Abstract

Defect Liability is one of the most pertinent and heavily negotiated clauses in infrastructure contracts. This clause, by imposing a liability upon contractors to remedy its defective work, poses as a contractual relief in respect of the affected owner and as an effective deterrent to the concerned contractor. In this article, the author has analysed the contractual and statutory tenets pertaining to Defect Liability in infrastructure contracts and an attempt has been made hereunder, to answer a few relevant and frequently asked questions, such as the correlation between the Defect Liability clause and the doctrine of the ‘duty of care’, the major types of defects that threaten infrastructure projects and their distinguishing factors, among others. The author has also highlighted a lacuna of the Indian legislative framework relating to Latent Defect Liability Period and has drawn a comparative study between the Indian and foreign standpoints.

Introduction

The English dictionary explains the word ‘defect’ as an abnormality, imperfection, shortcoming or a lack of something, which thereby affects the effectiveness, utility or functionality of the product, machinery or commodity. While infrastructure contracts usually define the word ‘defect’ thereunder, the English courts, in various instances, have attempted to shed more light on this term. The Queen’s Bench inTate v Latham & Son defined the word “defect” as the ‘lack or absence of something essential to completeness’. Moreover, the same court inYarmouth v France defined ‘defects’ to include ‘anything which renders the plant, etc unfit for the use for which it is intended, when used in a reasonable way and with reasonable care‘.

Infrastructure projects are, more often than not, intricately complex and highly technical. Such projects which are performed by industrial experts comprising of highly skilled and experienced contractors, demand the scrupulous and complete compliance of the contractor’s works with extensively studied data, project specifications, engineering designs, drawings, layouts, calculations and established industrial standards. This leaves the contractor with a substantially large room for error, thereby, making infrastructure projects particularly vulnerable to succumb to the fangs of defects.

Any defect in the project execution, particularly relating to the works, can essentially derail the works or entirely wreck portions, machinery and/or components of the project.  From the owner’s perspective, defects are an extremely detrimental concern which could potentially involve and attract substantial losses to the concerned project owners. While monetary losses of any nature are generally frowned upon, it is of great concernment and has lasting repercussions in the infrastructure sector since this sector underpins the nation’s growth and economic development.

To tackle this menace, Defect Liability clauses are meticulously tailored into the fabric of infrastructure contracts at the time of preparation of the bid or tender documents, with a view to act as an effective deterrent and necessitate the concerned contractor to exercise reasonable care in the execution of the work relating to such infrastructure contracts. It is an important and a heavily negotiated clause which not only holds the negligent contractor responsible and liable for its defective works but also insulates the owner against the losses or damages incurred therefrom.

Purpose of the Defect Liability Clause in Infrastructure Contracts

An Engineering-Procurement-Construction Contract (EPC Contract) is one of the most commonly used contractual documents in the infrastructure sector that incorporates the contractual, technical, and commercial terms and conditions of the parties involved in an infrastructure project.  The central theme of any infrastructure EPC Contract is to ensure that the contractor performs the works with due care, within the time specified thereunder and in accordance with the contractual stipulations, procedures, and the standards set forth thereunder. With respect to the contractor’s performance under the contract, it also envisions that the contractor shall bear the primary responsibility for and in respect of any defect found in the work, since such defects could have an adverse effect on the fitness, quality and functionality of the work.

To supplement and materialize this contractual intent with express words, the drafters of the infrastructure EPC contracts sought to incorporate the Defect Liability Clause into such contracts with the expectation that it would serve as an effective mechanism to hold the contractor responsible for its defective works or services. The Defect Liability clause is also known as a warranty clause or remedial provisions. Therefore, if a defect become apparent to the owner or the project management consultant (PMC) appointed by the owner for the project, during the period specified in this clause, then the owner can, armoured by the provisions of such Defect Liability clause, compel the defaulting contractor to rectify, make-good or remedy the defective works.

