Swansea Council contracted with Interserve for a new stadium (the Liberty Stadium) for Swansea’s football and rugby teams. That project, and in particular the defects in the works, generated a number of disputes. In the latest case concerning the stadium it has been made clear that, while notices of completion of making good defects are an important milestone in the completion of a contractor’s obligations under a building contract – often allowing the release of any final retention monies to the contractor – those notices do not signify the end of the contractor’s liability and certainly do not release the contractor from its obligations to build in accordance with the contract specification.

Background

In Swansea Stadium Management v. City and County of Swansea and Interserve, the Technology and Construction Court (TCC) had to consider the consequence of defects in the construction of the Liberty Stadium, which caused slippage on wet concrete floors and the early failure of the painted surface of steelwork. Practical completion was certified on 31 March 2005 and the defects liability period (DLP) ran for 12 months thereafter. After practical completion, the stadium was leased to Swansea Stadium Management Company (the Tenant) on a long lease.

The Tenant had a collateral warranty from the main contractor, Interserve. After attempts to settle, the Tenant started a claim against both the Council (the Employer) and Interserve on the basis that the original building works were defective and in breach of the building contract specification. The judge in that case struck out these claims because they were brought after the expiry of the contractual limitation period. The limitation period for the claim under the collateral warranty, which, like the building contract, was executed as a deed, was 12 years from practical completion and this date had been missed by just four days.

Interserve’s liability to the Tenant under the collateral warranty, which was executed at the earliest in April 2005 (after the building contract), was coterminous with its direct contractual liability to the Council under the building contract. As is often the case, the collateral warranty contained a clause which provided that the contractor shall have no greater liability under the collateral warranty than it would have had if the Tenant had been named as joint employer with the Employer under the contract. Liability for defects in the original works would not therefore run for longer than 12 years after practical completion.

In its next set of proceedings, the Tenant therefore fell back on two secondary claims, which might avoid the consequences of the expiry of the limitation period. One of those claims was that Interserve was in breach of obligations under the building contract, which arose after practical completion, to identify and make good flooring and paintwork defects during the DLP.

It is important to note that, notwithstanding the known and subsisting problems with the concrete floor and paint, on 26 May 2011 (more than five years after the expiry of the DLP) the Employer’s agent issued Interserve a notice of completion of making good defects recording that the defects required to be made good had been made good as of 14 April 2011.

The TCC decision

The Tenant’s claims in this set of proceedings were also dismissed. The TCC held that, although on the facts, Interserve failed to make good the defective flooring and paintwork during the DLP, the failure did not create a new cause of action which survived the notice of completion of making good defects. In reaching the decision, the judge considered the building contract, which provided that “completion of making good defects shall be deemed for all purposes of this Contract to have taken place on the day named in such notice.” It was held that the effect of the notice was to deem that the parties had reached completion of the discrete and limited obligation to make good defects in accordance with the relevant contractual provisions. And that was the case even if the defects had not actually been made good – no further instructions could be given regarding the rectification of those defects. Importantly, though, the notice was not conclusive evidence that the works were in conformity with the building contract and the Council was not deprived of its claims under the core provisions of the building contract if there were outstanding or defective works – right up until the limitation period expired. As the limitation period under the building contract had expired, the Tenant’s claim under the warranties also failed.

This case underlines the need for tenants, funders, forward purchasers and buyers of buildings that have not yet, or have only recently, been constructed to carry out full due diligence to back up the warranties or third party rights they are being granted.  Consider, in particular, the following points:

  • The value of third party rights and collateral warranties is always dependent upon the underlying contract, and a full understanding of both the contract terms and the specification is therefore critical. An occupier’s business may depend on these documents being suitable for their requirements.
  • If the contract documents do not suit their purpose, then negotiate changes or protections in the agreement for lease and lease, making the landlord/seller responsible
  • Be aware of changes from the standard form in the building contract – it is unusual, as happened in this case, for the responsibility to identify and schedule defects for rectification during the DLP to fall on the contractor.
  • Do not let the landlord/seller compromise claims without your approval.
  • Require amendments to the building contract so that a third party certifier is engaged to sign off practical completion (and any notice of making good defects) and ensure they owe a duty of care to you. The third party certifier should be independent, and this requires a change to the standard JCT design and build terms.
  • Insist that the certifier does not issue any notice without you having an opportunity to make representations or submissions in relation to defects. If the certifier fails to take such representations into account, you may then have a separate cause of action against the certifier.
  • Keep track of all dates – in the Swansea case, the Tenant missed a chance of remedy by a few days.
  • Once a project enters the defects liability period, both the employer and the tenant/purchaser/funder should seek to identify and keep records of any defects that come to light and ensure that they are notified and that rectification of those defects is scheduled in accordance with the terms of the building contract, then monitored for progress.