Legal: Swansea stadium and the dangers of change

Disputes over Swansea stadium have been back in the courts again. Avid readers of these pages will remember that last year the parties were before Mrs Justice O’Farrell, who looked at the matter of limitation periods for claims under the collateral warranty given by Interserve Construction Ltd to Swansea Stadium Management Company Ltd. She decided that given the terms of the warranty the limitation period was coterminous with that applicable under the building contract to which it related.

This decision meant that the claims here were mostly time-barred as they had been brought more than 12 years after practical completion. However, the question of whether any claims could be brought for breaches relating to the defects liability period (any such claims would not have been time barred) was left outstanding.

This issue came before Mr Justice Pepperall, who issued his judgment on the point this April (Swansea Stadium Management Company Ltd vs (i) City and County of Swansea and (ii) Interserve Construction Ltd [2019] EWHC 989). Unusually, the provisions in the contract (the JCT Standard Form of Building Contract 1998 Edition) relating to the defects liability period had been substantially amended. Broadly, clause 16.2 put the responsibility on the contractor to identify and notify any defects and then to make them good (although under clause 16.3 the employer also reserved the right to notify defects and to require them to be made good).

Swansea Stadium claimed Interserve was in breach of these provisions in relation to defects in the concourse flooring and the paint applied to the steelwork. In relation to the flooring, the judge said that the floor was indeed defective and that the defect had come to light in the defects liability period. That defect had not been notified by the employer to the contractor so Interserve could not be said to be in breach of clause 16.3, but Interserve had itself failed to notify the defect pursuant to clause 16.2 and therefore was in breach of that provision. The judge reached similar conclusions in relation to the paintwork.

Had the defects liability provisions been left unamended the employer might have felt the need to become more actively involved in resolving defects and would have been less likely to issue the notice of completion

However, importantly, the notice of completion of making good defects had been issued. The judge found that any defects falling within clauses 16.2 and 16.3 were, as a result, deemed to have been made good and the contractual machinery of those provisions had been brought to an end. As a consequence, there were no surviving claims that could have been brought by the employer against the contractor under the building contract for breach of these provisions – and, equally, no surviving claims that could be brought by Swansea Stadium against Interserve in respect of them under the collateral warranty.

The judge was at pains to point out that the issue of the notice would not deprive the employer (and therefore the beneficiary of the warranty) of a claim for defective or outstanding works under the core provisions of the building contract. Generally, then, the employer/beneficiary would still have a claim for defects – the issue here was that such a claim was time-barred due to the expiry of the limitation period.

What this means, however, is that where a notice/certificate of completion of making good defects has been issued an employer will have a six- or 12-year period (depending on whether the contract has been executed as a deed) from practical completion in which to bring claims (and there is no longer period available for claims for breach of defects liability period obligations). This means that in future employers and contract administrators might be even more cautious about issuing such notices/certificates.

In future employers and contract administrators might be even more cautious about issuing such notices/certificates

The case also raises the issue of the consequences of making amendments to contracts. In this case, unusually, the onus was put on the contractor to identify and notify defects. The contractor had failed to do so – and the employer could not point to any instruction issued to the contractor requiring them to be made good. Perhaps the amendment to the contract encouraged the employer to sit back and let the contractor take the lead in the defects liability period; had the defects liability provisions been left unamended the employer might have felt the need to become more actively involved in resolving defects and would have been less likely to issue the notice of completion of making good and might still have had a claim for breach of the defects liability provisions.

Similar issues are highlighted by the Court of Appeal’s decision in Mears Ltd vs Costplan Services (South East) Ltd & Ors [2019] EWCA Civ 502. That case clarified the meaning of “practical completion”. As the court said, it is often easier to recognise than define. That can lead employers to attempt to define what “practical completion” means for the purposes of their contract (perhaps aiming to make the requirement more stringent). However, doing so can have the opposite result. For example, the definition might state that the works are practically complete when capable of operation or occupation – but, as the Court of Appeal made clear, that concept is not of itself determinative of whether works are practically complete. So adding the definition might have the opposite result from that intended.

These cases highlight again the need to think through any amendments to standard contracts. Beware the law of unintended consequences.

Victoria Peckett is partner in, and co-head of the construction and engineering team at, CMS UK