To what extent would a person who procures or carries out building works have liability for any physical damage or economic loss suffered by the end user(s) of the completed development? Can such liability be excluded in any way?
Under the consumer protection laws, the end user of a building benefits from a warranty period against construction defects of five years after delivery date. This right cannot be excluded by contract.
With regard to the liability of the land developer procuring the works to the end-users of the building, it is often the case that the development agreement (or contract of sale, if applicable) will limit its liability for the design and construction of the works to a stipulated period (usually ending on the expiry of the defects liability period under the building contract for the development, but depending upon the developer, the nature of the project and the stage in the economic cycle, sometimes for considerably longer than this period) after completion of the works – except either for claims that have been issued or where the intention to make a claim in respect of accrued and identified rights of action has been notified to the developer before the expiry of the period.
When the contractor and end user have a contractual relationship, in principle, only the rules relating to contractual liability will apply.
A contract party that does not fulfil its contractual obligations commits a contractual default as that party has not produced the promised result (in case of result engagement or the obligations to achieve a certain result) or has not carried out its obligations in the manner that would normally be expected from a normal person or entity (in case of an effort engagement being the obligation to act as any other contractor or architect or other professional would act in the same circumstances). The compensation here is limited to the damage that was foreseen or that could have been foreseen at the point of conclusion of the contract (this would reasonably include physical damage as well as economic loss), although this rarely poses a problem in practice. There is therefore a direct causal connection with the contractual default and the resulting damage.
Limitation of a contractual liability is in principle possible, except in cases where:
In accordance with the Law on Obligations, a developer is liable for shortcomings related to the soundness of a building if those shortcomings are proved within 10 years from the date of completion of work. The developer is also liable for the site conditions beneath the building unless a specialised body certified that the land was safe for use. This liability cannot be waived by contract. A developer is not freed from liability even where the damage was a result of the purchaser’s specific requests, unless the purchaser was notified of possible risks and instructed the developer to proceed.
The pursuit of claims against a developer by the end-user of the facility for physical damage or economic loss, and how the developer can potentially exclude those claims, depends on whether the developer is in “privity” with the end-user, ie whether the end-user and developer have entered into a contract. If they have entered into a contract, recovery of damages or losses incurred by an end-user will be governed by the law of contract. If the developer and end-user are not in privity, recovery of damages or losses is governed by tort law, and the limitations on recovery applicable to claims for “pure economic loss” under the law of torts.
Depending on the contract provisions, claims for physical damage and economic loss against the developer may be made by the end-user, if the two parties are in privity and the contract so permits. Subject to any limits imposed in the contract, the party in breach of the contract will be liable to the counterparty for all reasonably foreseeable damages flowing from the breach of contract. The developer can limit its liability via contract provisions, and insure for some risks it cannot otherwise eliminate or limit by contract.
One method to limit liability is to negotiate a shorter liability period than allowed by the statute of limitations where the project is located (see limitation period). Another method, which may be beneficial to both parties, is to provide for delay damages via a liquidated damages provision; the liquidated damages likely will include economic loss suffered by the end-user.
Developers seek to limit their risk on construction projects by purchasing (or ensuring that their construction manager or principal building contractor purchases) course of construction insurance, and a project liability of wrap-up insurance policy. Developers also typically require that any major contractor on the project carry commercial general liability insurance, and that professional consultants carry errors and omissions insurance.
In Canadian common law jurisdictions, claims for physical damage against a developer by those who ultimately use the facility (but who are not in privity with the developer) would be governed by the law of tort (generally, the law of negligence), and not contract. Under the law of tort, the claim must satisfy four elements in order to constitute a viable cause of action:
The developer would typically attack each of those elements in an attempt to exclude or limit the claim. The developer would also assert affirmative defences that might exclude the claim, eg an expired limitation period.
