Can contracting parties choose to alter the legal limitation period for bringing claims under their contract?

What are the consequences of failing to bring a claim within the time limit?

The law imposes a “limitation period” on all types of legal claim. This provides a time limit during which a legal course of action can be commenced, preventing people from bringing claims many years after events have occurred. Ensuring that the limitation period has not expired is one of the key aspects of any legal claim, because a party who seeks to bring a claim after the limitation period has expired will almost certainly be unsuccessful.

Limitation Periods

For breach of contract claims, the limitation period starts to run from the date of the breach of contract. In the context of a typical construction claim, where works or services are provided over a period of time, the time limit will usually start to run when the works/services are complete, as it is at this point when the party providing the works/services is deemed to have breached his contractual obligations. However, this will depend on the circumstances. For example, where works have been completed in sections, different limitation periods may start running at different times.

In England and Wales, limitation periods are set out in the Limitation Act 1980, which provides that anyone bringing a breach of contract claim has 6 years from the date of the breach of contract in which to do so. Alternatively, if the contract has been executed as a deed, the limitation period is extended to 12 years from the date of the breach of contract. However, it is not safe to simply assume that the limitation period under your contract will be either 6 or 12 years, as there is nothing to stop contracting parties from agreeing to a longer or shorter limitation period if they wish. Indeed, it is increasingly common to see clauses in contracts which lengthen or shorten the periods in which claims can be made. Such clauses should be considered carefully, as they can work both for and against each party to the contract, depending on whether they are bringing or defending the claim.

Two recent cases illustrate the potential risks of contracting out of the normal legal limitation periods.

Inframatrix Investments Limited (“IIL”) v Dean Construction Limited (“DCL”)

IIL engaged DCL, a firm of specialist roofing and cladding contractors, to carry out certain works in relation to the construction of a factory. Clause 17.4 of the contract between the parties stated that:

“No action or proceedings under or in respect of this Agreement shall be brought against the Contractor after:

(a) the expiry of 1 year from the date of Practical Completion of the Services, or

(b) where such date does not occur, the expiry of 1 year from the date the Contractor last performed Services in relation to the Project.”

DCL completed the works in early 2009. Shortly afterwards, IIL alleged that there were a number of defects in the works. The parties subsequently engaged in lengthy without prejudice negotiations, which included visiting the site and carrying out investigations into the alleged defects. DCL made offers to remedy certain defective items and IIL rejected these offers. Eventually, in December 2010, ILL issued legal proceedings against DCL.

DCL argued that even if the works they had carried out could not be considered to be practically complete, the time bar set out in clause 17.4(b) of the contract prevented IIL from bringing a claim because DCL had last attended the site to complete its works in February 2009, over 18 months before IIL had commenced legal action. IIL argued that the last time DCL attended the site to carry out work was in March 2010, when DCL attended the site along with IIL to inspect the alleged defects, and their claim had been made within 1 year from March 2010.

The Court of Appeal rejected IIL’s argument, pointing out that the purpose of clause 17.4 was to provide a clearly identifiable limitation period for both parties. The Court found that DCL’s attendance at the site inspection as part of the on-going without prejudice negotiations could not be viewed as “performing Services” within the meaning of clause 17.4(b). DCL’s visit to site was clearly made in an attempt to settle the dispute. Accordingly, IIL’s claim failed because they had allowed the 1 year limitation period to expire before commencing legal proceedings.

ENER-G Holdings v Philip Hormell

ENER-G purchased shares in a company from Mr Hormell for several million pounds. The share purchase agreement stated that any party seeking to bring a claim under the agreement had to notify the other party within 2 years of the date the share sale was completed (2 April 2008). The claiming party then had a further 12 months from the date of the initial notice in which to issue legal proceedings.

ENER-G first served notice of its intention to bring a claim against Mr Hormell on 30 March 2010, just a couple of days before the initial 2 year limitation period expired. Following service of this initial notice, ENER-G then had until 30 March 2011 to commence legal proceedings. Clause 13 of the agreement between the parties provided that a notice “may be served by delivering it personally or by sending it by pre-paid recorded delivery post”.

On 29 March 2011, ENER-G’s court claim form was delivered by hand to Mr Hormell’s home address. However, as no one was at home, the claim form was left in the post box. Mr Hormell did not discover the claim form in his post box until 2 April 2011.

Mr Hormell argued that the legal proceedings had not been served within the 1 year time limit because they had not been personally received by him until 2 April 2011. ENER-G argued that the agreement required them to deliver the claim form personally, but it did not require Mr Hormell to personally receive the claim form within the 1 year time limit.

After much consideration of the different possible meanings of clause 13 of the agreement, the Court found that the claim form had to be personally received by Mr Hormell at his home address. If the claim form had been handed to Mr Hormell personally on 29 March 2011, the 1 year time limit would have been met. However, simply leaving the claim form in Mr Hormell’s post box did not constitute valid service of a notice under the contract, meaning that the claim form could not be viewed as having been received within the 1 year time limit. This meant that ENER-G’s claim against Mr Hormell failed at the first hurdle.

Analysis

Both these cases indicate the potentially serious risks of agreeing to very short contractual limitation periods. Whilst it may seem beneficial to agree on a short limitation period in order to provide certainty about potential liabilities for breach of contract, in reality it may transpire that a period of, say, 1 year is simply not long enough to prepare your case.

Contracting parties should remember to look out for clauses in contracts which shorten or lengthen the normal time limits imposed by the Limitation Act and consider whether they could be problematic in the future. Contractors should be particularly wary of clauses which extend the limitation period for claims way beyond the norm, as this may greatly increase a contractor’s potential liability for breach of contract. Such clauses should only be accepted if they can be adequately justified by the employer.

In all cases where the limitation deadline is fast approaching, but especially in cases where a particularly short contractual time limit has been agreed, it is essential to keep in place an adequate diary/reminder system to ensure that relevant steps are taken before the deadline expires. As these cases show, missing the deadline by even a couple of days can prove fatal to the success of what might otherwise be a perfectly valid claim. 

Contracting parties should also always check the requirements of the contract before serving an important notice. The vast majority of contracts will set out specific requirements relating to the method of serving notices and when they will be deemed to have been received. As demonstrated by the ENER-G case, failing to serve a notice in accordance with the requirements of the contract can act as a real barrier to bringing a claim.