The Idea in Brief
- Many jurisdictions in Australia have statutory limitation periods of six years in which parties must bring actions for breach of contract claims, failing which the claim may be successfully defended on the basis that it is statute barred.
- The limitation period can cause problems for large scale or complex construction and infrastructure projects, particularly where a breach of contract claim may be related to alleged breach of a fitness for purpose warranty that operates as at the date of handover of the project or practical completion.
- In some instances, six years may not be long enough to identify the problem, establish liability, gather sufficient evidence and start court proceedings. Recognising this, some jurisdictions have enacted 10 year long stop periods for building defect claims.
- The High Court recently unanimously confirmed in Price v Spoor that parties can contractually waive the benefit of a limitation of actions period under the limitations of actions legislation in Queensland, even before a cause of action arises, by drafting specific clauses into their contracts to this effect.
- The High Court concluded such contractual provisions were consistent with public policy and not prohibited by the limitation of actions legislation in Queensland.
- This decision is consistent with the finding in Commonwealth v Verwayen that a limitation period is a conferral of a right, which a defendant can waive.
- Practical implications for industry:
- Project owners are now likely to consider the benefit of including a clause that contracts out of the application of limitation of actions legislation to specific types of claims, so as to not undermine their ability to pursue contractors for major defects despite the passage of time since practical completion of the project.
- Whether this will be effective in jurisdictions that have specific longstop liability periods set by building legislation that apply to certain types of building claims is yet to be tested, but questionable.
- Contractors and major insurers in the market are likely to be focused on minimising the degree to which clauses are agreed to that seek to contract out of limitation of actions periods, citing the risk of long-tail risk on major construction and infrastructure projects and whether that risk will be insurable at commercially viable pricing.
- If a clause seeking to contract out of or waive the application of limitation of actions legislation is to be included, it must be carefully drafted as the legal reasoning of the High Court turned specifically on the nature of the language used to avoid the operation of the limitation of actions legislation and turned on the particular statute in question. Legal advice should be obtained.
- If you wish to obtain advice or support for your major construction or infrastructure project contracting, or further information on this particular development, reach out to Merlehan Group to engage our leading major projects legal support.
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The Idea in Detail
In June 2021, the High Court in Price v Spoor [2021] HCA 20 unanimously dismissed an appeal of Spoor & Ors v Price & Ors [2019] QCA 297 and confirmed that parties have the ability to contract out of the limitation periods of the Limitation of Actions Act 1974 (Qld). This could be particularly beneficial for large or long-term construction projects where defects or a failure to meet fitness for purpose warranties may not be discoverable until after the expiry of a contractual limitation of actions period, particularly in jurisdictions that do not already legislate a longer “long stop” liability period for certain building actions.
It can take time to identify liability for defects issues, and a conventional statutory limitation period of six years for breach of contract may not be sufficient to ensure parties have enough time to identify issues, engage upon them and take the appropriate action.
Provided the clauses are carefully drafted, the High Court has determined that parties can (in the context of the Queensland limitation of actions legislation) remove the otherwise available defence of an expired limitation period for potential litigation, even before the cause of action arises.
A separate question yet to be tested is whether this same reasoning will apply to building legislation in some jurisdictions in Australia that separately sets long stop dates (often 10 years) for liability for building defect claims.
Contracting out after a cause of action arises
It has long been established that the statutory limitation periods under the Limitation of Actions Act are a benefit conferred on defendants that can be raised as a defence to potential litigation after a cause of action has arisen.
This is typically done by pleading a defence to an action that the claim has been brought outside of the applicable statutory limitation period.
In the High Court decision of Commonwealth v Verwayen (1990) 170 CLR 394 it was held that a letter provided by the Commonwealth 10 years after the cause of action arose in which the Commonwealth Government admitted fault and stated that it would not raise the claim being out of time as a defence, operated as a waiver of this benefit and therefore the expiry of the limitation period could not relied on to defeat the claim at trial.
Enter Spoor & Ors v Price & Ors [2019] QCA 297
Now the decision of Spoor & Ors v Price & Ors has found that the parties are capable of pre-emptively waiving this right in contract.
This is an important development for the construction and infrastructure development industry and commerce generally in Australia.
In Spoor v Price the main point of contention was the ability of the parties to contract out of the application of Limitation of Actions Act 1974 (Qld). The original mortgage in issue in that case included ‘Clause 24’ which read:
“The Mortgagor covenants with the Mortgage[e] that the provisions of all statutes now or hereafter in force whereby or in consequence whereof any o[r] all of the powers rights and remedies of the Mortgagee and the obligations of the Mortgagor hereunder may be curtailed, suspended, postponed, defeated or extinguished shall not apply hereto and are expressly excluded insofar as this can lawfully be done.”
The mortgagors argued that the cause of action arose on 30 April 2001 and therefore actions could not be brought against them for recovery of the money or land after 30 April 2013, relying upon sections 10, 13, and 26 of the Limitation of Actions Act 1974 (Qld).
In response, the mortgagee argued that Clause 24 constituted a covenant on behalf of the mortgagor that they would not raise the Limitation of Actions Act 1974 (Qld) as a defence to their claim.
At first instance, judgement was given that Clause 24 did not apply to the Limitation of Actions Act 1974 (Qld). Although the court at first instance accepted that the statute conferred a right which could be waived (in accordance with Verwayen), it was held that the specific clause in question did not apply because the words used in the clause (curtailed, suspended, postponed, defeated or extinguished) did not specifically apply to the Limitation of Actions Act 1974 (Qld) because the relevant sections of that Act did not ‘suspend, postpone or extinguish’ rights, rather they only defeated or curtailed the rights if it was pleaded as a defence.
