Lacunae In Indian Law Regarding Latent Defects In Construction Contracts

“If a builder builds a house for a man and does not make its construction meet the requirements and a wall falls in, that builder shall strengthen the wall at his own expense.”

Even in the present-day, parties to construction contracts are faced with similar questions pertaining to defect liability, the extent of the same, and the consequent effects the same may have on liability of the parties. Just as the government of Babylonia, contemporary governments have also taken steps to ensure defects in construction projects are addressed. However, certain uncertainties pertaining to the contractual relationship between the contractor and the builder still persist. Such uncertainties are cause for concern especially in light of the fact that the Government of India has been promoting the growth of infrastructure in the country. Therefore, an effort is needed to ensure that the law pertaining to infrastructure development and construction contracts is unambiguous. This article is written in the hope to contribute in such an effort.

The current statutory regime in India pertaining to deficiencies in real estate projects

Under the contemporary statutory regime in vogue, the Real Estate Regulatory Authority Act, 2016 (“RERA”) regulates the relationship between the buyer of the concerned real estate property and the promoter of the said real estate project. As per the explanation to Section 2 (zk) of the RERA, even though both are different entities the builder and the contractor, both come within the definition of “Promoter” under RERA.

As per Section 14(2) of the Real Estate Regulatory Authority (“RERA”), the promoter of a real estate project is under an obligation to rectify any defects pertaining to any structural defect, defect in workmanship, quality or provision of services or any other obligations. However, the buyer of the concerned real estate can only claim rectification of defects within five years of handing over possession by the developer/promoter. Further, it may also be noteworthy, that the aforesaid regime under RERA, does not take into account the relationship between the contractor and the developer/ promoter of the concerned project and the liability of the contractor to the promoter with respect to the deficiencies in the concerned project.

In addition to the aforesaid remedy, the consumer/buyer of the said project can also move various Consumer Fora under the Consumer Protection Act, 2019. However, similar to RERA, the regime under the Consumer Protection Act, 2019 (“CPA”) is also not applicable to the disputes arising between the developer/promoter of a project and the contractor.

Thus, while there is a comprehensive regime both under RERA and the CPA that addresses the concerns of the end consumer, there is no statutory oversight for the relationship between builder/developer and the contractor. Thus, the disputes that arise between the developer and the contractor become purely contractual and have little to no statutory influence. The aforesaid issues are dealt with between the parties with the aid of clauses such as the “Defect Liability Clause”.

“Defect Liability Clauses” in construction contracts

In the present day, a similar manifestation of the aforementioned ordinance of King Hammurabi can be seen in the “Defect Liability Period” clauses that are inserted in contemporary construction contracts. Generally, such a clause stipulates that after the construction of a building has been completed, there shall be a “defect liability period” of 12-18 months (or any other length of time as agreed between parties). Any defects that are notified by the employer during the aforesaid defect liability period have to be rectified by the contractor at their own cost and nothing in addition to the original consideration has to be given by the developer to the contractor.

However, there are some shortcomings to the aforesaid approach of designating a certain period within which defects may be notified, because under such a system, defects that become apparent and detectable beyond such a period are not accounted for.

Defects can be both patent and latent in nature. As per the Black's Law Dictionary a defect that is apparent and readily noticeable or detectable with the ordinary inspection may be referred to as a “Patent Defect” for example, patchy painting work or peeling off of plaster can be readily apparent to the developer within the defect liability period. On the other hand, a defect that is not visible or readily detectable or noticeable upon inspection may be referred to as a “Latent Defect”, for example, a corrosion of structural members of a tower due to substandard materials used by the contractor may not be detectable during the defect liability period and it may only come to the notice of the developer/promoter after the said period, by which time the tower may have already become structurally vulnerable.

In the latter example, latent defects in the structural members, are attributable to the poor workmanship or substandard materials used by the contractor. However, the contractor can easily shirk away from their responsibility by saying that the said defect pertaining to the structural members was not notified to them during the defect liability period, therefore, absolving themselves of any liability of rectifying the said defects.

The Contract Act, 1872 and the Limitation Act, 1963

As per Article 55 of the schedule under the Limitation Act, 1963, the limitation period for claiming compensation for breach of contract is three years from the said breach. Therefore, notwithstanding the Defect Liability Period clause, a builder would have a statutory time limit of three years to raise claims against the contractor. Further, Section 28 of the Contract Act, 1872 mandates that any clause agreed to between parties to a contract whereby a right of a party is extinguished or it is restricted from enforcement after the expiry of a specified time period, then such a clause even though arrived at by the parties by consensus, shall be void.

Therefore, any interpretation of a defect liability clause whereby the consequence is preclusion of the builder from enforcing his rights beyond the defect liability period, would be in teeth of section 28 and be void for that reason. Hence, it can be said that Section 28 of the Contract Act, 1872, allows the builder to raise claims against the contractor even beyond the Defect Liability Period and up until the statutory limitation period expires.

This renders the relevance of the Defect Liability Period clause in doubt as it can be argued that if existence of defects can be claimed by the builder beyond the defect liability period then the purpose of including the Defect Liability Period clause stands defeated.

