Limitation and collateral warranties

In Swansea Stadium Management Company Limited v City & County of Swansea, Interserve Construction Limited [2018] EWHC 2192 (TCC), two very important points of construction law were considered:

• When, in an undated document, a collateral warranty is effective from; and
• The significance of reaching contractual practical completion when the works were said not to be close to being 'complete'.

The facts

In 2004, the First Defendant, City & County of Swansea (the freehold owner of Liberty Stadium), engaged Interserve, the Second Defendant, as a building contractor to carry out the design and construction of the stadium. The Claimant, Swansea Stadium Management Company Limited, is the leasehold owner and operator of the stadium.

On 1 April 2005, the Employer's Agent sent notification to the Second Defendant that 'the Works have reached Practical Completion as at 31 March 2005.' As is usual, there were still some outstanding works to complete and defects to make good and a Notice of Completion of Making Good Defects was subsequently stated to be achieved on 14 April 2011.

Meanwhile, also around April 2005, the Claimant (as Beneficiary), the First Defendant (as Employer) and the Second Defendant (as Contractor) entered into a collateral warranty, again as is usual. However, it was disputed as to whether this document had been dated later, and in any event if it had been dated at all.

Fast forward twelve years and four days to 4 April 2017 when the Claimant issued a claim seeking £1.3m worth of damages from the defendants because the Liberty Stadium was allegedly beginning to rust prematurely, and visitors to the stadium were slipping on the unsuitable mezzanine floor. They alleged that this was due to breaches of the original building contract and consequently, breaches of the collateral warranty.

In its Defence, the Contractor argued that the claims were time barred because the claim had been issued more than 12 years after Practical Completion. The issue before the court was whether the Contractor could establish that the Claimant had no prospect of success because the claims were time barred.

The Judgment

As stated, there were two main points of law that Mrs Justice O'Farrell addressed.

The first issue is when an undated collateral warranty is effective from.

Mrs Justice O'Farrell used the 'factual matrix' surrounding the case and the wording of the collateral warranty in question to understand when the parties intended the warranty to take effect from.

• As is well established law, the intention of the parties to a contract is key when determining if a clause, or indeed the whole contract, has retrospective effect (see Trollope & Colls Ltd v Atomic Power [1963] 1 WLR 33; Northern & Shell v John Laing [2003] EWCA Civ 1035).
• The Factual Matrix: the purpose of a collateral warranty, Mrs Justice O'Farrell found, is 'to provide a direct right of action by the Claimant against the Second Defendant'. This purpose is served by giving the Claimant the same rights as it would have had if they were a party to the original building contract in 2004. It follows, that it would not make sense for the warranty to begin or end before or after the Second Defendant (the Contractor) stopped owing a duty to the First Defendant (the Employer).
• The wording of the contract: in this case, as is typical, clause 1 of the warranty expressly limited the liability of the Contractor to the Beneficiary to the same as it would have been 'if the Beneficiary was named as joint employer with the Employer under the [original building contract]'.

Mrs Justice O'Farrell found that this gave 'the parties clarity and certainty as to the extent of liability […] including limitation'. Clauses of similar effect are commonplace in collateral warranties, see for example clause 1.2 of the standard form JCT Contractor Collateral Warranty for a Funder CWa/F 2016.

• For these two main reasons, the warranty was found to have retrospective effect and to have consequently expired 12 years after Practical Completion of the Works

The second issue that was considered was whether Practical Completion occurs when the works themselves are physically practically complete, or when the threshold or procedure for Practical Completion is met in accordance with the building contract.

• Mrs Justice O'Farrell confirmed that where a clause a building contract specifies when practical completion is due to occur (as was the case here), it is not for any objective judgment of the works or for any non-specified third party to decide.
• Practical Completion occurred when, in the Employer's Agent's reasonable opinion, the works have reached practical completion, clause 6A.5.1 has been achieved by the Contractor (health and safety provisions have been met) and a written statement confirming as such is given to the Contractor. These conditions having been met, it was held that Practical Completion occurred on 31 March 2005, as per the original notification.

Summary

In an ideal world, all contracts would be perfectly executed, practical completion would only occur when works are practically complete and football stadiums would not become rusty after they were built. However, in the construction industry, such idealism is rarely a reality and so what can, and should, be taken from this case is the importance of diligence, organisation and the wording of the contracts parties seek to rely on.

Comment

We are grateful for this clarity whilst questioning whether it was ever required. It is clearly true that warranties are collateral to a building contract and to have decided otherwise would have introduced potential chaos.

Whilst not mentioned in the submissions, nor discussed in the judgment, an interesting example arises from the arguments made by the Claimant. If the warranty was only effective when it was executed as a deed by the Second Defendant in 2007, what is the Claimant's legal position if the negligent/inadequate works were carried out before that? In other words, if the duty is only owed to the Claimant from 2007 onwards, could the Second Defendant be sued for faulty work carried out in 2006? Mrs Justice O'Farrell's ruling is unequivocal that collateral warranties give the beneficiary the same rights, and same limitation periods, as employers under a building contract.

Jonathan Hutt, partner and Ellie Gilbert, paralegal