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Friday01 August 2014

A client is threatening to sue over an old project. How long until I’m safe?

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A client has been threatening a claim on a very old project for years. When will it lose the right to commence proceedings?

Clients can sue for damages for allegedly defective work in two principal ways. Firstly for a breach of contract. Secondly, in the tort of negligence. A client’s right to sue does not last forever and is subject to certain limitation periods. These time constraints are set out in statute and provide long stop dates for particular causes of action. After the expiry of these limitation periods, you will have an absolute defence of limitation as the client’s action will be said to be “statute barred”.

Regarding a breach of contract, the position is relatively simple. Clients will have six years from the date of breach of the contract, or 12 years if it is a contract by deed (under seal), in which to bring a claim. With regard to a negligence claim, time will run for six years from the date when the damage is suffered. This may be much later than the date of the actual breach. For example, the design error may precede by many years the date of the damage arising from it.

There are several situations in which the time limit for bringing claims can be extended. For example, if the claim is for a fixed sum of money (such as a debt), the clock is effectively reset on any part payment or acknowledgment of the debt. Different time limits also apply if it is found there was any deliberate attempt to conceal the mistake. Claims for contribution, for example, by another professional involved in a project, also have different rules.

Lastly, and in respect of negligence claims, it is possible to bring a claim outside the six-year period if the damage complained of was not discovered until after the time expired. If that is the case, then the damage is known as “latent damage” and the client will have a further three years from his discovery of the damage (or from the date he ought reasonably to have discovered the damage) to commence his claim. However, all “latent damage” claims are subject to a 15-year long stop date (from the date of the negligent act or omission).

One final point: there is potential for the clock to be “reset” from the date of an adjudication. Where one party has paid money to the other in compliance with the decision of an adjudicator, the paying party is entitled to have the dispute finally determined by legal proceedings, should it not agree with the adjudicator’s decision. The court has recently held that, even if the limitation period for the original claim has expired, the paying party has a further six years from the date of the adjudicator’s decision, to seek to overturn it.

Many parties will feel relatively “safe” in respect of work carried out over six years ago, or 12 years if the contract was under seal, but where it has taken time for the damage to manifest itself, it could potentially take up to 15 years from the project date for the risk to have really gone; even longer if there have been prior adjudications, or there is the potential for claims for contribution from other parties involved in the project who have already been sued.

It is hard to think of a statute that has generated more litigation than the Limitation Act 1980. The only certainty is that there will be a dispute as to what it means and how it applies.

Should we use a letter of intent?

The client is keen for the contractor to start work on site straight away. Should I use a letter of intent?

Lawyers often cringe when mention is made of letters of intent. They are a far cry from the neat, orderly, standard form contract terms that clearly define the parties’ rights and obligations. However, they have advantages: work commenced prior to entering into a formal contract can bring forward the completion date and avoid costs associated with delays.

The clear risk with letters of intent is that they will either not be binding or, if they are, may fail to deal in full with all of the terms that would be included within the final contract. If the works proceed smoothly, no problem. However, if a dispute arises, the client may wish that it had held back until a formal contract was concluded.

General contract rules will apply to letters of intent. If they are to be binding, there must be an offer that is accepted, consideration, as well as an intention to create legal relations. For these reasons, it is often sensible to ensure that the letter of intent is signed by both parties, with the consideration stated as the payment of the price by the client for the work required at that juncture.

Letters of intent often specify a date (or a period) on which they expire, to account for the likelihood that a formal contract will be agreed by that time. However, there is a risk in underestimating the time required to finalise contractual negotiations. Parties may become preoccupied with technical aspects or delays might arise, and this can lead to the contractor continuing work without any form of contract in place.

This situation occurred in the recent Court of Appeal decision in RTS Flexible Systems. In that case, although key terms were agreed between the parties, the court held that no contract had come into existence after the expiry of the letter of intent. The parties were then left to argue over the application of quantum meruit (as much as they have deserved).

Perhaps the most important consideration in deciding whether to proceed with a letter of intent is why it is required. Thought needs to be given to the client’s objectives and the minimum terms that need to be put in place to ensure that those objectives can be achieved.

If in doubt, the safest course is to proceed with a “full” contract; but, as a lawyer, I would say that, wouldn’t I?

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