When drawing up contract conditions, you should consider if the contract needs to be executed as a deed or if a simple underhand contract will suffice, but what is the difference? Why does it matter which route you go down.
Essentially they differ, as the limitation period for bringing a claim, or conversely the liability for defending a claim, is six years for a contract that is executed under hand, whereas for contracts executed as a deed the period of limitation is twelve years.
According to English law, a simple under hand contract is one that is executed by one person and that person can be authorised by the company’s directors. However, for a deed there are formalities such that two directors registered at Companies House must sign and execute the contract or a company director and the company secretary. Failure to execute the contract correctly could lead to it being classed as a simply underhand contract, therefore getting it right is important.
Contracts that are executed as a deed can also be executed by a company using its company seal, but as time has evolved, and as per Section 130 of the Companies Act, the deed can be executed via signature.
In summary, a contract executed under hand can be signed by an authorised representative of that company, whereas for a deed to be executed it must be:
- Expressly stated that the contract is being executed as a deed
- Delivered as a deed
- The company executed the contract by way of using its seal so long as this is stated in their articles of association
- The executed contract contains the signature of two directors, or;
- The signature of a director and the company secretary
When executing contracts, always check the intent of the document, as according to sub-section 5 of the Companies Act 1989 if the document makes it clear on its wording that it is intended to be a deed, but only signed by one director, then it will still operate as a deed. Proceeding with caution is required. If your expectation is that the contract is underhand and only requires one signature then check there is not references to a deed before signing.
Each has a timescale of how long it’s valid for – what are the implications of each for a developer?
As noted above, both have different limitation periods. This is a period of time that a party to the contracts can bring about a claim, and in construction these are generally in regards to latent defects i.e. defective work that could not have been discovered by reasonable inspection during the works or through the defects liability period.
Most people will be aware that in construction contracts there is a defects period that follows completion of the works, and that during this period of time the contractor is responsible for correcting defects whether notified or not. However, it is a misconception that following the expiry of this period the contractor is effectively off the hook for taking ownership of defect correction. Dependent on the contract being under hand or under deed, this will define the statutory limitation period which can, by law, override the end of the defects liability period.
The Limitation Act 1980 defines the period of time that applies to the parties bringing about a claim for a breach of contract. If the case was a latent defect, the claim might be for one of negligence on the basis that the works were incorrectly designed, which led to the ensuing defects occurring some years later. The Act refers to simple contracts, which according to English law, are those requiring one only signature of each party, therefore this would by default refer to contracts executed underhand.
Dependent on the individual contract terms, as they may have been amended, the limitation period starts from when the breach first occurred. This is an interesting and key point for those bringing about the claim, but equally for those defending the claim, as providing evidence that a party knew about an issue at a certain time, and therefore this time barred any claim, could be crucial in determining if one party has legal recourse or not before launching legal action.
Under English law, by default, if the contracts do not specifically state what limitation periods apply, and it cannot be found if the contract was executed as underhand or as a deed, then the statutory period provided by the Limitation Act will apply, which is six years. However, limitation periods are generally used as defence upon the presence of a claim, as opposed to a statutory requirement that you must make a claim before it expires. Most courts will not time bar a claim. This is an action for the defending party to provide evidence that they do not need to defend the claim, as they are effectively time barred from taking liability.
As a developer you will be employing the services of a main contractor or operating on a management contractor basis employing the various trades yourself. The development, once constructed, might be sold or operated by a third party, therefore it’s important that you understand your legal obligations and liability and seek to cover these off through your contracting model.
You should consider the use of collateral warranties, as without these in place, then come to the time to sell an asset, the new building owner may have not direct recourse through the contracts you have set up and operated in the event that there is an issue. This may affect the residual value or alternatively end up in complex legal agreements being drawn up to cover the liability.
It is possible to draft contracts with shorter limitation periods that can operate successfully if they are mutually agreed between the parties before entering into contract. However, proceed with caution and get the necessary legal advice here, as with an issue so complex you could well end up creating ambiguity. Make sure that any new clause is clear when the limitation period starts and ends and what is the trigger point that starts it e.g. completion certificate or defects correction certificate. Also, ensure that you make it clear how a claim should be raised and how it should be notified, what information is needed for it be considered properly, etc.