However, this may not be the case. The purpose of the Defect Liability Period clause is to provide a “warranty period” within which defects as notified by the builder must be rectified without question. If a defect is notified by the builder during the said defect liability period, the contractor does not have the option to dispute such defects by saying that they are a consequence of normal wear and tear. Contrary to the defects notified during the defect liability period, any claims raised by the builder after the defect liability period can be disputed and contested by the contractor before the concerned fora.

When does the limitation period start running for latent defects?

As per Article 55 of the Limitation Act, 1963, the limitation period of three years for breach of contract starts running from the date when the contract is breached or in the case of a continuing breach, whenever the said breach ceases to occur. However, it is possible that latent defects in the structure are discovered by the developer/ builder or the residents much later and after the passage of three years. The question then arises as to the nature of breach in the context of latent defects in a construction contract and whether the said breach is a one-time breach or a continuing breach.

In the case of Sammruddhi Co-operative Housing Society Ltd. Versus Mumbai Mahalaxmi Construction Pvt. Ltd [2022 SccOnLine SC 35] the Hon'ble Supreme Court of India has distinguished between the source of a legal injury and the consequent effect of the legal injury. It has been held by the court that merely because the effect of a legal injury has persisted does not mean that the breach has also persisted. A continuing breach would be a breach of a duty that has continued to exist. Thus, a breach of a continuing duty leads to a continuing wrong and a continuing injury does not have any bearing on the same. It follows from the above law laid down by the Hon'ble Supreme Court that in case of a latent defect which comes to the notice of the developer/ builder or the residents after three years of the completion of the project, the said claimants would have to demonstrate that the duty of the contractor under the contract is of a continuing nature in order to establish that they have been suffering a continuing breach. Therefore, the standard for proving continuing breach in the case of latent defects may be very high.

At this juncture it may be pertinent to note an anomaly in the law with respect to liability arising from a breach of contract and tortious liability. As explained hereinabove, as per Article 55 of the Limitation Act, 1963, limitation period in case of a breach of contract starts running from the date when the contract is breached and not from the date of knowledge of the said breach. Contrary to the above position as per Article 113 of the Limitation Act, 1963 limitation period for a suit for damages arising out of negligence conduct is three years from “when the right to sue accrues”. Therefore, a resident may approach the court by filing a suit for damages against the negligent conduct of the contractor/ developer if they are able to establish that the right to sue for the said negligence only accrued to them when they got the knowledge of the said latent negligence. In the case of VN Shirkhande vs. Anita Sen Fernandes [AIR 2011 SC 212] the Hon'ble Supreme Court was deciding a medical negligence case wherein gauze pieces were left into a woman's abdomen in 1993 during a surgical procedure, which she later discovered in the year 2002. The question before the Hon'ble Court here was when did the cause of action accrue to the patient. It was held by the Hon'ble Supreme Court that cause of action accrued to the patient on the date when she became aware of the said gauze pieces in her abdomen because the aforesaid negligence was latent in nature. Applying the aforesaid ratio in similar circumstances to a tortious claim against a contractor for latent defects that came to the knowledge of the resident much later than the date of construction is possible.

Thus, while there may be difficulty in ascribing liability arising from a breach of contract, liability arising from negligence can be attributed because the Hon'ble Supreme Court has acknowledged that in the case of latent negligence, right to sue accrues to the petitioner on the date of knowledge of the said latent negligence.

The aforesaid principle has been codified by the Parliament of the United Kingdom by passing Latent Damage Act of 1986. As per the said act, residents can claim for latent defects in a building and the limitation period for the said claims will start running from the date of knowledge of such claims.

From the above discussion it can be concluded that the law pertaining to latent defects in construction project and liability of the contractor or the developer for the said defects that come to fore much after the statutorily prescribed limitation period is still unclear. The said ambiguity in law may have serious consequences for (a) consumer interests as well as (b) commercial interests of the developers and the builders.

Since the liability of the developer or the contractor towards the end consumer of residential complexes with respect to latent defects is unclear, there may arise a situation where the consumer is left remediless if the latent defect comes to the knowledge of the end consumer beyond the prescribed limitation period.

Similarly due to the ambiguous nature of the law on the latent defects in construction contracts, there can be uncertainty and unpredictability with respect to the extent of liability of the contractor in case the said project has been built by a contractor. If the latent defect is discovered by the developer/builder beyond the prescribed limitation period then the builder may face difficulty in holding the contractor liable.

In view of the judgment of the Hon'ble Supreme Court in Sammruddhi (Supra), the builder as well as the end consumer can hold the contractor liable by establishing that the latent defect is a continuing injury and the same has been caused by breach of a continuing duty on the part of the contractor. Further, in light of the judgment of the Hon'ble Supreme Court in VN Shirkhande (Supra), the end consumer can also hold the contractor liable for negligence by establishing that the said defect was latent in nature and that the right to sue accrues to them when they have the knowledge of the said defect. However, the end consumer might face some hardship in the aforesaid endeavour considering the fact that the judgement in VN Shirkhande (Supra) pertains to cases of medical negligence.

A cogent answer to the aforementioned conundrum lies with the Parliament. Similar steps as taken by the UK Parliament while enacting the Latent Damage Act of 1986 may also be taken by the Indian Parliament. While the UK Latent Damage Act of 1986 only protects the rights of the end consumer, it is suggested that the Indian Parliament may go a step further by protecting contractors and developers as well under a prospective law pertaining to latent defects.

The author is an Advocate on Record at Supreme Court of India. Views are personal.