The Defect Liability clause, in infrastructure and construction contracts alike, sets out the duration for which a concerned contractor shall warrant and remain liable for the fitness, quality and utility of its work, the manner in which the aggrieved owner may proceed against the defaulting contractor upon the discovery of any defect in the contractor’s work, the notice period or the cure period to be provided to the contractor and where the contractor fails to carry out its remedial obligations prescribed thereunder, then the clause may also provide the owner a contractual right to engage a third party contractor to remedy, make-good, replace, modify or rectify the defects or defective work, as the case may be, at the sole risk and cost of the concerned contractor.

The Defect Liability clause, thus, acts as a two-pronged approach, whereby it compels the contractor to observe due care and remedy its defective works, while also providing the owner of the infrastructure project with a contractual right and a corresponding framework by which, it can effectively and contractually necessitate such a contractor to remedy its own defects, by itself and at no additional cost to the owner. This ensures that the project owner is not inconvenienced by having to directly contract a third party to remedy its contractor’s defective works, which would result in the owner losing out on time and incurring additional expenses in respect of such project.

Applicability of the ‘Duty of Care’ Doctrine

The doctrine of the ‘duty of care’ is a universally recognised legal obligation which finds its roots in the law of torts. It obligates an individual to owe to another and, as a result, exercise a reasonable measure of care by avoiding negligence and any act or omission on its part that could be reasonably or ordinarily cause or be foreseen to cause any harm or injury to the person or property of another. Simply put, it calls for the doer to act in a manner that a reasonable and prudent individual ordinarily would or to avoid doing something that such a person would not do.

Moreover, the ‘duty of care’ doctrine rests on the ground that the doer has an actual duty to care, in the first place. In relation to infrastructure projects, the drafters of such contracts make it abundantly clear in the contractual terms and conditions that a concerned contractor must possess the requisite experience and skillset, and perform and deliver its work diligently, with the utmost care and in line with every stipulation or qualitative requirement. Hence, due care is the fundamental principle by which the contractor must perform its work under the contract and where there is a defect in respect of the work or services offered by the contractor, it would be deemed a breach of contract which would thereby, attract the application of the provisions of the Defect Liability clause under that contract, thus, compelling the contractor to remedy the said defects.

Considering the aforesaid, the principle or doctrine of ‘duty of care’, therefore, essentially forms the contractual bedrock upon which the concerned contractor must carry out the execution of its project activities. It has a two-fold advantage and bestows a right upon the project owner to expect and require its contractor to comply with the requirements of the project that are commensurate not only to the contractual and technical specifications agreed upon but also to the accepted industry standards. Parallelly, it also enforces a corresponding duty upon the concerned contractor to act prudently, exercise caution and adhere to the standard of reasonable care while performing its work under the relevant contract.

Moreover, a claim by the project owner to remedy any injury, loss or damage must stem from a proximate cause of action arising on account of the contractor’s breach of its duty of care, which consequentially causes the said harm. The intent of this practice is to provide effective contractual or legal remedies to the owner in light of the fact that but for the contractor’s breach of its requisite and expected duty of care, the injury, loss, harm or damage would not have occurred or arisen to such owner in respect of that concerned project.

Therefore, in light of the above, this principle is entwined with and finds its purpose being analogous to the contractual intent envisioned by the Defect Liability clause of infrastructure and construction contracts, alike. Where the contractor fails to adhere to a reasonable duty of care and the same results in harm or injury to the person or property of the owner, its personnel and/or third parties, then the Defect Liability clause coupled with the duty of care doctrine, would render the contractor liable for the same by imposing accountability for the negligent and flawed workmanship upon such contractor.

Differentiating between Latent and Patent Defects

In the Infrastructure setup, defects are multifaceted in nature and can exist and manifest itself as either patent or latent defects. Patent Defects are also known as obvious defects because they are those defects which are visible on the face of it. They are and can usually be discovered prior to the expiry of the contractual Defect Liability Period (“DLP”) and therefore, requires that the concerned project owner exercises reasonable caution, inspection, and vigilance with respect to the work of the contractor and any consequent acceptance of the same.

