – so there will be little if any effect on risk assessment, especially as many contracts are now executed as deeds providing a 12-year limitation period.

One obvious difficulty is determining when a person has the requisite knowledge to start the clock running, an existing issue with section 14a of the Limitation Act 1980 in relation to negligence claims. Both the Court of Appeal, in 3M vs Linklaters, and the House of Lords, in Haward vs Fawcetts, held last year that time would generally run from when the claimant has sufficient knowledge to start investigating.

We are likely to see clauses which vary the limitation period. Careful drafting will be needed to ensure such clauses are effective

The right to claim will be lost within three years of when there should have been concerns, which could mean clients are deluged with a flood of information, as contractors offer further inspection opportunities, and consultants offer more information about their work, in the hope of arguing that this was sufficient to put a claimant on a trail of inquiry.

It is also possible that a shorter limitation period will mean that it would be necessary to issue protective claims, or enter into standstill agreements while parties engage in the pre-action protocol or adjudication.

Deeds will also be subject to the three-year period, so we are likely to see clauses that vary the limitation period or which require parties to waive the right to rely on limitation defences once disputes are referred to adjudication. Careful drafting will be needed to ensure such clauses are effective.

The new regime will also resolve some questions as to when a loss occurs so as to give rise to a negligence action. This would still be relevant as the basis for the 10 year long-stop period, but for claims in tort the period would run from the act or omission that gave rise to the cause of action, as is the case with contractual claims. .

This is therefore an opportunity to replace the current inconsistent and confusing regime. We will need, however, to wait and see when the proposals will be implemented and their final form, especially with regard to any proposals concerning the retrospective application of the reforms to existing contracts.

The chance to comment on the reforms should not be ignored.