Collateral damages? Court considers retrospective effect of collateral warranties with “no greater liability” clauses

Published on
3 min read

In Martin Moore & Camilla Hegelund v National Westminster Bank , the High Court determined an appeal concerning repair costs versus diminution in value as the measure of damages.

The recent case of Swansea Stadium Management Company Limited v (1) City & County of Swansea (2) Interserve Construction Limited highlights the importance of ensuring a collateral warranty properly reflects the intention of the parties.

Background

Swansea City Council (“SCC”) engaged Interserve Project Services Limited (“Interserve”) to build Swansea’s Liberty Stadium in 2004. Interserve alleged that practical completion took place in March 2005, although this was disputed. In April 2005 SCC granted a 50 year lease to Swansea Stadium Management Co Limited (“SSMC”). SCC, Interserve and SSMC entered into an undated collateral warranty some time after practical completion. That warranty included a clause which provided that Interserve should “have no greater liability under [the collateral warranty] than it would have had if the Beneficiary had been named as joint employer with the Employer under the Contract”.

SSMC issued a claim against Interserve in April 2017 seeking damages of £1.3 million. SSMC alleged that there was structural corrosion of the steelwork and inadequate surfacing causing some visitors to slip and fall. It alleged that this was because Interserve’s design and construction of the steelwork and flooring at the stadium was defective. SSMC also alleged that Interserve had failed to rectify those defects.

Interserve argued that, as practical completion was achieved in April 2005 and the claim was not issued until 2017 (more than 12 years later), SSMC’s claim was time-barred. It also argued that the collateral warranty should have retrospective effect from the date of practical completion, even though it was not entered into until afterwards. Interserve applied for summary judgment on that basis.

Decision

The court found that the words used in the collateral warranty indicated that the parties had intended the warranty to have retrospective effect. The judge described the “no greater liability” clause in the collateral warranty as “the clearest indication” of the parties’ intentions. The court also agreed that practical completion took place on 31 March 2005. Accordingly, the majority of SSMC’s claims under the collateral warranty were dismissed, because no corresponding claim could be brought under the building contract.

Analysis

This case highlights the importance to all consultants, contractors and subcontractors of ensuring that collateral warranties contain a “no greater liability clause”.

Such a clause is particularly important in circumstances where many professional indemnity policies contain clauses excluding cover for claims arising from collateral warranties (or other such contracts) where the period of liability exceeds the period of an Insured’s liability under the contract to which the warranty is supplemental. Before entering into a collateral warranty, professionals should check this is the case and consider the extent to which the absence of such a clause might leave them without insurance cover should a claim arise in the future.

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