On the other hand, latent defects are those defects which exist at the time of execution of the work by the contractor but lie inherently hidden to the ordinary eye. Such defects may unnoticeably exist in the structural components or the material forming a part of such infrastructure projects or on account of an error or deficiency in the design of the project. They are not discoverable by a prudent and experienced owner, despite such owner exercising a reasonable measure of caution prior to the acceptance of such defective work of the contractor. The English Court inBaxall Securities Ltd v Sheard Walshaw Partnership, resonated with this view and held that,

The concept of a latent defect is not a dicult one. It means a concealed flaw. What is a flaw? It is the actual defect in the workmanship or the design, not the danger presented by the defect….To what extent must it be hidden? In my judgement, it must be a defect that would not be discovered following the nature of inspection that the defendant might reasonably anticipate the article would be subjected to.”

Such defects are, thus, rightfully known as hidden defects as they may remain hidden for an indefinite amount of time. Furthermore, it may also so happen that minor latent defects which are seemingly dormant, could progressively but gradually cascade into major structural defects that would compromise the safety, functionality and integrity of the component, machinery or the whole or part of an infrastructure project.

In discerning the contractor’s liability for defects, especially those which become visible post the expiry of the contractual DLP, courts generally consider it important to first decide whether the said defect was a patent or latent defect. Reiterating the stance taken by the English Court inBaxall Securities Ltd v Sheard Walshaw Partnership, the author further emphasizes that a mere statement that the defects in question, were not observed by the owner (or its third-party inspection authority, if any) would not be enough to bind the contractor to a claim of latent defect liability, especially post the expiry of the contractual DLP. The Queen’s Bench, in the case ofSanderson v National Coal Board clarified that:

A patent defect is not latent when there is no-one to observe it. The natural meaning of the word “patent” is objective, not subjective. It means “observable” and not “observed”. A patent defect must be apparent on inspection, but is not dependent on the eye of the observer; it can blush unseen. In this case, although the defect was in darkness, it was patent. Had the plainti or his mate shone their lamps on it at the relevant moment, they would have seen it.”

Therefore, it can be concluded that the test for deciding whether a defect is patent or latent, depends upon whether the defect was discoverable by a reasonable measure of care and vigilance by the aggrieved project owner at the time of inspection of the work. The above stance finds its roots in the universally accepted ‘Good Industry Practices’ and is also synonymous with the legal maxim, ‘caveat emptor’, which means that the buyer must beware. It requires that a concerned buyer must carry out a diligent inspection of the goods or products prior to buying the same, or in the case of infrastructure projects, prior to accepting the work performed or issuance of the Final Acceptance Certificate by the project owner. The Supreme Court of India inCommissioner Of Customs (Preventive) v. Aafloat Textiles India Private Limited And Others took an interesting stance on the correlation between caveat emptor and latent defects and held that,

“Caveat emptor means “let the purchaser beware”. It is one of the settled maxims, applying to a purchaser who is bound by actual as well as constructive knowledge of any defect in the thing purchased, which is obvious, or which might have been known by proper diligence. Caveat emptor does not mean either in law or in Latin that the buyer must take chances. It means that the buyer must take care.

15. “Caveat emptor is the ordinary rule in contract. A vendor is under no duty to communicate the existence even of latent defects in his wares unless by act or implication he represents such defects not to exist.” Applying the maxim, it was held that it is the bounden duty of the purchaser to make all such necessary enquiries and to ascertain all the facts relating to the property to be purchased prior to committing in any manner.”

Needless to say, it would, thus, be incumbent on the aggrieved project owner to prove that the defect in question, was not discoverable by the said owner (or the inspecting authority, if any) despite possessing the requisite skill, experience and technical knowhow, being vigilant and undertaking careful inspection. A similar view has been echoed in the Indian courts whereby, inMinu B Mehta and Anr. v. Balkrishna Ramchandra Nayan and Anr., the Apex Court of India cited the English judgment in Henderson v. Henry E. Jenkins & Sons and stated that,

In order to sustain a plea that the accident was due to the mechanical defect the owners must raise a plea that the defect was latent and not discoverable by the use of reasonable care…. The burden of proving that the accident was due to a mechanical defect is on the owners and it is their duty to show that they had taken all reasonable care and that despite such care the defect remained hidden.