Claims for “pure economic loss” are afforded special treatment under Canadian law, and are best explained by way of an example. If a building is negligently constructed and leaks, the loss of rental income while the building is being repaired is “pure economic loss” (sometimes referred to as consequential or indirect damages), as opposed to the cost of repairing the physical damage caused by the leaks — still a form of economic loss, but considered direct damages. Subject to one exception explained below, the parties must be in privity of contract in order for one of them to assert a claim against the other for damages in the nature of pure economic loss. The one exception is claims arising out of conditions that constitute a physical danger to person or property. Such claims for pure economic loss are recoverable even in the absence of contractual privity.
The person who procures or carries out building works may have contractual and tortious liability to the end user suffering loss. There are no restrictions on excluding such liability, however, in practice, counterparties would not agree to such an exclusion.
Any person carrying out construction works is liable to the investor as well as to any further person who acquires the building for any defect in the substantial parts of the building which appears within ten years from the completion of the construction and for any defect in other parts of the building which appears within two years from the completion of the construction. The same liability applies to the designer if the defect results from a defect in the project and to the supervisor if the defect results from a mistake in the supervision. This liability may not be excluded.
With regard to the developer’s liability to the end users of the building, liability issues are usually dealt with in the contract. The developer is normally liable for damage or loss occurring during a stipulated period after the completion of the works. Restrictions on or exclusion of such liability is limited by the protective provisions of the Civil Code.
A second buyer of the property, meaning someone who bought the property from a buyer who bought it from the developer, can raise a claim against the developer in some circumstances and depending on the character of the claim. Recourse to a prior party or making a direct claim against an original developer is generally quite a complex matter; however, it has been known in relation to real estate.
If the developer constructs a building with the intention of selling it the limitation periods in the Limitation Act apply between the end user/buyer and the developer/seller.
Under French Construction law, the period of time during which a party is entitled to bring a claim depends on the nature of the defect affecting the building:
These liabilities are mandatory and cannot be excluded by contract.
Construction risks are also covered through insurance. The insurance coverage for construction projects, decennial civil liability policies (responsabilité civile décennale) and damage to property policy (dommage-ouvrage) are mandatory.
Whether the person procuring or carrying out building works is liable for damages or losses suffered by the end user(s) as well as the extent of such liability depends on whether a contractual relationship exists between these parties:
Whilst liability under a contract can be limited to a certain extent, liability under the law of tort cannot be excluded effectively.
Usually, the developer will limit his liability for the design and construction of the works to a stipulated period after completion of the works under the agreement between the developer and the end users (usually ending on the expiry of the defects liability period under the building contract for the development, but depending upon the developer, the nature of the project and the stage in the economic cycle).
Such liabilities may also be excluded by contract with the end users. However, such exclusion clauses are subject to the Unconscionable Contracts Ordinance (Cap. 458 of the Laws of Hong Kong) and the Control of Exemption Clauses Ordinance (Cap. 71 of the Laws of Hong Kong). The Control of Exemption Clauses Ordinance prohibits the exclusion or restriction of liability for death or personal injury resulting from negligence and requires all exclusion or restriction of other liability for negligence to satisfy the requirement of reasonableness.
Provided that the developer and the end user have contractual relationship, the developer is liable for any physical damage or economic loss suffered by the end user in accordance with the general liability rules for breach of contract. Limitation (including exclusion) of developer’s liability for the construction of the works may only be possible if there is an adequate compensation (eg. a price reduction) for such limitation. In certain cases however, the developer’s liability may not be validly excluded including bodily injury damage to health, and for damages caused by wilful misconduct or a criminal act.
Development agreements will generally limit liability for the design and construction of the works to a specific period that usually ends on the expiry of the defects liability period under the building contract for the development, but depending upon a number of factors, including the developer, the nature of the project and the stage in the economic cycle, liability can sometimes extend for considerably longer than this period after completion of the works.
