The rights and liabilities of contractors for latent defects depends not only on the terms of the particular construction contract but also the law of the jurisdiction in which the work is done.
This article reviews a contractor’s contractual and legal obligations and limitation of liability for latent defects after a performance (or defects liability) certificate is issued from a United Arab Emirates (UAE) perspective.
In spite of the fall in oil prices, the outlook for construction activity in the UAE remains positive, making it an attractive alternative for Chinese contractors. However, you will need to be aware of the legal nuances when tendering for or performing work in the UAE.
In this article, “defect” means “a failure of the completed project to satisfy the express or implied quality or quantity obligations of a construction contract”, as defined in Justin Sweet’s Defects. A “latent defect” means a defect that becomes visible after, but was not discoverable by reasonable inspection of the employer before, the performance certificate is issued.
Contractual rights and liabilities
The International Federation of Consulting Engineers’ (FIDIC) Conditions of Contract for Construction, more commonly known as the FIDIC Red Book, is the most widely used contract for building and engineering works designed by the employer in the UAE. (This article references the 1999 first edition.)
The following are the key clauses in the Red Book dealing with latent defects:
- The contractor is liable to remedy defects in workmanship and materials supplied by it;
- The contractor must make good defects notified by the employer on or before the expiry of the defects notification period, at its cost. This period may be extended if and to the extent that the building (or part) cannot be used due to the defect;
- The performance certificate constitutes acceptance of the works by the employer. The contractor’s obligations are considered completed when this certificate is issued;
- After the performance certificate is issued, the contractor remains liable for fulfilling any obligation, which remains unperformed. Importantly, the contract will be deemed to remain in force for the purpose of determining the nature and extent of unperformed obligations.
These provisions are generally consistent with the position under UAE law, being that contractors may be liable for latent defects discovered after the performance certificate is issued.
Legal rights and liabilities
Structural defects. The UAE legislature codified the law on construction contracts in Federal Law No. 5 of 1985 (Civil Code). This framework is drawn from judicial principles, comparative law and jurisprudence, and Sharia law. Although court judgments are not legal precedents or binding, they may be persuasive.
Under the Civil Code, contractors are obliged to achieve a result, construct a building that is structurally sound and stands for 10 years after the building is handed over to the employer.
The contractor and supervising architect have a joint liability to compensate the employer if the building is destroyed in whole or part, or a defect materialises that threatens its stability and safety.
Liability will be apportioned on the basis of the contribution that each made to the failure to achieve this result. This is a form of strict liability where the claimant does not need to prove breach of contract or negligence by the contractor or the supervising architect, known as “decennial liability”.
It is generally accepted that the handover of a building that appears in acceptable condition does not exempt the contractor from decennial liability for defects at the time of delivery. Liability will remain even if the collapse is due to ground conditions or the employer consents to the erection of a defective building or installation.
Decennial liability is a mandatory provision of UAE law and cannot be circumvented, unless it is intended that the building stand for a shorter period. Although the contractor may agree to cap the amount of compensation, even then, the cap be varied so as to make the compensation equal to the damage.
As it is a form of strict liability there are few defences. One defence is that the failure was caused by a force majeure event.
Non-structural defects. Although there is no specific set of rules for non-structural defects in buildings in UAE law, the Civil Code allows an employer to seek compensation for latent defects.
Contractual liability will be established where there is a breach of contract by a party, damage or loss incurred by the other party and a causal link between both.
Liability for acts causing harm (akin to tort) arises where there is a breach of a legal duty (e.g. negligence) by a party, damage or loss incurred by the other party and causation between the breach and damage or loss.
Under sales contracts, buyers have a right of recourse against sellers for latent defects after the contract is completed. We are not aware of any reported cases relating the buyer’s right of recourse to construction contracts.
Claims first brought against a contractor more than three years after the date of collapse or discovery of the structural defect by the employer will, in all probability, be time barred.
It is generally accepted that proceedings for breach of contract claims relating to non-structural latent defects are barred after 10 years.
If a contractor is in breach in the performance of the works, or if the workmanship is contrary to the specifications agreed with the employer, he will be liable for any loss or damage caused by his act, and his liability will be negated only on proof of a cause not attributable to him. Compensation may be awarded for loss of opportunity of the employer to exploit the land and have the benefit of it.
Conclusion. The contractor’s liability for latent defects in buildings constructed in the UAE after the performance certificate is issued is not clear-cut, with the exception of structural defects. The nature and extent of the contractor’s liability depends on the facts, especially the investigations that the employer should carry out, and the drafting of the contract.
It is important that a contractor, prior to signing a contract, ensure that it understands the extent of its obligations for latent defects and that any necessary amendments are made to the contract to ensure that it is protected to the greatest extent possible.
Scott Lambert is the regional head and Niall Clancy is a senior associate in the construction and infrastructure division of Al Tamimi & Company
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