In relation to infrastructure projects specifically, given the intricacies involved, the infrastructure contracts have a very stringent and detailed framework with regards to conducting inspections, quality checks, and carrying out complex tests, which are usually a precondition that a contractor needs to meet or carry out in order to achieve the project milestones specified under such contracts. This strategy works as an effective vigilance mechanism that affords both the contractor and the owner, the opportunity to maintain due care by thoroughly inspecting the work and remedying the defects that are found, as a result of the tests conducted. Therefore, where the defects lie hidden and cannot be observed by the owner or its appointed expert despite complying with the stringent inspection framework, it is a settled understanding that the non-discovery of the concerned defect during such inspections would act as adequate proof that due and reasonable care was taken by the owner and such defects were in fact, latent in nature.

Defect Liability Period in the Indian Infrastructure Setup

The infrastructure contracts stipulate a fixed duration for which the contractor shall remain liable for the rectification, replacement, modification, making-good or repair of its defective work under the Defect Liability clause of the contract. This specified duration is known as the Defect Liability Period, Warranty Period or the Maintenance Period of the contract and where the owner raises a claim or a notification as specified under the clause and within the period specified thereunder, then the defaulting contractor would be bound to remedy the defects. In infrastructure projects, after the expiry of the DLP, the project owner usually issues a Final Completion Certificate to the concerned contractor, which signifies the end of that contract and the discharge of all contractual obligations between the two parties.

Keeping in mind the difficulties relating to the discovery of (patent and latent) defects, vigilant owners usually stipulate different DLPs for patent, as well as latent defects in their contracts. Therefore, where the DLP in respect of patent defects would extend over a period of around 12-24 months, the DLP in respect of latent defects would extend for much longer, to secure the interests of the concerned project owner. In respect of any defect that may arise during the respective DLP, the owner would, thus, have the contractual right to demand a remedial action from the contractor only during the said period.

However, in certain instances, it has been observed that the infrastructure contracts do not distinguish between patent and latent defects and thus, provide for a general DLP without precisely specifying the duration of the contractor’s liability for latent defects. Here, considering that latent defects may very well show up only after the expiry of a general DLP, such a short or generic period may not be sufficient to bind the contractor to its liability under the Defect Liability clause with respect to latent defects and this could essentially set the contractor scot-free, thereby, defeating the entire purpose of having a Defect Liability clause.

In such a scenario, the Indian Courts have taken a bold stance in some instances, that in case of latent defects which were not discoverable at the time of inspection of the works and where there was no simultaneous failure by the project owner to properly maintain or operate the work or the equipment or the machinery involved, then in such a case, irrespective of the expiry of the DLP, the concerned contractor would be solely liable for rectifying such defect and remedying the resultant harm, if any. The reasoning behind such a stance is that it would be considered unfair to shrug off the liability of carrying out such rectification or remedial action on to an innocent project owner for a harm not attributable to its own default. However, this would imply that the contractor could potentially be liable for latent defects even several years after the expiry of the contractual DLP. In such cases, it is assumed that the law would step in to shed light on this ambiguity and define a clear statutory period, during which the defaulting contractor would be liable for any latent defects in its work.

However, this is where the problem exacerbates for Indian infrastructure projects because the Indian legislative framework does not specify a clear or definite DLP or Latent Defect Liability Period. The Limitation Act 1963 is the Indian legislation which provides for a fixed duration within which a suit or other proceeding, including an arbitral proceeding, can be filed. While DLP is not specifically provided for under the Limitation Act, in respect of defect liability or breach of contract irrespective of whether the breach is express or implied, thelimitation would run  for a period of three years from the date on which the cause of action accrues to the claimant or when the relevant contract was broken or when the said breach occurred or ceased to exist. Moreover, underSection 28 of The Indian Contract Act, 1872, an agreement which tends to shorten or limit the duration specified by the Limitation Act would be void. It also expressly bars agreements that extinguish the rights of a party to a contract or discharges a party from its liability under a contract on the expiry of a certain period. When read together, the law clearly upholds the stance taken by the courts, whereby the concerned contractor could potentially remain liable for an indefinite amount of time in respect of latent defects found in its work.

