We recently interface between different standard forms of contracts used for construction and process plant projects within the drinks sector (particularly on distillery projects), as well as some of the key provisions surrounding testing procedures and commissioning regimes and fitness for purpose. In this article, we will consider the defects liability period ("DLP") within the context of the most frequently used standard form contracts for process plant projects.

Why is the length of a contractor's defects liability important in a process plant contract?

The length of a contractor's defects liability is important under any construction contract as it is the period of time within which the employer can require (and the contractor has the right) to return to site to make good a defect (usually at the contractor's time and cost).

This has the effect of allowing the contractor to mitigate its own losses (rather than the employer claiming breach of contract and damages due to the defect, which may include the cost of a third party rectifying the defect). After the expiry of the DLP, without a contractual provision to the contrary, the employer is still entitled to claim damages for defects appearing outside the defects liability period but within the usual limitation period of the contract (eg 12 years under English law if executed as a deed).

However, under some standard form process plant contracts, this is not the case and instead the contractor has no further liability for defects after the expiry of the defects liability period. This makes negotiation of the defects liability period under these contracts much more significant than under a JCT/SBCC (amongst others).

  • What do the typical "process plant" standard forms provide for?

    The table below highlights the defects liability periods and defects regimes within the most commonly used standard form contracts for process plant projects:

    Form of contract

    Defects liability period

    IChemE Red Book

    The 'Defects Liability Period' is 365 days after the date of the relevant Take Over Certificate as adjusted in certain scenarios set out below. Parties can agree a longer period by amending the contract through special conditions.

    Adjustments to the Defects Liability Period:

    • If in the course of making good a Defect which arises during the DLP the Contractor repairs, replaces or renews any part of the Plant, then the DLP for such part of the Plant shall commence afresh from the date of completion of the repair, replacement or renewal of such part.
    • If the Plant cannot be used because of a Defect, the DLP shall be extended by a period equal to the period during which it cannot be used.
    • The DLP will be extended by any period where the Plant cannot be used by reason of the Contractor putting or attempting to put the Plant into such condition that it passes any relevant take over procedure or any relevant performance test.
    • The duration of the DLP will be adjusted if any part of the Plant has a guaranteed working life under normal running conditions which is less than the duration of the DLP. The DLP for that part will be the stated guaranteed working life.

    The Contractor has no obligation to remedy Defects and the Purchaser has no claim against the Contractor in respect of Defects following the issue of a Final Certificate (which is issued on the later of expiry of the DLP, the date Contractor has remedied all Defects appearing during the DLP and issue of an Acceptance Certificate).

    There is also an exclusive remedies clause meaning the Purchaser can only rely on the remedies set out in the contract.

    MF/1

    The Defects Liability Period is the period stated in the appendix to the contract or if not stated, 12 Months from the date of taking-over of the Works (or Section).

    Adjustment to the Defects Liability Period:

    • Like IChemE, the DLP in respect of the repair/replacement will renew from the date of completion of the repair/replacement except that the DLP in respect of any repair or replacement shall not extend beyond 2 years from the date of taking-over (or such other period as may be stated in the appendix and agreed by the parties).
    • The DLP will be extended by a period equal to the period during which the Works (or that part of the Works in which the defect/damage has appeared or occurred) cannot be used by reason of that defect or damage.

    There is also a 3 year latent defect liability period which applies from the date of taking-over of the relevant part of the Works. The Contractor shall make good a defect appearing in the Works within such a 3 year period PROVIDED the defect would not have been disclosed by a reasonable examination prior to the expiry of the DLP. After expiry of the latent defect liability period, the Contractor is not liable for defects and the Purchaser has no claim against the Contractor for the same.

    As noted in our previous article, the Contractor's liability under the Defects Liability Period is instead of any fitness for purpose obligation.

    There is also an exclusive remedies clause meaning the Purchaser can only rely on the remedies set out in the contract.

    FIDIC Yellow Book

    The Defects Notification Period is the period stated in the appendix (to be agreed by the parties) calculated from the date the Works or Section is completed and certified by issuing a Taking-Over Certificate. The default position is 365 days.

    Adjustment to the Defects Notification Period:

    • If and to the extent that the Works, Section or a major item of Plant (as the case may be, and after taking over) cannot be used for the purposes for which they are intended by reason of a defect or damage (for which the Contractor is responsible to bear the costs) then the Employer may extend the Defects Notification Period however the Defects Notification Period may not be extended by more than 2 years.
    • Note the Employer must comply with the strict claims procedure regarding the extension to the Defects Notification Period.

    The issue of the Performance Certificate (which is issued within 28 days after expiry of the latest Defects Notification Period or as soon thereafter when Contractor has completed and tested all Works including remedying any defects and issued all required documents) constitutes acceptance of the Works.

    Unlike MF/1 and IChemE, the Performance Certificate is not final and binding which means the Employer could still claim against the Contractor for defective work after the Performance Certificate has been issued. The parties remain liable for fulfilment of any obligation which remains unperformed after issue of the Performance Certificate however, in relation to Plant, the Contractor shall not be liable for any defects or damage occurring more than 2 years after expiry of the Defects Notification Period for the Plant except if prohibited by law or in any case of fraud, gross negligence, deliberate default or reckless misconduct.

As can be seen, the differences between these standard forms can have significant implications for an employer seeking to have defects remedied (and a contractor's potential exposure) – in terms of duration of liability/rights to recover but also the cost and risk allocation of the remedial work.

While none of the three standard forms above take the same approach, in all cases, the importance of ensuring defects are rectified, appropriate oversight and continual reivew of the DLP is undertaken such that relevant extensions to the DLP are registered and performance tests completed satisfactorily before issuing the relevant final certificate cannot be overstated.

Parties should consider these positions as part of their decision-making process as to the most appropriate standard form contract to use.

In the next blog we will look at some of the other key provisions in typical process plant contracts.

Contributors

Jane McMonagle

Partner & Head of Transactional Construction, Infrastructure and Projects

Kate Morrison

Senior Associate

Sandra Jurak

Solicitor