According to case law, the designer is jointly liable with the contractor vis-à-vis the end users in the event of serious defects of the building works. Under Italian law, pure economic loss – which includes the costs of remedying defects in a building, as well as loss of profits, loss of income, damage to stock and so on – is recoverable from non-contractual parties exclusively on the basis of a judicial ruling attesting the existence and the quantification of the damages, the damaging party’s fault or malice as well as the causal relationship (nesso di causalità) between the damaging party’s behaviour and the occurrence of damages. For this reason, it is common and standard for end users to require the main construction parties to provide them with separate collateral warranty agreements or ‘third-party rights’ whose content and extent may vary on the basis of the size and value of the development.
The contractor is liable to the owner (end-user) which is a party to the construction contract for any physical damage or economic loss suffered by the owner in accordance with the general defect liability rules. In addition, the owner may request the contractor to repair defect(s) of the building. Even though there is no contractual relationship between the contractor and the owner, tort liability of the contractor could be sought by the owner in some cases. Or, in some cases, subrogation by the owner could be an option.
In the case where the owner is an individual executing a contract not for business, the contractor’s liability for damages cannot be excluded totally by any agreement between the parties. In the case of structural defect(s) of a new residential building, defect liability of the contractor (and the seller) cannot be excluded by any agreement between the parties. Under the Product Liability Act, the manufacturer of a product is liable for damages caused by a defect even if there is no negligence on the part of the manufacturer. This act does not apply to real properties, but applies to building equipment etc.
In general, under Dutch law, it is possible to exclude or limit liability, apart from liability for intentional acts or gross negligence. A developer can exclude or limit liability to the end-user for the construction, apart from intentional acts or gross negligence. It is however likely that parties will arrange for certain guarantees or maintenance contracts to be put in place, in similar terms to those between the developer and the builder. Any construction guarantee/liability arrangement between developer and contractor may be made to apply directly to the end-user.
Upon completion of the building development, it is handed over to the employer who may, in turn, transfer the development to other end users. Depending on the nature of the relationship between the end-user and the employer, claims for damage to the property may be made either under contract or in tort.
Where a contractual relationship exists between the end-user and the employer, the employer is liable to the end-user for defects to the building and this liability may by agreement of the parties be limited to the defects liability period, the period within which any defects identified is to be made good. The end-user is entitled to claim damages against the employer for any loss accruing from such defects.
The parties may also by their contract exclude any liability for defects after hand over of the building development or may agree to adopt the liquidated damages approach by which the amount of the damages payable in the event of any defect is pre-determined at the commencement of the contract.
Where no contractual relationship exists between the end-user and the employer, the end-user cannot claim damages under contract but can sue the employer in an action in tort for breach of a duty of care in the construction of the building.
The developer is responsible to end users for faults and defects in the building works, including faults in the contractor’s or the architect’s work.
The developer’s liability to the end user is limited to the time limits for claims contained in the agreement between the developer and the end user and the general limitation period under the Limitation Act of 1979.
In accordance with Polish Civil Code, a warranty for physical defects shall expire in the case of defects in a building, after five years have lapsed from the time of releasing the building to the buyer. The person who procures or carries out building works is liable for both physical damage and economic loss suffered by the end user of the completed development. This liability can be excluded or limited with end users who are not classified as consumers, ie in transactions between business entities.
The developer may be liable to the end user of a building for losses caused by and arising from:
Collapse or defects in the construction must be notified to the developer within one year from the date of the collapse or the defects becoming known to the end user, and any indemnity must be claimed in the subsequent year. This liability cannot be excluded.
The client/employer is liable to purchasers of a building or any part of it in respect of any defects only in the following circumstances:
The parties may agree to increase, reduce or even exclude the liabilities of the seller for the hidden defects. However, any contractual clause regarding the limitation or exclusion of the purchaser’s right to claim will not be valid if, when the sale and purchase agreement was concluded, the seller was aware of the hidden defects but the purchaser was not.
