In a recent TCC decision, O'Farrell J held that a collateral warranty had retrospective effect, so as to effectively incorporate the terms of the original construction contract and to ensure that the warrantor had no greater liability than it would have done had it been a party to the original construction contract.
In June 2004 the City and County of Swansea ("Swansea") engaged construction company Interserve Construction Limited ("Interserve") to carry out the design and construction of the Liberty Stadium. The construction contract was executed by deed.
On 1 April 2005, Interserve received confirmation by letter from Swansea's Agent that, in its opinion, the works had reached Practical Completion on 31 March 2005.
Subsequent to this, but also in April 2005, Swansea leased the stadium to Swansea Stadium Management Company Limited ("the Claimant") for a period of 50 years. This arrangement also involved Interserve entering into a deed of collateral warranty in favour of the Claimant. The collateral warranty was executed, but undated. The collateral warranty contained the common proviso that Interserve would have no greater liability under the warranty than if the Claimant had been named jointly with Swansea as Employer under the construction contract.
Claim/Application for Summary Judgment
On 4 April 2017 the Claimant brought proceedings against both Swansea and Interserve for stadium defects, seeking damages of approximately £1.3million. Part of the Claimant's case against Interserve was that a breach of the underlying construction contract constituted a breach of the collateral warranty.
The Claimant alleged that Interserve had executed the warranty in 2007, whilst Interserve alleged the warranty had been sealed and delivered to the Claimant in April 2005.
Interserve brought an application for summary judgment on the basis that the Claimant's proceedings were statute barred. Interserve argued that the collateral warranty was retrospective and that the relevant limitation period ran from the date of Practical Completion, as it did under the original construction contract, and not from the date of the later executed collateral warranty. The proceedings, issued on 4 April 2017, were commenced more than 12 years after the date of Practical Completion (31 March 2005) and were therefore said to be statute barred.
The Claimant argued the warranty did not have retrospective effect and that in any event Practical Completion did not occur on 31 March 2005 because defects in the works still existed.
Although executed, the collateral warranty was not dated and contained no reference to when a cause of action for breach of warranty would be deemed to arise. However, O'Farrell J held that the collateral warranty should have retrospective effect, and that time for limitation purposes would start running when it did under the construction contract, i.e. from Practical Completion.
O'Farrell J followed the Court's approach in Northern & Shell which considered the wording of the deed, the circumstances of the matter and the need for business efficacy to determine the warranty had retrospective effect. O'Farrell J gave four reasons supporting her conclusion that the collateral warranty had, and indeed was intended to have, retrospective effect:
- The purpose of the collateral warranty was to provide the Claimant with a direct action against Interserve in relation to the original construction contract;
- The recitals to the collateral warranty spelt out the Claimant's interest in the performance of Interserve's obligations under the construction contract;
- The collateral warranty referred to past and future performance under the construction contract; and
- The proviso to the collateral warranty makes clear that the parties' intention was for the Claimant to be in the same position as Swansea under the construction contract. That was effective in determining Interserve’s liability
The Claimant tried to argue that Practical Completion was not achieved by 31 March 2005 because Interserve was still on site and defects in the works were still outstanding. O'Farrell J held that Swansea’s Agent's letter of 1 April 2005 alone would not be enough to show Practical Completion. However, the fact that the construction contract specifically explained that Practical Completion would be subject to Swansea’s reasonable opinion and required express written notice, shows that Practical Completion would be deemed to occur even if defects remained. Breach of the construction contract must have therefore taken place by 31 March 2005 making the Claimant's proceedings out of time.
- The court in following Northern & Shell affirmed the approach to retrospective effect by addressing both the wording of the warranty and the factual matrix. If the wording and circumstances imply that a warranty should have retrospective effect, limitation will run as per the relevant date of breach under the original construction contract.
- O'Farrell J also considered the meaning of the common "no greater liability" clause in the warranty, and concluded that its intention was to put the Claimant as tenant in the same position as Swansea under the construction contract. This "back to back" liability was determined to apply to limitation as well as to the underlying obligations of the construction contract. The decision therefore provides certainty to contractors in this situation.
- Finally, O'Farrell J determined that the formal notification of Practical Completion which was required by the construction contract was enough for Practical Completion to be achieved despite the existence of defects.