It was held that the wording of the clause was too ambiguous and should be interpreted in favour of the party who did not draft the clause – in this case, the mortgagor. This meant the mortgagee was not able to recover the monies owed to them.
This judgement was reversed by the Court of Appeal in December 2019 and then upheld by the High Court in June 2021 where (for the reasons below) it was found that Clause 24 was able to be applied to the Limitation of Actions Act in respect of recovering money owed to them. As a result, clauses properly drafted that contracted out of the limitation periods prescribed by the Limitation of Actions Act 1974 (Qld) are now valid and enforceable.
Public Policy Implications
On appeal, the mortgagor submitted that the initial decision was correct, and that the primary court should also have found that Clause 24 of the mortgage should have been void and unenforceable because it violated public policy to contract out of statutorily imposed limitation periods.
The judgement in the first instance was based on the principle in Verwayen that the Act provides a benefit/right that can be waived. In the appeal, it was submitted that a clause pre-emptively contracting out of legislation prior to the accrual of such cause of action should be void and unenforceable on the grounds that it is contrary to public policy.
The public policy this argument was concerned with was the importance of finality in civil litigation. The American cases raised by the mortgagor on this point stated that the use of these types of clauses would allow for the same abuse of process the statute was intended to prevent, by allowing claims to be litigated in court well beyond when the cause of action first arose and evidence and witnesses would be available. However, this argument was rejected by the Court, as it was held that the Parliament had implemented the policy of finality in civil litigation not by imposing a restriction on commencing actions, but by conferring a right to plead the expiration of the limitation period as a defence. As such, Clause 24 was held to be consistent with public policy because it was the party who stood to benefit from the defence that was voluntarily waiving it pre-emptively in contract. Similarly, it was noted that the Limitation of Actions Act 1974 (Qld) itself does not either explicitly or implicitly prevent contracting out of it.
The importance of accurate language
For clauses to effectively contract out of the Limitation of Actions Act 1974 (Qld) it is critical to ensure clear and accurate drafting to this effect. Spoor v Price extensively considered the definitions of the words chosen and narrowly interpreted their application.
In first instance, the primary judge held that the clause in question was too ambiguously worded, and the words used did not accurately describe the effect of the Limitation of Actions Act 1974 (Qld) that was sought to be contracted out of. The clause was consequently interpreted by the court in favour of the party that did not draft it – in this case, the mortgagor. This serves as an important reminder of the principles of effective drafting of clauses, by establishing clearly and objectively their desired effect.
It is also important to consider the exact words used in such clauses. For example, on appeal in Spoor it was noted that the use of the word ‘curtailed’ would not have been sufficient for the clause to operate to waive the right under the Limitation of Actions Act 1974 (Qld) had only that term been used. Whilst it was argued by the mortgagee that such a term means to ‘cut off’, the mortgagor argued the full dictionary meaning is ‘to cut off part of’. At first instance it was held by the primary judge that even though it completely removed the mortgagee’s right, the provisions of the Limitation of Actions Act 1974 did not ‘cut off part of’ their right, and therefore the drafting term ‘curtail’ would not, alone, apply to waive the limitation period under the legislation.
This depth of reasoning serves to illustrate that it is important to consider the precise language used when drafting clauses that seek to contract out of the limitation periods under the Limitation of Actions Act 1974 (Qld).
It is also important to appreciate that some attempts to contract out of limitations of actions legislation could separately be deemed unfair and unenforceable under unfair terms legislation in Australia, especially standard form attempts to do so where a significant imbalance of market power is evident.
Implications for industry
We expect Spoor & Ors v Price & Ors will see more project owners attempt to contract out of limitation of actions legislation on more major infrastructure and construction projects, citing the need, in cases where fitness for purpose is warranted by contractors, to have a longer tail of liability within which the project owner can properly test whether the asset delivered really was fit for purpose and compliant with the long design life many major infrastructure projects are expected to be designed to meet.
On the other hand, we expect contractors (and insurers) are likely to be focused on avoiding these types of clauses becoming common practice in the industry. The reason for this is the industry operates on modest profit margins, yet involves the management of large amounts of risk. Contracting out of limitation of actions legislation and prolonging the long tail of post completion risk for major contractors may increase commercial risk beyond what is economically feasible to be managed by contractors and their insurers. Insurers are likely to carefully view this development and propensity of such clauses in the industry against the extent of cover offered to contractors.
Conclusion
Although it presents a significant opportunity for parties to more carefully allocate contractual risk, and the time period it is held for, Spoor v Price does present a challenge for the construction and infrastructure industry and the insurance industry to engage with, particularly in those jurisdictions that do not already legislate a long stop date on certain types of building claims. Equally, the development is important for commercial contracts generally in Australia.
It is necessary to find the balance between risk identification, management and transfer and that of sustainable business and market practice to operate a sustainable market.
Separately, the decision highlights the importance for adopting a meticulous approach to drafting key contractual provisions that seek to contract out of the operation of limitation periods and serves as a timely reminder to the proper approach to contractual drafting.
If you wish to obtain advice or support for your major construction or infrastructure project contracting or would benefit from further information about this particular development, contact Merlehan Group to engage our leading major projects legal expertise.