This is contrary to the position in some foreign jurisdictions, wherein the laws of such countries set out a specific duration pertaining to Latent Defect Liability. The United Arab Emirates dictates a decennial liability, which means a ten-year liability, in respect of latent defects for buildings and other fixed installations. The source of this duration can be traced back toArticles 880 to 883 of the UAE Federal Civil Code. Similarly, under theQatari Civil Code, the concerned contractor or engineer shall remain liable for its work for a period of ten years and any provision which attempts to limit or extinguish such liability, shall be deemed null and void.

The French Civil Code also, underArticle 1792-4-1, specifies that the builders, contractors, subcontractors, architects, technicians and all persons who are liable under Article 1792 to Article 1792-2 of the Civil Code, shall be liable and provide warranty for its work for a period of ten years from the date of acceptance of the work. In the United Kingdom,Section 14A of the Latent Damage Act, 1986 provides that where there is a latent defect, subject to a maximum cap of fifteen years from the date of accrual of the damage, the time limit for claiming damages in respect of any harm, injury or loss caused by the said latent defect, is the later of:

(a) six years from the date on which the cause of action accrued in respect of the plaintiff or the claimant; or

(b)three years from the earliest date on which the potential plaintiff first knew and had a right to bring such an action.

Hereby, the author highlights that the attempt of the foreign legislatures to specify a particular duration for which the concerned contractor shall remain liable for its work, provides clarity regarding the contractor’s responsibility to warrant its works for that fixed period and its liability in respect of patent and latent defects across the construction and infrastructure landscape.

Conclusion

Any defect in the contractor’s work implies a breach of such contract by the concerned contractor. Accordingly, the “duty of care” doctrine, which is the driving force behind the Defect Liability clause in infrastructure contracts, seeks to ensure that a contractor shall provide a reasonable measure of care and in case of any defect that may arise in its work, the defaulting contractor shall bear the sole responsibility of rectifying or making-good such defective work and remedying the aggrieved owner for any damage or harm caused by the resultant breach.

The test for determining patency of defects in infrastructure contracts is to show that the defect was discoverable by a reasonable inspection of the work and where the same is not observable to a skilled and trained eye, they are latent in nature. The purpose of this test is to define a clear attributability in respect of whose failure it was to ensure reasonable care, especially where the contractual DLP has already expired (i.e., the owner’s or the contractor’s). Therefore, where the contractor is liable for such failure, such contractor shall be responsible under the Defect Liability clause of the contract and where the owner has failed to remain vigilant, it should not be allowed to shrug off the onus of the resultant harm or damage on to its contractor.

Additionally, in relation to DLP, there is a lacuna in the Indian legislative framework, whereby the laws do not specify a definite DLP. The author emphasizes that the need of the hour is for the Indian legislature to prescribe a specified DLP to define and establish a fixed duration and a sense of accountability with respect to the contractor’s patent and specifically, latent defect liability. This would be a landmark development in the infrastructure setup which will not only protect the interests of the owner in case of any defect found post the contractual DLP, but also ensure that the contractor’s liability in respect of latent defects does not carry on in perpetuity.

About the Author 

Ms. Melissa Lianca D’Souza is an Indian lawyer, working at Larsen & Toubro Limited in the Energy- Hydrocarbon space. She possesses experience in the infrastructure/EPC sector.

Editorial Team 

Managing Editor: Naman Anand 

Editors-in-Chief: Jhalak Srivastav and Akanksha Goel

Senior Editor: Hamna Viriyam

Associate Editor: Kopal Kesarwani

Junior Editor: Manav Ganapathy

Preferred Method of Citation  

Melissa Lianca D’Souza, “Dissecting the Enigma of Defect Liability in Indian Infrastructure Contracts” (IJPIEL, 13 April 2022) 

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