Wily words

A main contractor whose materials or equipment supplier has not produced goods of the right quality will often be heard to complain that the obscurely worded warranty that confronts him "isn't worth the paper it's written on".

The problem can arise in regular building contracts where defects become apparent during the defects liability period. If the defect is noticed during that period but is not put right properly, or at all, does that give rise to a new cause of action or right to sue? As with most contract problems, the answer often lies in the wording.

A recent case addressed these problem areas. In VAI Industries (UK) Ltd vs Bostock & Bramley and others (23 July 2003), the Court of Appeal was concerned with a contract for the supply of a main drive gearbox for aluminium rolling mills in India. Delivery was to be in England by the supplier to the main contractor. The warranty, provided in the contract, was superficially sensible: "All equipment is to be warranted as free from defects in design materials and workmanship and must conform to the specification and drawings. The warranty period is for no longer than 24 months from [delivery]." There was also a "guarantee" that stipulated that any work that became defective because of faulty materials, workmanship, quality or design was to be replaced free of charge within 12 months of acceptance; any latent defect found within three years of acceptance was to be made good by the supplier.

The supply contract was entered into in September 1994. The equipment was delivered in July 1995 in England but not shipped to India until early 1996. It was installed in July 1996 and production started in March 1997, when it was provisionally accepted by the ultimate client. In August 1998, the gearbox failed. The supplier, without prejudice but free of charge, supplied replacement parts in February 1999. These failed to rectify the problem. Proceedings were issued against the supplier in February 2002.

Beware attractive wording: lawyers make their living from examining words microscopically

The question of limitation (or time bar) was immediately raised; the action would be time-barred if the right to sue had arisen more than six years before the claim was issued. The first judge said it was time-barred, essentially because the gearbox had been delivered more than six years before the claim was issued. The reasoning was that the gearbox was defective when it was delivered and the supplier could in theory have been sued then; usually you can't overcome a limitation defence by saying that the defect was not noticed.

The Court of Appeal took a more analytical approach. It decided that the claim under the 24-month warranty was time-barred. The warranty stipulated in effect that the gearbox was free from defects at the time of delivery; the breach occurred then, and as it had not been replaced in the following 24 months there was no claim under the warranty in relation to that period. There were, however, properly arguable complaints that were not time-barred: as the work had been accepted in March 1997 and the failure had occurred within 18 months of that date, the guarantee extended responsibility for putting right latent defects for three years after; there was a claim that there was a breach of an implied term that the replacement parts should comply with the contract; and there was a factual case that the parties had entered a new contract in respect to the replacement parts and this had been breached.