Alyson Cowan: Importance of limitation clauses in collateral warranties
The recently published judgment of O’Farrell J in Swansea Stadium Management Co. Ltd v Swansea City and County Council ( EWHC 2192 (TCC)) provides guidance on limitations of time clauses contained in collateral warranties and acts as a reminder that collateral warranties are capable of being time barred.
The facts of the case are simple, and although the case was heard in England, the construction law applies to Scotland. The City & County of Swansea (the “Council”) is the owner of the Liberty Stadium, home to Swansea City Football Club. The Stadium was leased to the management company for the stadium, which is Swansea Stadium Management Company (the “Claimant”). Interserve Construction (the “Contractor”) was contracted by the Council to design and construct the Stadium under an amended JCT Standard of Form of Building Contract with Contractor’s Design 1998 Edition (the “Building Contract”).
On 1 April 2005, the Contractor was informed by the Employer’s Agent under the Building Contract that practical completion had occurred in terms of the works on 31 March 2005. The Council then entered in to a 50 year lease with the Claimant, which contained a tenant’s repairing covenant. This would usually mean that the tenant has full responsibility for rectifying any defects arising in the building. The Claimant was granted a collateral warranty by the Contractor in respect of the works, which was signed as a deed but left undated. This collateral warranty would give the Claimant the direct route needed to raise proceedings against the Contractor in the event of a defect and would help satisfy the Claimant’s repairing covenant in terms of the lease.
There were several alleged defects in relation to the works and the Claimant raised a claim in April 2017 against the Council and the Contractor complaining of defective workmanship and a failure to rectify the defects, which was a breach of the Contractor’s obligations under the Building Contract, and thus the collateral warranty.
The Contractor applied for summary judgment and argued that the claims against it were time-barred because the time limitation (inferred by O’Farrel J to be 12 years in the collateral warranty) should run from the date of practical completion, namely 31 March 2005. The Claimant had issued proceedings on 4 April 2017, which was more than 12 years after the date of practical completion, and the Claimant could therefore not be successful.
The Claimant argued that practical completion had not been achieved by 31 March 2005 because, at that date, the works were incomplete and defective and should not be considered “practically complete”, and that the collateral warranty did not have “retrospective” effect. In other words, the Court should decide that the limitation period commenced from the date the deed of warranty was signed not from the date of practical completion.
Ultimately the Contractor was successful, and O’Farrell J ruled that the Claimant’s claim was time barred.
What can we learn from this judgment?
This case is unique, as most collateral warranties would normally contain an express limitation of liability to the effect that no claims can be commenced more than 12 years after practical completion of the works under the relevant building contract. There was neither an express commencement or expiry date in the collateral warranty, nor an express limitation period in respect of claims made against the Contractor. The collateral warranty did however contain an obligation to maintain professional indemnity insurance for at least 12 years from practical completion and an express limitation provision in respect of the guarantor’s liability 12 years from practical completion, although these were not determinative.
There was no question of whether or not practical completion had been properly achieved on 31 March 2005, and there was no evidence led to challenge that statement because the contract contained a provision stating that when the Employer’s Agent issued a notice that practical completion had been achieved, practical completion under the Building Contract was deemed to have been achieved, even if there were outstanding or defective works.
O’Farrell J. looked at the wording of the collateral warranty and the Building Contract itself, clauses of which she concluded to mean that the collateral warranty intended to cover the full scope of the contractual work regardless of when it was executed. The reason for this is that the collateral warranty contained a “no greater liability” clause, which provides that the Contractor would have no greater liability to the Claimant under the contract than it would have had if the Claimant had been named as joint employer with the Council under the Building Contract. O’Farrell J. concluded that the commercial purpose of the “no greater liability” clause was to put the Claimant in a position of it being as if it “had been named as joint employer” and clearly indicated that the provision intended to operate as if the Claimant was to “stand in the shoes of the employer”. In effect, the Contractor’s liability to the Claimant was intended to run at the same time as its liability to the Council under the Building Contract, which was 12 years from practical completion, not 12 years from the date of signing of the agreement.
As practical completion was therefore deemed to have been achieved on 31 March 2005, any breach of the warranty in respect of the original construction claims had to have occurred by that date. Since the proceedings were not issued until April 2017, those claims were time-barred.
The decision provides guidance not only on the importance of any time limits within which proceedings have to be commenced but also on “no greater liability” clauses. In this instance, the “no greater liability” provision allowed a limitation defence to carry across into the collateral warranty from the underlying Building Contract. This was particularly important here as the collateral warranty was eventually executed years after practical completion of the works.
- Alyson Cowan is a solicitor in the commercial real estate team at independent law firm Morton Fraser
This article was originally published on the Morton Fraser website.