The developer is usually contractually liable under the agreement put in place between the developer and the end user of the completed development (eg a purchase contract or a shared construction agreement). The contractual liability usually takes the form of penalties. The contract may also specify a warranty period within which the developer must rectify any defects in the completed development. The liability imposed by law in relation to relevant types of contract will also be applicable.
In addition, it is a general rule under Russian law that the defaulting party must pay compensation for damage suffered as a result of such default, including direct damages, expenses incurred in order to rectify the breach and loss of profit. The quantum of damages can be contractually limited by the agreement of the parties.
Under consumer protection legislation, it is a general rule that individual consumers (as opposed to legal entities) have a right to bring quality claims against both the seller and the manufacturer of faulty products.
It is a general rule that compensation must be paid for personal injury and damage caused to the property of third parties by the entity who caused such injury or damage. The initial claim is likely to be brought against the owner of the property who will then be required to prove that the injury or damage was caused by other parties (for instance as a result of improper use of the building, or the fault of the designers or contractors).
Under Russian law damage caused by defects in the design and construction works must be compensated by the entity that carried out such works. The self-regulating organization that admitted the entity that carried out such works and the state supervising authorities bear joint and several liability with such entity.
There is a difference between the legal regulation by:
In most cases, a developer concludes a contract for work with a contractor and afterwards a sale contract with an end user. In this event, an end user can hold the developer liable on the basis of the sale agreement and the developer is entitled to claim reimbursement from the contractor.
Contractual parties cannot agree upon a waiver of the right to damages in the contract. Since a contractual party cannot waive its right prior to the breach of a contractual obligation from which a right to damages arises, such a clause in the contract would be invalid. Although the parties may attempt to limit the liability for damage, it is not clear whether an agreement to limit liability would be enforceable before Slovak courts as currently the relevant case law is ambiguous.
The limitation of the liability of the developer (contractor) is connected to the fact that liability accords with the principles of objective liability embodied in the Commercial Code, but with the possibility of exclusion of liability due to force majeure.
The Commercial Code stipulates a limitation that an aggrieved party will not be entitled to compensation for damage if the non-performance of obligations by the liable party was caused by the conduct of the aggrieved party itself or due to the lack of co-operation to which the aggrieved party was obliged.
Every party involved in the construction process is liable for its part in the project. Additionally, the developer is jointly and severally liable to end users in relation with the development. These legal liabilities to end users may not be excluded. This liability is without prejudice to any contractual liability of the developer to the end user.
The development agreement will limit the liability for the design and construction of the works as between the contracting parties. If the end user is not a party to the contract, damage is governed by the Tort Law (skadeståndslagen). It is not possible to exclude liability in such cases.
In principle, the developer is liable for damages or losses suffered by the end user according to the relevant contractual relationship. Notwithstanding this, the developer, unless the contract provides otherwise, is only liable for defects appearing within five years from the date of delivery, if the work involves the construction of a building and is based upon the hire of work or service contract, pursuant to section 600 of the Civil and Commercial Code. The prescription period will be reduced to one year in case where the agreed contract is a sale and purchase agreement.
In addition, the end user may claim for compensation against the developer for damages incurred if the developer, willfully or negligently, unlawfully injures the end user’s life, body, health or property under the law of tort/a wrongful act pursuant to section 420 of the Civil and Commercial Code. In particular, under section 434 of the Civil and Commercial Code, if the damage is caused by reason of the defective construction or insufficient maintenance of a building, the possessor of the building is bound to make compensation; but if the possessor has used proper care to prevent the damage from occurring, the owner is bound to make compensation. In addition, if a third party caused the damage, the possessor or owner may seek indemnity from such third party.
By law these liabilities may not be excluded.
Although the relevant provisions of the UAE and Abu Dhabi law are not particularly clear, it is generally considered that, in the absence of a contractual liability, a contractor will not normally be liable to an end user of a building if the end user was not the employer of the contractor under a building contract.
