How long does your collateral warranty last?

The Technology and Construction Court's recent judgment will be of interest to all those in the industry who either provide or receive collateral warranties.

The Technology and Construction Court's recent decision in Swansea Stadium Management Company Ltd v City & County of Swansea & Anor [2018] EWHC 2192 (TCC) has provided judicial guidance on the effectiveness of no greater liability provisions.

The matter concerned the construction of the Liberty Stadium in Swansea. RPC acted for Interserve who undertook the construction of the stadium. Construction was complete in 2005 however in 2012 the Claimant, who is the management company for the stadium (SSMC) commenced proceedings against Interserve and the local Council (the freehold owner of the stadium) alleging there were defects with the stadium.

The judgment concerned the claim by SSMC against Interserve that was made pursuant to a collateral warranty Interserve provided to SSMC.

The project reached practical completion on 31 March 2005 but the collateral warranty was provided to SSMC after that date. SSMC issued its claim form on 4 April 2017 (i.e. 12 years and 4 days after practical completion). Ordinarily a party to a deed (collateral warranties are usually executed as deeds) has 12 years from the date of a cause of action arising to bring a contractual claim before that claim becomes statute barred by limitation. As the claim was brought more than 12 years from the date of practical completion, Interserve's position was that the majority of SSMC's claims under the collateral warranty were barred by limitation. Interserve's position was that on a proper construction of the warranty it had retrospective effect such that the same limitation period applied to the collateral warranty as applied to any claim under the building contract.  Interserve applied for summary judgment on the limitation point.

In response, SSMC argued that the earliest date limitation could run from was the date the collateral warranty was provided and because the warranty was provided after the date of practical completion the claims were not barred by limitation. SSMC also made submissions that, in fact, practical completion was not achieved on 31 March 2005.

As a summary judgment hearing, a more stringent test had to be applied by the Court, namely whether SSMC's claim on the relevant points had no reasonable prospect of success. Mrs Justice O'Farrell gave judgment and was satisfied SSMC's claim had no reasonable prospect of success. On the central issue she noted "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" and "In my judgment, the words used in the Collateral Warranty and the factual matrix indicate that the parties intended the warranty to have retrospective effect"

Mr Justice O'Farrell cited four reasons for her decision:

1. The purpose of the collateral warranty was to provide a direct right of action by SSMC against Interserve in respect of its obligations under the building contract to which the SSMC was not a party. Such purpose was served by a warranty that gave SSMC the same rights against Interserve but did not require any extension of those rights.
2. The recitals to the collateral warranty explained the interest of SSMC, as tenant, and that interest was to ensure that Interserve performed its contractual obligations in the underlying building contract.
3. The collateral warranty specifically referred to the past and future performance by Interserve of its obligations under the building contract. When read together with Article 10 of the building contract (which did not contain any time limitation on a written request for Interserve's to execute a collateral warranty), it indicated that the collateral warranty was intended to cover the full scope of the contractual works regardless of when it was executed.
4. There was a proviso to clause 1 of the collateral warranty that read "Provided that [Interserve] shall have no greater liability under this Agreement than it would have had if [SSMC] had been named as joint employer with the Employer under the Contract". Mrs Justice O'Farrell said this 'no greater liability clause' was the clearest indication that the parties intended SSMC to be in the same position vis-à-vis Interserve as the employer was under the building contract. She also noted "The commercial purpose served by this provision is that it gives the parties clarity and certainty as to the extent of any liability in respect of the works, including the period of limitation."

With regard to the practical completion argument put forward by SSMC, the Court noted the existence of the deeming provision in the building contract and said "Regardless of the physical state of the works at 31 March 2005, or any ongoing works carried out by the Second Defendant, they were deemed to be complete on that date. Clause 16.1 expressly provides that practical completion was deemed to have occurred "for all the purposes of this Contract"."

Comment

The case is a welcome decision for the industry and in particular those that provide collateral warranties as most would expect that the limitation period under a collateral warranty would be co-terminus with the limitation period under the underlying contract. It also emphasises that deeming provisions in contracts will be upheld.

However it is important to recognise the judgment does not close the door on the possibility of a limitation period under a collateral warranty being longer than the limitation period of the underlying contact. As the Court recognised it will depend upon the express or implied intention of the parties. Accordingly, those providing warranties would be well advised to ensure the warranties they provide make it expressly clear that the warranty is co-terminus with the underlying contract.