Unless defined by contract, a “defect” is not a term of art; it relates to the concept that works do not conform to contract requirements. Defects encompass defects in workmanship and materials, and design defects. In relation to defective work, a contractor will, depending on the nature/extent of the defect, potentially (1) assume obligations to its employer pursuant to the defects liability clauses of its contract, (2) be liable to its employer in damages for breach of contract, and (3) be liable to its employer under the decennial liability provisions of local law.
Contractual defects liability
Most industry standard construction contracts contain “defects liability” clauses. These clauses oblige a contractor to return to site and remedy any defects in its works that are notified by (or on behalf of) an employer within a certain time period calculated from the date on which the works are certified as complete in a taking-over certificate. In a rail project, the defects liability period may be 24 months or longer. The employer frequently withholds a portion of the contractor’s retention money until the expiry of the defects liability period.
A contractor does not ordinarily have the “right” to return to remedy a defect unless the contract expressly confers that right. Consequently, without a defects liability provision, an employer is entitled to employ others to rectify any defects that may arise after the date of taking over and claim
the cost of doing so from the contractor. Such clauses are therefore often said to benefit the contractor: they afford the contractor a “grace period” during which it possesses a first (and depending on the wording, exclusive) right of refusal to rectify defects that are not apparent at the date of taking over. It is in a contractor’s interest to ensure that any defects are dealt with promptly once it is given notice of them. Doing so, avoids the risk of being back charged with remedial works costs which potentially exceed those which it would have incurred in remedying the defects in question itself (and any dispute arising in relation to which contractor is responsible for the defect).
However, it is important to appreciate that the expiry of the defects liability period does not release the contractor from all liability for defects. This simply constitutes the end of a period during which the contractor is contractually obliged to return to site and make good defects. An employer remains entitled to pursue the contractor for breach of contract.
Liability in damages for breach of contract
A defect ordinarily constitutes a breach of contract. The existence of a contractual defects liability period does not limit the employer’s rights in respect of that breach, absent express words to the contrary. Therefore, unless the defective work is removed/remedied before taking over, the employer is entitled, subject to the contract, to pursue an action for breach of contract against the contractor.
The period during which the contractor may be liable for defects will be determined by reference to the applicable limitation period prescribed by law, namely the period of time within which an action must be commenced. Federal Law No. 5/1985, as amended by Federal Law No 1/1987 (UAE Civil Code), Article 473 provides that a claim is time- barred after a period of 15 years unless a specific provision of the law provides otherwise. In relation to breach of contract, UAE Federal Law No. 18 of 1993, the Commercial Transactions Code, Article 95 provides the non-defaulting party with a time limitation period of 10 years from the date of breach to issue proceedings. In consequence, a contractor responsible for defective work in breach of contract will be liable to its employer for a period of 10 years from the due date for performance. In the context of defective work, this will usually be the date of the taking over certificate (commencement of the defects liability period).
This 10-year limitation period therefore runs in parallel with the defects liability period and potentially, as set out below, overlaps with a decennial liability period.
The employer shoulders the burden of proving that the contractor is responsible for the defective work. If successful, its remedy is damages, which by virtue of the general principles applicable to the calculation of compensation under UAE law, will likely constitute substantiated costs of reinstatement, or where the defect is irreparable, an award to reflect the diminution in value of the project in question.
A contractor’s liability for defective work in breach of contract may be curtailed or extinguished by virtue of any liability limitations or exclusions contained in the contract.
Decennial liability applies if the subject matter of the contract in question is the construction of buildings or other fixed installations, the plans for which are made by an architect to be carried out by a contractor under its supervision. Pursuant to the UAE Civil Code, Article 880, the architect and the contractor will be jointly liable, for a period of 10 years from the time of “delivery” of the work (unless the contract prescribes a longer period), to compensate the employer for a total or partial collapse of the building/installation constructed and for any defect which threatens the stability or safety of the building.
It is important to distinguish decennial liability from the forms of liability described above.
Importantly, decennial liability is applicable by law in the country where the site is located irrespective of any choice of law clauses contained in the contract.
Another distinguishing feature is that liability only arises where a total or partial collapse of a building or fixed installation occurs and/or a defect threatening the stability or safety of a building is discovered during the decennial liability period. The terms “fixed installation” and “building” are neither defined in the law, nor considered in any detail by the local courts. Decennial liability under Article 880 also applies only to structures which are intended to be in place for 10 years or more. The distinction therefore lies between those works that are considered to be “permanent” structures with an intended installation life of 10 years or more, and those which are considered to comprise “temporary” structures (i.e. those that will be removed/ demolished on or after completion or aren’t intended to remain in place for 10 years or more).
Applying this principle in the context of UAE rail infrastructure development, means that contractors constructing, by way of example, elevated metro stations, underpass structures which support those stations, depot areas or elevated viaducts will fall within the ambit of Article 880. Contractors engaged to procure rolling stock will not (as rolling stock does not comprise “structures”).
Decennial liability is strict; it is imposed jointly and severally on a contractor and architect regardless of fault/ breach of contract. The contractor and designer remain liable even if the structural defect/collapse is the result of a defect in the land, or if the employer consented to the defective construction. A contractor engaged under a design and build contract is equally likely to be liable.
The 10-year decennial liability period ordinarily runs from the date of the taking-over certificate - the date of “delivery” of the works under Article 880.
Any agreement which seeks to exempt this liability is void and unenforceable (UAE Civil Code, Article 882).
Any claim on the basis of decennial liability must be commenced within 3 years of the discovery of the collapse or defect (UAE Civil Code, Article 883). Applying this limitation period may result in shortening the decennial liability period if the collapse occurs/defect occurs during the first 7 years, or extending the decennial liability if the collapse occurs/defect is discovered in the last 3 years.
The employer’s remedy will be the measure of damages required to compensate it for the total/partial collapse of the structure, namely the substantiated costs of replacing the structure.
A 10-year limitation period relating to legal liability for the consequences of defective performance generally exists in relation to a contract governed by UAE law. This is not replaced by either the defects liability period or decennial liability.
In relation to the former, the defects liability period is a supplementary contractual remedy available to the employer which operates alongside the limitation period for claims in breach of contract. As to the latter, decennial liability constitutes a supplemental liability in law for the particular events of total or partial collapse of a building or fixed installation.
Generally decennial liability falls outside the scope of standard CAR and PI insurance available in the UAE, and so, unless particular cover can be obtained, contractors and architects commonly retain this residual risk. It is for this reason that rail infrastructure providers operating in the UAE should continue to be aware of decennial liability.
Decennial liability is also a facet of other key Middle East jurisdictions in which large-scale rail projects are being or are to be performed. Decennial liability provisions are found at Articles 711 to 715 of the Qatar Law No. 22 of 2004, Articles 692 to 697 of Kuwait Law No.67 of 1980, and Article 76 of the Government Tenders and Procurement Law of the Kingdom of Saudi Arabia.