Prescription and limitation of claims in global construction contracts

A defendant’s case can be handicapped due to fading memories, lost records, personnel attrition or expired opportunities for related proceedings, to name just a few reasons. This is especially important in the construction industry where disputes are often contractually complex, highly fact-intensive and where many personnel are employed on a project-to-project basis, depending on where their skills are most valued at the time.

It is very difficult to defend claims when the people who were once involved in the project are no longer available to provide evidence and instructions. This interest of fairness is not engaged solely in the construction and engineering infrastructure fields, it applies more broadly in civilian and commercial life. And it is why many jurisdictions around the world include extinctive prescription or limitations of actions laws.

There are, however, downsides to limitation periods. In some jurisdictions where the period for action is both fixed and rather short, a party may have its hand forced into commencing litigation or arbitration in order to preserve its rights even in circumstances where such a step is premature. For example, the parties might be engaged in constructive settlement discussions or alternative dispute resolution processes which, if allowed to run their course, could avoid the need for litigation or arbitration.  

Here are the approaches to limitation of actions and the extinguishment of rights taken in Australia, Germany and South Africa and some useful tips for managing these risks. 

Australia

In Australia, legislation in each of the states and territories stipulates the time within which proceedings must be brought. For a breach of contract case, the period runs for six years in most, but not all, Australian jurisdictions. Time starts to run from the date of the breach and is stopped upon the filing of a writ or other originating motion, or the commencement of arbitration where that is the agreed mode of resolution. Time may start to run even before the potential claimant has knowledge of the cause of action.

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In those many common law jurisdictions, such as Australia, where the relevant legislation does not prohibit ‘contracting out’, limitation periods do not extinguish rights per se, nor do they prevent a party from commencing litigation or arbitration after the limitation period has expired. Instead, the defendant may plead it as a total defence to the cause of action. Because a cause of action is not extinguished by the statute – rather, the statute confers a personal right on the defendant to plead such a defence if it so chooses – the defendant may elect not to rely on such a defence.

This might occur if, for instance, it has entered into some contractual arrangement where it has agreed not to rely on the statutory limitation defence either prior to the dispute arising in the original contract or by subsequent agreement. The High Court of Australia has previously confirmed the enforceability of such an agreement, even where the statute does not expressly permit the lengthening or shortening of limitation periods by agreement. This is not to be confused with the situation where there are statutory time limits which the court must apply strictly and which it has no discretion to extend.

Germany 

In Germany, generally speaking, claims are subject to a standard federal statutory limitation period of three years. This period commences at the end of the calendar year in which the claim arose and in which the relevant party became aware or ought to have become aware of the circumstances giving rise to the claim. Within certain limits, parties are, in principle, free to contractually provide for shorter or longer periods. Special statutory limitation periods are foreseen, for instance, in the event of ‘dishonest’ conduct or with respect to claims based on injury or death.

German statutory law also provides that specific events will lead to a ‘suspension’ of the limitation period, stopping it from running and thereby effectively extending the time available to initiate ‘formal’ proceedings. One such event is negotiations between the parties, which merely requires that there are exchanges between the parties relating to the claim in question or the circumstances underlying the claim. In this way, the approach taken in Germany avoids the downside noted above, that parties may be forced to commence proceedings even if they are engaging in productive settlement discussions. Further, the commencement of litigation or arbitration suspends any applicable limitation period. 

The legal consequences of the expiry of any limitation period are quite similar to the ones set out above in relation to the common law position: claims do not automatically expire after the lapse of the limitation period, and the respective party is likewise not prevented from asserting a time-barred claim in any litigation or arbitration proceedings. Rather, German statutory law entitles the counterparty to raise a defence against any time-barred claim, which would then prevent the enforcement of the claim.

However, a time-barred claim may still be set off against any payment claim, provided the set-off situation – the existence of the respective claim and ‘counterclaim’ – arose prior to the lapse of the applicable limitation period. In addition, to the extent that an amount forming part of a claim that subsequently becomes time-barred had already been legally retained, it must not be returned. Moreover, security rights ‘in rem’ remain enforceable even where the secured claim has become time-barred.