Which should I be using?
In terms of construction contracts, if you are contracting on a design and build basis for any packages of work that contain a design element, you will certainly want to execute these as deeds, such as piling, cladding, structural steel frame or mechanical and electrical systems requirements.
However, there are other contracts, such as temporary works design or scaffolding, where they contain a design element but are not incorporated into the final works, which should suffice a as a simple contract. For other simple contracts such as labour only subcontracts or plant hire contracts, they are all simple underhand contracts.
However, what you need to consider here is that even if the works are of a relatively simple nature and might not contain any substantial design elements, such as flooring, then whilst you might consider these to be acceptable to be underhand, the end client (of a development) might need a collateral warranty once they sell the development, so agreeing a contracting strategy at the outset is important, along with standard wording across all collateral warranties that can be issued to the supply chain at the outset.
Outside of the traditional build contracts (e.g. for the conveyancing of land), this must be transacted as a deed, and if it is not then such conveyancing will be considered void under law.
How would a developer make a claim during the certain period?
In the case of latent defects, the claimant would have to establish the cause and identify those responsible before notifying their intent to make a claim for negligence. The defendant, upon receipt of the claim, would normally notify their insurance company of a claim under their professional indemnity insurance cover. The insurance company would then appoint solicitors to act upon their behalf.
As noted above, the time the claimant became aware of the issue becomes an important part as to the success of the claim as the solicitors might well seek to have the claim dismissed on time barring grounds if they can demonstrate that they should have been notified within the limitation period, which has subsequently expired, and that in the case of the Latent Damage Act they were aware of the issue historically but did not notify it.
Can I extend the period of each/either?
If a latent defect is found then the Limitation Act, as amended by the Latent Damage Act 1986, could provide an additional three years of cover. The reason being is that from three years of the claimant becoming aware of the loss or damage, or the date when you should have reasonably known, can be enough to launch legal action. Therefore, if these circumstances arise at the end of the limitation period, this could extend the period from twelve to a maximum of fifteen years.
However, the Latent Damage Act also extends the simple contracts or under hand contracts from the standard six years in cases of negligence claims for latent defects i.e. a defect caused by a fault in design, materials or workmanship that was not apparent at the time of completion.
In the majority of construction contracts there will likely be amendments that seek to introduce a limit of liability. This could be a maximum value of so many times the contract value, or simply a stated value. There are also limitations of ‘reasonable skill and care’ as opposed to ‘fit for purpose’ obligations imposed on to design and build contracts.
Interesting Case Law
In the case of Brickfield Properties vs Newton (1971), upon action launched against the designer more than six years after the breach of contract, the architect sought to have the case time barred, but the courts found in the favour of the claimant on the basis that it was less than six years from the date of practical completion, and crucially that the architect had an obligation to ensure their design will work in practice and that errors should be identified and managed through the construction phase.
In the case of OTV Birwelco Limited and General Guarantee Co Limited (2002), the defendant sought to challenge that the deed was unenforceable as it was executed using its trading name as opposed to the registered name with Companies House. However, it was held by the courts that it did not make the deed unenforceable, only susceptible to a fine from Companies House for using an incorrect seal.
In a landmark case as to when the limitation period applies, the case of Reeves vs Buther (1891) held that in this case, a loan was due over five years but the repayments were not made. A new agreement was drawn up whereby the loan would not be called in if payments of interest were made. However, no payments of interest were ever made, and in the sixth year the claimant sought to launch proceedings and stated that even though they could have called the loan in after the first payment was defaulted, they were not obligated to do so and that at the end of the five year agreement a new breach of contract occurred where the loan was not repaid and they were entitled to call the loan in at this point. However, the court of appeal found that the debt could have been recalled after the first payment was missed and therefore they had no right to sue at this time and were effectively time barred.
Image credit: iStock.com/BrianAJackson
About Dean Suttling
A member of the Royal Institution of Chartered Surveyors, Dean has twenty years of experience in commercial management and quantity surveying, undertaking roles for contractors, clients, and consultants.