Latent Defect Period: Application In Construction Contracts

[By Ashish Kumar and Rebecca Singh]

The author are a students of NMIMS School of Law, Bangalore.

 

Introduction

In the realm of construction and infrastructure contracts, the inclusion of a Latent Defect Period is essential to address the potential emergence of hidden flaws or deficiencies after project completion. However, this provision poses legal challenges regarding limitations and applicability. Determining a reasonable timeframe and defining eligible defects are crucial considerations. Additionally, notice requirements for timely defect reporting must be established. By effectively navigating these challenges, the Latent Defect Period can ensure project quality and protect the interests of both clients and contractors. This article will be analyzing the legal standing of India on Latent Defect Period with the application of law of limitation and liability of contractor with a comparison with other jurisdictions.

What is Latent Defect?

A latent defect refers to a flaw or fault that is not readily apparent to the naked eye or noticeable upon ordinary inspection. It represents a concealed flaw in either workmanship or design, which may not be immediately detectable but can impact the functionality, safety, or value of the subject matter. This distinction is crucial, as the focus lies on the defect itself rather than the potential danger it may pose.

Characteristics of Latent Defect:

  • Concealment: A latent defect is characterized by its hidden nature, making it difficult to identify through routine observation or ordinary care.[1]
  • Lack of Knowledge: The defect is one that the owner or party responsible for the subject matter does not possess knowledge of or should not have had knowledge of, even with reasonable care exercised[2].
  • Reasonable Inspection: To determine the presence of a latent defect, the level of inspection that a party should reasonably anticipate the subject matter to undergo is considered. The defect must remain undiscovered within the bounds of such anticipated inspections.[3]

Legal Analysis

In the context of sales where goods are described as the basis of the contract, the accuracy of the description is vital. The Indian perspective recognizes that the falsity of this description, resulting in substantial differences, constitutes a failure of consideration. Moreover, when goods are bought by description, an implied condition exists that the goods should be of merchantable quality, i.e., free from defects[4]. This article explores relevant cases and legal observations to provide insights into the Indian perspective on defects, implied conditions, and latent defects in the sale of goods by description.

Defining Latent and Patent Defects:

In Sorabji Hormusha Joshi and Co. vs V.M. Ismail and Anrs, the court established a distinction between two types of defects: patent defects and latent defects. Patent defects are those that can be reasonably identified by a person of ordinary prudence through a careful examination of the goods. On the other hand, latent defects are not readily detectable through such an examination. The seller implicitly bears responsibility for latent defects, while the buyer assumes responsibility once they have been identified. Whether a defect is considered latent, or patent depends on various factors such as the nature of the goods, the specific defects involved, and the level of examination required to discover such defects. Each case must be individually evaluated based on its own circumstances.

Implied Conditions and Examination:

Under the Indian Sale of Goods Act, an implied condition exists that the goods sold by description must be free from latent defects. However, for a seller to be absolved of responsibility, the buyer must have had a genuine opportunity to examine the goods thoroughly. If the buyer only conducts a superficial examination of the goods, the implied condition that they are free from latent defects may be nullified. This is because defects that could have been discovered through a more thorough examination are no longer the seller’s responsibility. The required level of examination by the buyer varies depending on the circumstances and nature of the goods.

Board of Trustees of the Port of Calcutta v Bengal Corporation Pvt:

In this case, where wire ropes were supplied for crane use, the court held that the goods were bought by description, and the seller was obligated to supply goods reasonably fit for use in cranes. As the defective nature of the goods was not apparent through ordinary examination and could not be detected before use in cranes, Section 16(2) of the Sale of Goods Act, 1930,regarding defects, was not applicable. The Section 16(2) of the Sale of Goods Act prescribes when the goods are purchased from a seller on the basis of the description then there is an implied condition that the goods must be of satisfactory quality. However, if the buyer has examined the goods, there is no implied condition for defects that could have been discovered during the examination. Thus, there was an implied condition of merchantable quality, which the goods supplied by the seller did not meet.

