In Swansea Stadium Management Company Ltd v City and County of Swansea  EWHC 2192 (TCC), England’s Technology and Construction Court held that a collateral warranty signed after practical completion had retrospective effect and related back to the date of practical completion, resulting in the Claimant’s claim for beach of the Collateral Warranty being statute barred. The Court also held that the cause of action accrued on the date of practical completion for breach of the construction contract if there were defects or outstanding works, although there may be a further cause of action under the defects liability provisions in the contract.
The 1st Defendant engaged the 2nd Defendant to carry out design and construction works by an amended JCT standard form contract dated 17 June 2004 (Building Contract), executed as a deed. On 1 April 2005, a letter sent by the Employer’s agent to the 2nd Defendant (Letter), stated that the works reached practical completion on 31 March 2005, but there were outstanding works and defects to make good. In or about April 2005, the parties entered into an undated collateral warranty (Collateral Warranty), executed as a deed, under which the Claimant was the beneficiary, in respect of works carried out by the 2nd Defendant under the Building Contract.
On 4 April 2017, because of flooring and paintwork defects, the Claimant sued the 1st and 2nd Defendants, claiming that (1) the design and construction of the concourse flooring and supply, construction and painting of the steelwork were defective, and (2) contrary to clause 16 of the Building Contract, the 2nd Defendant failed to identify and rectify defects, which arose from breaches of the Building Contract and the Collateral Warranty.
The 2nd Defendant argued that (1) the works under the Building Contract reached practical completion on 31 March 2005, and the Collateral Warranty was retrospective, relating back to the date of practical completion; and (2) the claims were time barred because the action was commenced more than 12 years from the date of practical completion on 31 March 2005.
Issues in dispute
The issues before the Court were:
- Did the Collateral Warranty have retrospective effect?
- Were the Claimant’s claims under the Building Contract time-barred and when does practical completion occur if there are still defects to be made good?
Effect of the Collateral Warranty
The Court referred to the general principle that a contract or a deed can take effect retrospectively. It said that whether or not a contractual clause is capable of having retrospective effect depends on the express or implied intention of the parties.
The Court found that the words used in the Collateral Warranty and the factual matrix indicated that the parties intended the warranty to have retrospective effect:
- The purpose of the Collateral Warranty was to provide a direct right of action by the Claimant against the 2nd Defendant in respect of its obligations under the Building Contract to which the Claimant was not a party. Such purpose was served by a warranty giving the Claimant the same rights against the 2nd Defendant that it would have had if there had been privity of contract.
- The recitals to the Collateral Warranty explained that the Claimant’s interest was to ensure that the 2nd Defendant performed its obligations in the Building Contract.
- Clause 1 of the Collateral Warranty specifically referred to the past and future performance by the 2nd Defendant 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 which would trigger the 2nd Defendant’s obligation to execute a collateral warranty in favour of a first tenant, this indicated that the Collateral Warranty was intended to cover the full scope of the contractual works regardless of when it was executed.
- The proviso to clause 1 of the Collateral Warranty expressly limited the 2nd Defendant’s liability to that it would have had if the Claimant had been named as joint employer under the Building Contract. The provision gave the parties clarity and certainty as to the extent of any liability in respect of the works, including the period of limitation. The reference in the proviso to the Claimant’s position being as if it “had been named as joint employer” was a clear indication that the parties intended the Claimant to stand in the employer’s shoes. The 2nd Defendant’s liability to the Claimant was intended to be coterminous with its liability to the employer under the Building Contract. The Court concluded that any breach of contract created by the Collateral Warranty would be regarded as actionable from the original date on which the breach occurred even though the relevant facts occurred prior to the effective date of the Collateral Warranty.
When did practical completion occur?
The Court referred to the well-established law that the 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 works, the Court said, the cause of action for failure to complete the works in accordance with the contract accrues at the date of practical completion. The Claimant’s argument was that practical completion had not been achieved by 31 March 2005, since at that time, the 2nd Defendant was still working on site and there were patent defects in the works.
The Court held that the Letter sent by the Employer’s agent to the 2nd Defendant was strong evidence that practical completion occurred on 31 March 2005 because it contained a clear statement that the works had reached practical completion in accordance with clause 16.1 of the Building Contract on 31 March 2005. The Court said that although that alone would not be sufficient to conclusively establish that practical completion was achieved by 31 March 2005 (at least for a summary judgment application), clause 16 of the Building Contract provided that the date of practical completion was based on the reasonable opinion of the employer that the works had reached practical completion and merely required the employer to give the contractor a written statement to that effect. Where such statement is given, the clause deems practical completion to have taken place on the day named in such statement, even if there are outstanding or defective works and regardless of the physical state of the works as at the practical completion date.
The Court concluded that any breach of the Collateral Warranty in respect of the Building Contract must have occurred by 31 March 2005, and the proceedings commenced on 4 April 2017 were therefore time-barred.
Where it is plain from express provisions and the factual matrix of a building contract that the collateral warranty was intended to cover the full scope of the contractual works, it is more likely than not that a collateral warranty will be given retrospective effect. Hence, regardless of the date of execution of a collateral warranty, one must be aware of the date of practical completion under the building contract when commencing proceedings under the collateral warranty, to avoid being time barred.
For example, in a JCT standard form contract, the date of practical completion is determined according to an express term of the building contract, and such contract specifically contemplates works outstanding to be made good after practical completion. In such a case, a cause of action will accrue right up to practical completion if the contractor fails to complete the works properly, rather than when all works are actually complete / all patent defects are remedied. There may then be a further cause of action after practical completion under the defects liability provisions of the contract.