UK: Collateral Warranty Signed Later Than Practical Completion Had Retrospective Effect

Last Updated: 10 December 2018
Article by Akin Akinbode, Kirsti Olson and Tracey Summerell

In Swansea Stadium Management Company Ltd v. City & County of Swansea and Interserve Construction Ltd [2018] EWHC 2192, the contractor argued that the tenant's claim under an undated collateral warranty had been issued outside the statutory limitation period and was unenforceable. The parties' disagreed about the effective start date of the warranty which was important as this was the date on which the cause of action arose and from which the limitation period was calculated. The issue was resolved by the Technology and Construction Court (TCC) which held that the warranty had retrospective effect to the date of practical completion (PC) despite having been signed later than PC. This meant the tenant's claim had indeed been issued outside the limitation period. The claim was therefore unenforceable and was struck out.

What happened in Swansea?

The City and County of Swansea (Swansea) had appointed Interserve Construction Limited (Interserve) under a JCT Standard Form of Building Contract with Contractor's Design, 1998 edition, (the Contract) to design and construct the Liberty Stadium.

Interserve entered into an undated collateral warranty (the Warranty) with the prospective tenant of the Stadium, Swansea Stadium Management Company Ltd (the Management Company), who were to manage the ground for Swansea City Football Club. The Employer's Agent issued notice under clause 16.1 of the Contract that PC had been reached as at 31 March 2005, at the same time as flagging up that there were still works to complete and defects to be made good.

In April 2005, Swansea granted a 50-year lease to the Management Company but Making Good Defects under the Contract was not achieved until May 2011. Defects were found in the stadium and, on 4 April 2017, the Management Company issued a claim seeking damages from Swansea and Interserve alleging defective construction and design in breach of the Contract and the Warranty.

Interserve applied to strike out the claim arguing that: the Management Company's claims had no real prospect of succeeding because they were barred by limitation under the Limitation Act 1980; the Warranty, which it had executed as a deed in April 2005, had retrospective effect to the date of PC (31 March 2005); and, therefore, the Management Company's claims were time-barred having been issued out of the limitation period of 12 years from the cause of action arising (on PC).

The Management Company disagreed, alleging that: the Warranty had been executed in 2012 (and by Interserve in 2007); Interserve's works were incomplete and defective as at 31 March 2005 and PC had not been achieved; or, if PC was reached on 31 March 2005, it was on the basis that Interserve would remedy the patent defects in the works and therefore had an ongoing obligation to perform the Contract and comply with its terms.

Mrs Justice Farrell agreed with Interserve, for the key reasons set out below, and struck out the Management Company's claim. (References are to paragraphs in the judgment.)

Retrospective effect of the Warranty

  • A contract or a deed can take effect retrospectively: Trollope & Colls Ltd and Holland & Hannen and Cubitts Ltd (t/a Nuclear Civil Constructors (a firm)) v. Atomic Power Constructions Ltd [1963] 1 WLR 333. (See paragraph 41.)
  • Whether or not a clause in a contract is capable of having a retrospective effect depends on the express or implied intention of the parties: Trollope & Colls. (See paragraph 42.) Farrell J construed the Warranty as having retrospective effect to the date of PC on 31 March 2005.
  • Where it is clear that the parties intended a deed to have retrospective effect, full effect should be given to that common intention even if it has not been expressed in words [in the Warranty]: Westminster City Council v. Clifford Culpin & Partners (1987) Con LR 117. (See paragraph 43.)
  • The words used in the Warranty and the factual matrix indicated that the parties had intended the Warranty to have retrospective effect. The Warranty contained no express start date or limitation period; the Management Company had agreed to maintain professional indemnity insurance for 12 years from PC; the purpose of the Warranty was to give the Management Company a direct right of action against Interserve in respect of its obligations under the Contract with Swansea (to which the Management Company was not a party).
  • The Warranty did not give the Management Company any extra rights over or beyond those Interserve had under the Contract. The Warranty was intended to cover the full scope of the contractual works regardless of when it was executed. The Management Company was only ever intended to be in the same position vis-à-vis Interserve as the employer (Swansea) was under the Contract: it had no greater liability and was clearly intended to stand in the shoes of the Employer.

When did the cause of action arise?

A key element of Farrell J's decision was her finding that the Management Company's cause of action under the Warranty arose on PC - from which date the 12-year limitation period would run. The judge followed established law in this respect, quoting from Henry J in Tameside Metropolitan BC v. Barlow Securities Group Services Ltd [2001] EWCA Civ 1 as follows:

"It is well-established law that a cause of action for breach of a construction contract accrues when the contractor is in breach of its express or implied obligations under the contract. Where, as in this case, there is an obligation to carry out and complete the works, the cause of action for a failure to complete the works in accordance with the contract accrues at the date of practical completion ... "

Applying the established law to the facts of Swansea, Farrell J then considered the date of PC in this case.

  • The employer's agent issued the statement of PC under clause 16.1 of the Contract. The date of PC is not based on an objective view of the state of the works: it is based on the reasonable opinion of the employer. Once the statement is given, "[PC] of the Works shall be deemed for all the purposes of this Contract to have taken place on the day named in such statement." In effect, therefore, the parties were deemed to have agreed that PC was achieved on 31 March 2005. The Management Company did not challenge this conclusion. Under the Contract, this deemed agreement, in turn, triggered the release of 50% of the retention and the start of the defects liability period.
  • Neither Interserve's continued presence on site after the PC date, nor the existence of patent defects in the work affected the deemed date of PC as at 31 March 2005.
  • Any breach of the Warranty in respect of the Management Company's defects claims must have occurred by 31 March 2005. The proceedings were issued on 4 April 2017. Therefore, as there were no other compelling reasons why the matters in issue should go to trial, the Management Company's claims were statute-barred.

Comments

Collateral warranties ensure that beneficiaries, such as a tenant, obtain the same (but no greater) rights and defences as those held by the parties to the building contract. The Swansea decision, giving retrospective effect to the Warranty, prevented the later signing of the Warranty (i.e. after the building contract) from giving the beneficiary more time to bring a claim than the original signatory of the building contract.

It is normal for some defects to remain outstanding after practical completion – "snagging" lists are a necessary fact of life on most projects. While the time it takes to remedy those defects can vary from project to project, employers and future tenants should remain vigilant and log the date of the expiry of the limitation period. If problems with the project continue or arise later, the dispute can be managed so as to ensure court proceedings are issued in good time. Failure to do so, even by a matter of days, could prove fatal to a claim.

While the TCC applied established law in reaching its decision in Swansea, the strike-out of the tenant's claim is a strong reminder to parties to check the limitation period carefully and not to leave the issue of proceedings to the last minute.

Swansea is also a warning for tenants who take on full repairing leases on a new build. Check for defects. Keep on top of the snagging list and deal with defects before signing up to full repairing leases. If defects are not being remedied, take action sooner rather than later.

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