Pursuant to the Civil Code, a contractor is liable for damage which he causes. Therefore, if the contractor causes property damage suffered by an end user, he will be liable under the Civil Code, subject to limitation periods. It will be necessary, at the outset of any new claim, to determine whether or not the limitation period has expired. If it has, the claim will be 'statute-barred' and the claimant may be prevented from bringing a claim against the alleged wrongdoer. If a claim is brought out of time, the defendant will be able to plead the defence of limitation and the claimant will have the burden of proving that the cause of action arose within the relevant statutory period.
Under the Jointly Owned Property Law of Dubai the owner's association has liability over any decennial liability claims which mirror the liability under the Civil Code.
With regard to the liability of the land developer procuring the works to the end-users of the building, it is often the case that the development agreement will limit his liability for the design and construction of the works to a stipulated period (usually ending on the expiry of the defects liability period under the building contract for the development, but depending upon the developer, the nature of the project and the stage in the economic cycle, sometimes for considerably longer than this period) after completion of the works – except either for claims that have been issued or where the intention to make a claim in respect of accrued and identified rights of action has been notified to the developer before the expiry of the period.
With regard to the liability of the land developer procuring the works to the end users of the building, it is often the case that the agreement between the developer and the end‑user will limit the developer's liability for the design and construction of the works to a stipulated period (usually ending on the expiry of the defects liability period under the building contract for the development, but depending upon the developer, the nature of the project and the stage in the economic cycle, sometimes for considerably longer than this period) after completion of the works – except either for claims that have been issued or where the intention to make a claim in respect of accrued and identified rights of action has been notified to the developer before the expiry of the period.
Generally, the developer shall be fully liable for any physical damage or economic loss suffered by the end user(s) of the completed development. It means that the developer shall be obliged to remedy the defects in the construction works and reimburse damages/losses in full. In the case of construction works which are performed by the developer's contractor, the latter would be obliged to reimburse losses to the developer.
The developer shall be released from liability if it proves that physical damage or economic loss was incurred without its fault (ie due to actions of the third parties).
The pursuit of claims against the developer by the end user of the facility for physical damage or economic loss, and how the developer can exclude those claims, depends on whether the developer is in privity with the end user, ie whether the end user and developer have entered into a contract. If they have entered into a contract, they are in privity, and the answer likely is found in contract law. If developer and end user are not in privity, the answer likely is found in tort law. The answer also depends on the economic loss rule in the state where the action is brought. Not only can the economic loss rule be complicated, it is applied differently from state to state.
In most states, claims for physical damage against the developer by those who ultimately use the facility but are not in privity with the developer would sound in tort, not contract. As a tort, the claim must satisfy four elements in order to be a viable cause of action: duty, breach, causation and damage. The developer would attack each of those elements in an attempt to exclude the claim. The developer also would attempt to assert affirmative defenses that might exclude the claim, eg an expired statute of limitations or repose (which likely is far less for property damage sounding in tort than for construction defects sounding in contract).
In its purest application, the economic loss rule provides that parties must be in privity in order for one of the parties to assert a claim against the other for purely economic loss. However, a claim for economic loss can be brought where there is no contract, if the economic loss arises out of physical damage to other property (ie to property not the subject of a contract). Again, the economic loss rule varies from state to state in the US.
Depending on the contract provisions, claims for physical damage and economic loss against the developer may be made by the end user, if the two parties are in privity and the contract so permits. The developer can limit its liability via contract provisions and insure for risks it cannot eliminate.
One method to limit liability is to negotiate a shorter liability period than allowed by the statute of limitations or repose in the state where the project is located (see limitation period). Another method, which may be beneficial to both parties, is to provide for delay damages via a liquidated damages provision; the liquidated damages likely will include economic loss by the end user (see delay).
The common law provisions in relation to damages and liability would be applicable in this instance in the absence of an agreement between parties. The standard agreements, that is, the National Joint Practice Committee (NJPC) Standard Contracts 2000 would normally provide for defects liability of the contractor.