Since 1949

Liberal interpretation of limitation provisions

Liberal interpretation of limitation provisions

Judgment of the Supreme Court of 3 December 2015 in Case no. T 4983-14

concerning liberal interpretation of limitation provisions

Claude D Zacharias

Attorney

1. Case-law being developed for total works

1.1 In recent years the Supreme Court has pronounced much needed judgments within the legal field of total works construction contracts. The General Conditions of Contract for Design and Construct Contracts for Building, Civil Engineering and Installation Works for 1994 (ABT 94) applied to the contract works for the case in question. This is a standard contract forming part of a group of similar contracts (the AB family) drawn up within the Construction Contracts Committee. Both employers and contractors are represented on this Committee. The ABT 94 standard contract – which has now been replaced by ABT 06 – is intended to be used for total works.

Systematics of AB contracts

1.2 In the case-law of recent years, the Supreme Court has attributed great importance to the systematics of AB contracts when interpreting them. The Supreme Court has considered that the outcome should be determined by non-mandatory law when the intention of the parties cannot be established and systematic reasons do not provide any guidance (cf. NJA 2012, p. 597). For example, such reasons were considered to justify the effective dispossession of rights whereby an employer that had suffered damage was rendered unable to enforce a non-contractual claim for damages against a sub-contractor (cf. NJA 2007, p. 758). Furthermore, one provision was interpreted in a certain way in light of the general principles of the law of contract when this was supported by the context and the other provisions of an AB contract (cf. NJA 2013, p. 271). In another case, a provision was interpreted considering the principles underpinning other provisions of the AB contract (cf. NJA 2015, p. 3). When no guidance is provided by non-mandatory law either, a more extensive assessment of reasonableness was conducted to assess whether reasons of purposefulness may justify a liberal, extensive interpretation of a provision.

2. Chapter 6, Section 13 of ABT 94

2.1 The issue in this case involved the application of the limitation provision contained in Chapter 6, Section 13 of ABT 94. According to this provision, the contractor’s claims in respect of alterations and additions became barred by a period of limitation of six months calculated from the approval of the total works. It is stated that the Statute of Limitations (the Swedish Limitation of Proceedings Act) shall otherwise apply. The exact wording is:

For the Contractor’s claims in respect of the Total Works a period of limitation of six months shall apply, calculated from the approval of the Total Works. However, this does not apply to the Contractor’s claims insofar as they relate to the Contract Price, value added tax or works executed after expiry of the Time for Completion.

If the Contractor can show that he neither knew of nor ought to have known of his claim, the period of limitation of six months shall be calculated from the date when he first ought to have had such knowledge. However the period of limitation shall never be more than ten years calculated from approval of the Total Works.

After interruption of the period of limitation, a new period of limitation of ten years shall apply.

Otherwise the Statute of Limitations shall apply.

2.2 Chapter 7, Section 12, seventh paragraph of the more up-to-date AB contract, ABT 06, contains a rule that is not included in ABT 94, namely that if a final inspection is not carried out due to the omission of the employer, the total works shall be considered approved from the date when the final inspection should have taken place. It may thus be assumed that the situation concerned in the present ruling would as such not lead to corresponding problems when the total works contract is based on the newer ABT 06 and subsequent issues of it containing a corresponding regulation. Despite the court’s lack of unanimity, the judgment still clarifies the case-law for total works in respect of limitation provisions.

3. Contentious issue in this case

3.1 In the case in question, a special provision had shortened the period of limitation to three months. The parties had decided that an ‘approved final inspection’ would be the starting point. By way of comparison, it may be mentioned that the period of limitation in Chapter 6, Section 19 ABT 06, regarding a contractor’s claims in respect of the total works, is six months calculated from the approval of the total works. If the contractor can show that he neither knew of nor ought to have known of his claim, the period of limitation of six months shall be calculated from the date when he first ought to have had such knowledge. However, a period of limitation of two years calculated from the approval of the total works shall apply to the claims of the contractor insofar as they relate to the contract price or value added tax.

3.2 A final inspection of the sub-contractors' works took place and the employer had been notified prior to this that the works included the total works were ready and available for final inspection. However, no final inspection of the total works ever took place. A guarantee inspection was carried out about two years after this.

3.3 The contractor had claims remaining to be drawn for, among other things, alterations and additions and wanted to be paid. However, the employer considered that these claims were time barred and refused to pay. The contractor argued that in the first instance the ten-year period of limitation under the Statute of Limitations would apply and in the second instance that the limitation period started to run three months after the guarantee inspection.

