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05 October 2020

Decennial liability in the Middle East: What is it and does insurance cover it?

Decennial liability exists in many countries, and is enshrined in the relevant Civil Code of many civil law jurisdictions, such as France, Egypt, the United Arab Emirates (UAE), Oman, Qatar, Bahrain and Saudi Arabia.[1] These statutory provisions impose ‘strict liability’, that is, liability arises without the claimant having to prove fault or causation. In other words, a presumption of liability is created.

When does it apply?

The liability arises if the subject matter of the contract in question is the construction of a structure (ie/ a building or a fixed installation) with an intended installation life of 10 years or more, where the plans are drawn-up by an architect or engineer to be carried out by a contractor. The contractor and the supervising architect or engineer are jointly and severally liable to the employer for a period of ten years (as the name suggests) from the date of delivery of the works in respect of serious structural defects or collapse.

However, Bahrain is unique in that even though its Code refers to decennial liability generally, the liability is specified to extend only to 5 years as opposed to 10, so it is not really decennial at all. Contractually therefore, we have seen an increase in the extent of the liability being imposed on design consultants when carrying out projects in the Kingdom, taking it from 5 to 10 years.

Public interest

The underlying philosophy is that it is in the public’s interest that structures are structurally sound. The argument supporting this philosophy is that the designer and contractor are best placed to deliver an outcome consistent with this objective.

Considering the significant element of public interest, decennial liability is mandatory and cannot be limited or avoided even by way of express contractual provisions between the parties. By way of example, Article 715 of the Qatari Civil Code 22 of 2004 provides the following:

“Any clause intended to exempt the engineer or the contractor from the guarantee or to limit such guarantee shall be deemed null and void”. [2]

This position is mirrored in the following laws: Article 882 of the UAE Civil Code; Article 620 of the Bahraini Civil Code; Article 697 of the Kuwaiti Civil Code; Article 636 of the Omani Civil Code; to some extent in Article 76 of the Government Tenders and Procurement Law of Saudi Arabia.

Where liability arises, the employer’s remedy is recovery of the monetary damages required to compensate it for the total/partial collapse of the structure, i.e. the substantiated costs of rectifying or replacing the structure. It is not possible for the contractor or supervising architect or engineer to contract out of or limit this decennial liability. However, where the role of the architect is to simply prepare plans and not to supervise their execution, the architect is only liable for defects in the plans.

Does insurance cover it?

Despite the mandatory nature of the law, it is nevertheless possible to mitigate the risk by means of indemnities and, in particular, indemnities in the form of insurance. The table below sets out a summary of the types of insurance policies generally available, as well as their respective pitfalls and gaps:

Insurance

Gaps/not covered

Note

Standard forms of liability insurance covering construction activities, such as contractors’ all risk, professional indemnity and latent or inherent defects policies.

These policies are not intended to provide decennial liability cover and do not, in general, do so.

These products can be confused with decennial liability insurance, especially if they are marketed as having some of the characteristics of decennial liability cover, or a ‘decennial’ label is attached.

Decennial liability endorsement on a contractors’ all risk insurance policy

Does not typically extend cover to include the applicable statutory decennial liability risk.

See note above. In addition such endorsements can be expensive in the Middle East region.

Professional indemnity insurance.

Typically provides cover for a consultant against negligent errors and omissions, but not for all liabilities imposed by law (such as decennial liability).

A defining characteristic of decennial liability is that no evidence of negligence or breach of duty by a consultant is required, so professional indemnity cover may fall short of fully protecting an insured from this risk.

Inherent defects insurance (typically procured on behalf of a building owner).

Not a suitable form of cover for protecting a consultant or a contractor from decennial liability. Most such policies exclude, for example, damage caused by ground conditions, a risk explicitly falling within the scope of decennial liability.

Rare to see designers taking out this cover or policy in the Middle East region.

Decennial Liability Insurance

Specifically designed to cover decennial liability.

Generally expensive in the Middle East region and generally not adopted as there is no legal requirement in the region to take out and maintain the cover.

 

With the above table in mind, the following should be noted in respect of decennial liability insurance and the residual risk in the Middle East:

  • In practice, the residual risk is retained by designers (including engineers) and contractors;
  • It may not be easy to convince an employer to incur the cost of a large insurance premium to cover this risk i.e. if the employer wants it, then it is generally asked to pay for it;
  • Conversely, designers and contractors consider that the likelihood of the risk eventuating is in fact low. Claims of a decennial liability nature are rare in the Middle East region and, in the case of designers in particular, professional indemnity insurance  will cover all but most the unusual cases in which decennial liability type issues arise; and
  • A limited pool of insurers will be willing to accept such a risk, even under a bespoke product that is a derivative of an inherent defects cover.

By way of comparison, in some jurisdictions, such as France, decennial liability insurance is compulsory. However, it is inherently expensive and insurers may be invasive to the point of interfering: for example, appointing inspectors to monitor the design and construction. The prohibitive cost and potential for monitoring can make decennial liability insurance unattractive for both designers and contractors.

External cause

Notwithstanding the effect of the strict liability, it may be possible to argue that the building failure is attributable to an external cause. In practical terms, it is the very existence of the defect or building collapse which establishes the liability and this cannot be avoided unless the contractor or designer can establish the existence of an external reason for the failure.

So, when defending a claim and the contractor or designer raises the external cause argument, they are not denying the existence of the liability but rather are seeking to invalidate the causal link between the liability and the damage caused.[3]

In this way there is a limited defence available against a decennial liability claim, and the onus is on the contractor or designer to clearly demonstrate that the damage arises from an external cause.

Practical considerations

It is unlikely that a party will be able to fully mitigate against the risks of decennial liability unless it takes out a fully-fledged and costly decennial liability insurance policy.  As a consequence, parties may try to include a net contribution clause in the agreement, as well as negotiating a cap on liability to limit overall exposure and liability. A net contribution clause has the potential to significantly reduce a party’s decennial liability. It states that where two or more parties are each jointly liable for the same loss or damage, the liability of each party will be limited to the amount which is just and equitable, having regard to each party’s responsibility for the default: effectively, that amount which would be apportioned to that party by a court.

It is important when undertaking works in the Middle East that designers, engineers and contractors are made aware of their liability and insurance requirements. This is the case even if the proper law of the contract is not the law of the country where the site is situated. Decennial liability will overrule foreign choice of law clauses in a contract if decennial liability exists by law in the country where the site is located. Contractual remedies such as the defects liability period are additional remedies which do not replace the decennial liability.


This article was written by Niel Coertse. For more information, please contact Niel on + 971 4 246 1924 or at niel.coertse@crsblaw.com or your usual Charles Russell Speechlys contact.

 

[1] Article 76 of the Government Tenders and Procurement Law of Saudi Arabia

[2] Note that all quoted extracts from the region’s laws and judgments have been translated from the official Arabic and should be treated with appropriate caution. Furthermore, although the statutory provisions and judgments referred to bring greater clarity to many issues, doubt remains as to the courts’ likely approach to some key issues and, indeed, to many issues on any given set of facts. In particular, in the absence of a system of binding precedent, care is required not to place excessive reliance on judgments, particularly those that do not form part of a line of consistent decisions.

[3] This is in line with the Article 287 of the UAE Civil Code which was also referred to in Dubai Cassation No. 290/1990 dated 3 August 1991.

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