Author: Juli Lau and Alexandra Belli

The second defendant, Interserve Construction Limited (Interserve) brought an application for summary judgment against the Claimant, Swansea Stadium Management Company Ltd (SSMC) in respect of striking out part of the SSMC’s claim on the basis that it had no real prospect of success, alternatively on the basis that the limitation period for that part of the claim had expired before proceedings had commenced.

The works had commenced in September 2003 and the date of practical completion was 31 March 2005. Afterwards, SSMC had been granted a 50 year lease of the stadium by the first defendant. Although the deed of collateral warranty between the second defendant, the first defendant and the claimant was undated, it had been sealed and delivered by Interserve in April 2005.

SSMC had issued a claim form in April 2017 for defective works against both defendants, claiming alleged defects in breach of the contract. Specifically, SSMC alleged against Interserve that it had breached its collateral warranty as elements of their design and construction were defective (the ‘Original Claim’) and they had failed to identify and rectify these defects (the ‘Rectification Claim’).

In its defence, Interserve argued that the Original Claim was time-barred. The warranty was executed in April 2005, running with retrospective effect from 31 March 2005 (the date of practical completion). As the claim was filed in April 2017, the 12 year limitation period had lapsed.

Decision:

Retrospective Warranty:

O’Farrell J held that the parties intended the collateral warranty to be read with retrospective effect. The document itself and the factual matrix surrounding it indicate this because:

  • The purpose of the collateral warranty was to provide a direct right of action between SSMC and Interserve. This meant that the rights afforded in the collateral warranty needed to be the same as in the Building Contract but separate from it.
  • The Recitals in the Collateral Warranty explain that SSMC’s interest was to ensure that Interserve performed the obligations contained in the Building Contract.
  • Clause 1 of the Collateral Warranty provided that the direct warranties are in respect of the performance of Interserve’s obligations contained in the Building Contract. This means the warranty covers the full scope of the Building Contract’s works period, regardless of when it is executed, as the obligation to execute a collateral warranty found in Article 10 of the Building Contract did not contain a time limit.
  • This Article 10 clause also contained an express limit on liability by stating liability would be no greater than if SSMC had been named as a joint employer under the Building Contract.

Date of Practical Completion:

A cause of action under contract will arise when a contractor is in breach of one of its contractual obligations. In construction cases, the action arises at the date of practical completion, as the obligation to carry out and complete the works only crystallises on the date of practical completions for a breach to be possible (Tameside Metropolitan BC v Barlow Securities Group Services Limited (2001) EWCA Civ 1).

The Building Contract provided for completion when the reasonable opinion of the employer was that the works were complete and the Contractor had met its obligation in clause 6A.4.2 (to provide a health and safety file). This process concluded on 31 March 2005, and it did not matter that there were still patent defects on that date. Interserve’s breach of the collateral warranty therefore occurred on 31 March 2005.

Having found that:

  1. i) Any cause of action in respect of the Original Claim accrued at the date of practical completion as the collateral warranty was supposed to be retrospective;
  2. ii) The date of practical completion was 31 March 2005;

iii)  i) and ii) therefore meant there was no real prospect of success for this particular head of SSMC’s claim; and

  1. iv) There was no compelling reason why this claim should go to trial nonetheless.

O’Farrell J therefore held that there was no real prospect of success in relation to the Original Claim due to it being statute barred as of 31 March 2017, as the breaches occurred on 31 March 2005.

Implications:

This decision:

  • Reinforces existing case law that a cause of action for contractual breach arises at completion date in respect of obligations to carry out and complete construction works, as distinct from further breaches that might occur for failure to rectify defective works during the defects liability period (the distinction between the Original Claim and the Rectification Claim).
  • Confirms that Collateral Warranties can have retrospective application, irrespective of the date on which they are executed, and that this will depend upon the parties’ intentions within the contract, which means the building contract between the Employer and the Contractor and the factual matrix surrounding the creation of a collateral warranty need to be considered.
  • Suggests that the commercial purpose of a “no greater liability” clause in a collateral warranty is to put the beneficiary in the same position as if it were a joint Employer under the main building contract. This provides certainty as to the extent of the contractor’s continuing liability for works and the limitation period upon which they expire.

Practical Tips

  • Always consider the drafting of limits on liabilities and “no greater liability” clauses in collateral warranties. Does the warranty reflect only the remainder of the liability running in the main building contract, or is the Contractor expected to provide a longer warranty to the Beneficiary, in which case make this an express provision.
  • Consider the drafting of the main building contract, especially the clause that creates an obligation on the Contractor to enter into a collateral warranty. Where there is no limitation on the process between the Employer and the Contractor for the Employer to require the Contractor to enter into a collateral warranty, this suggests that the warranty should run for a period to cover the works specified under the main contract themselves, rather than from an obligation under the main building contract. This is factored into the factual matrix to denote that the parties must have intended the collateral warranty to therefore be capable of retrospective effect.
  • Works are not practically complete if there are patent defects. However, both parties can get around this if they draft clear provisions relating to the date of Practical Completion and the Defects Liability Period. O’Farrell J was not prepared to look beyond the written statement that the works were completed on 31 March 2005. Both parties operated from then as if practical completion had been achieved by following the notice process.

We have extensive experience advising on construction contracts and ancillary instruments, including those involving public authority employers, and would be happy to advise further on collateral warranties and provisions on practical completion. Juli Lau is an Associate in the Infrastructure team at Sharpe Pritchard. Alexandra Bellis is a Trainee Solicitor at Sharpe Pritchard.