4. The minority at the Supreme Court

4.1 ABT 94 had several limitation rules that deviated from non-mandatory law, e.g. Chapter 5, Section 19 with a three-month period of limitation for the employer’s claims for liquidated or other damages or, for instance, Chapter 6, Section 3 with a six-month period of limitation for the contractor’s claims for compensation because of substantially disrupted conditions. A feature common to these rules is that approval of the total works is the starting point for the period of limitation.

4.2 The minority pointed out the following:

The systematics of the AB rules thus means that the line between time for completion and the guarantee period is of key importance. This demarcation point is normally established through a final inspection in which the date on which the total works were approved is noted. Chapter 4, Section 7, second sentence of ABT 94 includes an ancillary rule in the event that an inspection has not been carried out, providing that if a final inspection has not been carried out within the prescribed time because of an omission by the employer, the guarantee period is counted from the date when the final inspection should rightfully have taken place. The provision in Chapter 6, Section 10 also includes a corresponding type of ancillary rule: that the remaining portion of contract price be paid upon approval of the total works. The end of the guarantee period has also been specified in such a way so as to resolve the limitation issue in those contracts that superseded AB 92 and ABT 94 (AB 04 and ABT 06). The time for completion transfers to the guarantee period in a corresponding way as in the preceding contracts. However a new provision was added to both AB 04 and ABT 06 (Chapter 7, Section 12, seventh paragraph). This indicates that in the event that a final inspection has not been carried out within the prescribed time because of an omission by the employer, the total works shall be considered approved and handed over from the date when the inspection should rightfully have taken place. The time for approval of the total works is thus the same regardless of whether or not an inspection takes place.

5. The majority of the Supreme Court

5.1 The majority of the Supreme Court adopted a more restrictive approach and concluded, among other things:

There are no special provisions for cases where there has not been a final inspection. As regards the guarantee period, however, it is stated in Chapter 4, Section 7, second sentence that if a final inspection has not been carried out within the prescribed time because of an omission by the employer, the guarantee period is counted from the date when the inspection should rightfully have taken place. Chapter 6, Section 10 includes a corresponding kind of ancillary rule relating to payment of the contract price.

5.2 In contrast to the minority, the majority of the Supreme Court did not consider that the special conditions for interpretation otherwise expounded through case-law support an extensive interpretation of the limitation rule contained in Chapter 6, Section 13 ABT 94, but considered express support by the general provisions was required. The Supreme Court states the following by way of explanation:

The wording in Chapter 6, Section 13 ABT 94 – that the period of limitation starts once the total works are approved – is clear in the sense that it cannot be attributed the linguistic meaning that, in a case where a final inspection has not been carried out, the total works are to be deemed to have been approved when the final inspection should rightfully have taken place. Nor do the rules and regulation have any definition that gives cause for a definition that deviates from the wording […] The systematics of the rules and regulations thus do not give cause to interpret the rule in any other way than that the approval of the total works means exactly what is stated in conjunction with the final inspection. That the rules and regulations express a clear cut-off point between the time for completion and guarantee period does indeed imply that it would be natural to allow this cut-off point to also constitute the starting point for the period of limitation under the limitation rule in question when no final inspection has been carried out, but this is not such a systemic argument that may affect the interpretation. When a contractual rule concerning limitation has been formulated on the same lines as a statutory rule, the more precise definition of the statutory rule ought to guide the interpretation of the contractual rule, in any case as long as the wording is similar. However, there is no statutory rule concerning limitation that, as regards the starting point for the period of limitation, can provide any direct guidance for interpreting the rule in question. Nor does non-mandatory law otherwise shed any explanatory light on the present interpretation issue.

5.3 The systematics of the AB contracts are, just as mentioned by the minority, the same as older versions of the AB contracts. According to the author, the fact that a contractual rule relates to a statutory rule but there is no statutory regulation in certain parts, means nothing more than that, although the legislator’s point of departure may be considered to be good, it should also be viewed in the context of the systematics of the law relating to total works: in this case that the period of limitation starts running from the point in time when final inspection should rightfully have taken place even in the event that no final inspection has been carried out. The ancillary rules contained in the AB contracts are there for a reason and reasons of purposefulness suggest that it is appropriate to make such a supplement even when the matter involves the limitation rules contained in the AB contracts. This would result in a consistent and predictable application. Although this view was indeed also what the Supreme Court thought as such, it was of the opinion that, considering that this involves a limitation provision, this kind of interpretation would have gone too far. The effect of this