South Africa

In South Africa, the national parliament exercises exclusive legislative power in the realm of civil and commercial legislation. The Prescription Act 68 of 1969 caps the life of monetary claims of all kinds by means of extinctive prescription. The principles of prescription are codified in the Act; however, they are still evolving by means of South Africa’s common law system of case law. 

Extinctive prescription, as defined in the Act, dictates that, subject to several important (and ancient) exceptions, certain obligations may be extinguished, or rendered unenforceable, by the lapse of time, unless they are subject to appropriate legal proceedings before the applicable deadline. Not all rights of action give rise to a "debt" for purposes of the Act, meaning that not every right to approach a court for relief will amount to a debt for the purposes of extinctive prescription. An ordinary civil debt, including liability arising from and being due or owing under a contract, is generally extinguished after the lapse of three years and this period begins to run as soon as the debt is, objectively, due. 

South African courts have made it clear that a debt which has prescribed is not capable of resurrection, either in terms of the Act or by the courts themselves. The consequence of this is that any debtor sued in respect of a prescribed claim will be entitled to raise a specific defence of prescription which would likely dispose of the cause of action entirely. 

The primary method by which prescription is interrupted is for the creditor to sue its debtor in court. The Act also recognises that the institution of arbitration proceedings will suspend, not interrupt, the running of prescription. This is an important distinction: a court summons will end the running of the prescription period whereas arbitration proceedings will only suspend the running of that time period. It is therefore imperative that creditors recovering their debts by way of arbitration ensure that they finalise their proceedings and enforce their rights in terms of any award given in their favour. 

Parties also often find themselves bound by contracts which have multi-tier dispute resolution clauses, requiring mandatory adjudication or mediation before arbitration can be commenced. The courts have confirmed that a multi-tiered dispute resolution procedure may constitute “arbitration” and as such suspend the running of prescription. Accordingly, a dispute resolution clause will be viewed in its entirety when considering questions of prescription and how it preserves a disputant creditor’s rights. 

Managing prescription and limitation period risks

All parties should keep a close eye on the applicable prescription or limitation periods. This is not as easy to do as it may seem, especially where the project involves a mixture of applicable sources of law. Unfortunately, for many claimants, the very existence of the risk comes as a shock.  An early, thought-through plan based on strong legal advice that navigates the procedures in way that avoids ‘statute barring’ will be crucial for the survival of remedies.  

Often, it is prudent to seek to extend the applicable period by agreement. Where the period is short, it is best practice – where the applicable law permits – to agree this at the outset when agreeing the terms of the construction contract. Leaving this until later, when a claim is likely, will diminish the chances of agreement, especially when one or more parties are favoured by the earlier expiry. 

Ensure proper and ongoing compliance with notification and other mandatory communication requirements under the contract, including any early warning or impact requirements. This can help to identify claims at the earliest opportunity so that any potential disputes can be resolved sufficiently early.

Managing risks arising from a decrepit case

The risk of a ‘decrepit’ case remains until all claims have been finally settled or determined and until the latest possible prescription or limitation period has expired. If a dispute is brewing, while memories are fresh and personnel are still employed and engaged in solving the potential problem, those with knowledge of the project and the issues likely to arise in dispute should write up a statement based on the key issues as identified by an experienced legal adviser.

Comprehensive records should be created during the course of the project. It is common for records to be lost through the passage of time, particularly when records are moved from site, including local project servers, to a centralised location or server. Make sure records are secured, organised, and not destroyed until at least the passing of the longest limitation period that is likely to apply. It is also important to ensure that site and other ad hoc instructions are recorded and documented to avoid later evidential contests over who said what.

Navigating the risks

No claimant enjoys being forced into commencing litigation or arbitration simply in order to preserve their rights in the face of an impending statute barring. Having to do so frustrates the very sensible aims of amicable dispute resolution, disrupts resource planning in a commercial enterprise and destabilises commercial strategies. But, invariably, extinctive prescription and limitations of actions laws apply across the spectrum of civilian and commercial life – not merely multi-year infrastructure projects – and are seldom changed.

Participants in the construction and engineering infrastructure fields will fare best by navigating them conscientiously, and that starts with awareness based on sound legal advice and strategic planning.

For queries related to South Africa, contact Jason Smit of Pinsent Masons.