Life should mean life

The issue of limitation periods has been a subject of debate in these columns after the publication by the Law Commission of its final recommendations for the reform of the law on civil claims. The Law Commission reported – and nobody would dispute this – that the present rules are unfair, complex, uncertain and outdated. It particularly noted that insufficient recognition is given to the interests of the claimant. Nowhere is this more true than in the construction industry.

Although perhaps not built to endure for the same periods as the monuments of the Victorian era, modern commercial buildings are rarely designed to last for less than 50 years. Individual components of the building are often specified to have a life with minimal maintenance of not less than, say, 20 years. Some products are particularly specified as "very long life" products, such as fire protection and corrosion paints on exposed steelwork. And yet the present law gives the building owner no effective remedy after the expiry of six years or, in the case of a deed, 12 years from practical completion of the building. Paying extra for a quality product in the construction industry when there is little or no remedy if that quality is not delivered does not appear to be a good investment.

The only route by which employers can extend limitation periods to obtain a remedy for the failure of long-life products is by use of an indemnity. One of the effects of an indemnity is to postpone commencement of the limitation period until the "loss" is incurred or the "claim" is made, so that the clock starts running from that date rather than the date of the breach of the contract. Accordingly, if a product is required to have a life of 20 years and fails in year 16, the employer will have a claim against the contractor that supplied the defective product. If it does not have an indemnity, it will have no claim, notwithstanding the breach of contract.

But an indemnity, if correctly drafted, has other powerful effects. This was demonstrated in the House of Lords' decision this year in the Piper Alpha litigation, in which the operator settled claims by victims of the oil-rig disaster at a level in excess of any possible financial recovery under Scots law but below the levels likely in Texas (where the victims had tried to pursue the case). The operator was able to recover the excess in the English courts under the indemnity even though the amounts would not have been recoverable purely as damages.

The law in general gives the owner no effective remedy after the expiry of six years from practical completion

For these reasons, indemnities do not appear in most standard form construction contracts in use in the UK except in relation to specific issues such as death or bodily injury arising out of negligence, patent infringement and so on.

One of the key proposals of the Law Commission is that parties may make an agreement to modify or disapply any of the provisions of the legislation, or make provision in place of them. Clause 31 of the limitation bill will clearly allow parties by a contractual term to agree that they do have a remedy beyond the expiry of the limitation periods prescribed by the bill, if they have clearly agreed that that is what they intend.

Already, some of the supply side lobby are up in arms about this. But why? There is nothing to prevent the parties agreeing that, having notice of its right to claim, the employer must bring a claim promptly – say within the three-year period proposed by the limitation bill – but that the 10 year cut-off proposed as a standard by the bill will not apply to long-life products, and a cut-off of, say, 20 years is appropriate for them. That way, employers cannot sit on claims that they intend to make but do at least have a claim where a breach of contract has occurred rather than, as now, bearing the loss despite being the innocent party.