Supreme Court judgment is consequently:

that a general rule based on a statutory provision should lead to a more precise definition under the statutory rule serving as guidance for the interpretation of the contractual rule, in any case as long as the wording is similar,

that guidance should be sought in non-mandatory law in the absence of any statutory rule concerning limitation that could, as regards the starting point for the period of limitation, provide some direct guidance for interpreting the rule in question,

that the provision should be interpreted extensively in the event that non-mandatory law sheds any explanatory light on the interpretation issue, but

that the nature of the provision must be taken into consideration through the more comprehensive assessment of reasonableness that must ultimately and finally be made to assess whether reasons of purposefulness justify the contractual provision in question being interpreted in a way that is not supported by its wording,

that reference cannot be made to reasons of purposefulness, particularly as regards limitation provisions, because

first, special interpretation principles apply to limitation provisions, and

second, a limitation rule owing to its drastic effect of dispossessing rights should not be applied in this connection but instead should be interpreted restrictively.[1]

6. Concluding comments

6.1 In the case in question, the employer drew a short straw on an issue that the parties could easily have settled.

6.2 It is difficult to comprehend the principle that the Justice of the Supreme Court Lindskog, who is one of Sweden’s leading experts on limitation issues, chose to adopt concerning a more restrictive position, as indicated by the reasons for judgment; firstly owing to his previously explained opinion in published literature and secondly because the law relating to total contracts, regardless of its special status, ought not to be transformed to a far too great extent or too quickly. The author tends to the view that the judgment constitutes an unfortunate ‘dip’ in the otherwise clear and simple change of course concerning in particular the case-law relating to total contracts generated by the Supreme Court. On the other hand this issue may be isolated to contract provisions entailing a ‘drastic dispossession of rights’, more particularly limitation rules.

6.3 Notwithstanding the fact that this issue has been regulated in subsequent AB contracts, the importance of keeping up with legislative development and adding reservations and additions cannot be stressed often enough.

6.4 When a contractual provision is amended, an attempt should also be to as far as possible use the same way to express oneself and the same formulations.

6.5 Finally, and in order to avoid any misunderstandings, this judgment, notwithstanding the fact that it refers to an AB contract, has been framed in general terms and thereby applies to limitation provisions relating to all contractual relationships.

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[1] In this part, the Supreme Court notes in particular that the restrictiveness applies to both statutory and contractual provisions. The restrictiveness applies not only to the ambit of the provision but also the prerequisites for its application, including the starting point for the period of limitation. As regards an agreed limitation rule, a liberal interpretation is only acceptable if there is a clear basis for doing so (cf. NJA 1964, p. 152). The Supreme Court stated the following in its ruling of 1964: “K cannot claim to have been justified in understanding the provision to comprise a limitation provision considering the formulation of Clause 4 of the reservation – particularly the previously mentioned reference to the general provisions and the fact that no sanction for failure to observe the limit stipulated was specified.” The author does not think that reference to the 1964 ruling is particularly pertinent as it involved a provision regulating possible price increases in respect of construction costs and that “the increase would in this case be regulated according to standard form no. 1/57 (Clause 9) issued by the Associated General Contractors and House-Builders of Sweden”. These include Clause 4, which contains the following rule: “A request for compensation based on this reservation must be presented within the period specified in Clause 23, item 3 of the Swedish Association of Graduate Engineers general provisions for total works within the construction and civil engineering professions, standard form 10; i.e. no later than three months after the parties had access to a statement regarding the final inspection”. This legal case is 52 years old; considering this and taking account of the wording of the provision in the standard form, a certain amount of caution must be employed as regards the relevance of the ruling to the current case. In a nutshell, the author is of the opinion that the majority at the Supreme Court attributed too much importance to this old ruling. As this is one factor that determined the outcome in the current ruling, combined with the disagreement as such, the judgment is unfortunate. It may be questioned why the majority entirely disregarded what the minority pointed out regarding “[...] the end of the time for completion in the contracts that immediately preceded AB 92 and ABT 94 (AB 65, AB 72 and ABT 74) was expressly linked to the commencement of the warranty period. This was one expression indicating that the time for completion automatically ceases upon the commencement of the warranty period (see Reasons in AB 65, p. 24). There is no reason to assume that the amended definition of the time for completion introduced into AB 92 and ABT 94 was intended to entail any material change (cf. that stated by Justice of the Supreme Court Herre in item 15 of the supplement to NJA 2013, p. 271)”. The author cannot do anything other than agree with the opinion of the minority.

Construction contract law issues represent part of the normal work at Zacharias Advokatbyrå and we consequently also help our clients on a regular basis by providing expertise concerning, among other things, the issues raised in this article. 

 

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