Hasenbhoy Jetha, Bombay v New India Corporation Ltd., Madras:

In this case, the court noted that when the defect is latent and cannot be revealed through ordinary inspection, the opportunity for inspection or a hand-operated inspection is insufficient. The defect must be revealed through a demonstration with electric power, as in the case of a crushing machine producing only 1.5 tons per hour. In such situations, the buyer is entitled to damages for breach of contract or warranty.

Law of Limitation

The liability for latent defects in India is an area where the law lacks explicit clarity. However, the Limitation Act provides guidance by establishing a three-year limitation period for bringing claims related to latent defects. This period commences from the date when the cause of action accrues or when the relevant contract is breached or ceases to exist. To address latent defects in the construction industry, the Delhi Development Authority has issued guidelines for decennial latent defect liability. The term “decennial latent defect liability” refers to the liability arising from latent structural defects discovered or becoming apparent within ten years from the date of issuing the occupation cum building completion certificate by the authorized sanctioning authority. It is important to note that the time period for decennial latent defect liability is often specified in the contract.

United Kingdom.

In the UK, Section 14A of the Latent Damage Act, 1986, establishes the time limit for claiming damages related to latent defects. The maximum cap is fifteen years from the date when the damage accrues. The time limit is determined by the later of two factors:

(a) six years from the date when the cause of action arose for the plaintiff or claimant, and

(b) three years from the earliest date when the potential plaintiff had knowledge of the defect and the right to initiate legal action.

Damages

Standard forms of contract typically impose liability on the contractor for any defects in a building project. These contracts contain detailed provisions regarding the employer’s remedies for defective works. According to Ong (2005)[5], these provisions include:

  1. The contractor is responsible for remedying any defective work.
  2. If the contractor fails to address the defects, the employer may undertake the remedial work themselves.
  3. The employer may agree to a reduction in the contract price instead of rectifying the defect.
  4. The employer has the right to deduct the cost of remedial works from the contract price until the defects are resolved.
  5. sThe employer can withhold retention monies, which will be released upon the issuance of the Certificate of Practical Completion and/or Certificate of Making Good Defects.

In Ruxley Electronics and Construction Ltd v Forsyth [6], it was established on damages that a claimant can seek compensation for the cost of remedial works depends on whether the expense would unreasonably outweigh the benefit gained. However, even if the cost is considered disproportionate, the claimant may still be eligible for damages. Secondly, the assessment of damages is not only limited to the decrease in value or reinstatement. Thirdly, the court recognized that the existence of a middle ground to address the loss of amenity or inconvenience experienced by the claimant due to not receiving what was originally desired and contracted for. These principles highlight the importance of thoroughly evaluating the circumstances to determine the appropriate compensation in such situations.

However, if the employer neglects to inform the contractor about a defect or denies access to the site for rectifying a reported defect, the employer’s ability to recover losses related to that defect may be limited. The case of Pearce and High Ltd v Baxter and Baxter [7]clarified that the employer might only be entitled to claim damages up to the amount it would have cost the original contractor to address the specific defects in question.

Conclusion

In conclusion, the time period for latent defect liability remains unclear, and damages are subject to certain limitations. It is established that the contractor bears the responsibility for rectification of defects in construction projects. However, in the Indian context, while construction contracts may explicitly address latent defect clauses, there is a lack of legislative clarity on this matter, necessitating further clarification. This calls for a closer examination and potential legislative intervention to provide clear guidelines and address any ambiguities surrounding latent defect liability in the Indian construction industry.

 

[1]  P Ramanatha Aiyar: The Major Law Lexicon

[2] Bichl v. Poinier

[3] U.S. v. Lembke Const. Co

[4] Dr J N Barowalia : Commentary on the Consumer Protection Act; 7th Edn

[5] Ong See Lian. 2005. “Defective Works.” International Conference on Construction Law & Arbitration. (26th – 28th April 2005, Kuala Lumpur.) pp. 1

[6] [1996] A.C. 344 (29 June 1995)

[7] EWCA Civ 789

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