New TCC guidance on "no greater liability" clauses

A recent TCC decision has interpreted a “no greater liability” clause in a collateral warranty given by a builder as importing the same limitation periods applicable to claims under the building contract. “No greater liability” clauses are commonly included in collateral warranties and the present decision suggests that they are not to be given an overly technical interpretation but one consistent with their objective of creating back-to-back liability with the underlying building contract or appointment.

Swansea Stadium Management Company Ltd v City & County of Swansea

Swansea Council entered into a building contract with Interserve on 17 June 2004 in respect of the design and construction of the Liberty Stadium in Swansea. The Swansea Stadium Management Company Ltd (“SSMC”) agreed to lease the stadium from Swansea Council for a term of 50 years by a lease dated 22 April 2005. Around this time, Interserve executed a collateral warranty in favour of SSMC warranting its compliance with the building contract among other things. The warranty was executed as a deed and Interserve’s liability under the warranty was subject to the proviso that it, “shall have no greater liability under this Agreement than it would have had if the Beneficiary had been named as joint employer with the Employer under the Contract.”

On 4 April 2017 SSMC issued proceedings against Swansea Council and Interserve in respect of alleged defects in the stadium. Interserve applied for summary judgment to dismiss parts of SSMC’s claim on the basis that the 12 year limitation period under the warranty had expired.

Interserve argued that as defects claims under building contract accrued at practical completion, which had been certified on 31 March 2005, the limitation period under the warranty expired twelve years later on 31 March 2017. SSMC argued, among other things, that the earliest point any claim for defects under the warranty could have arisen was when the warranty was executed in April 2005, meaning that the limitation period had not expired when SSMC commenced proceedings on 4 April 2017.

In response, Interserve contended that the warranty should be given retrospective effect, so that claims for defects were taken to have arisen as at the date of practical completion under the building contract. Among other things, it relied on the “no greater liability” provision as indicating that its liability under the building was to be back-to-back with the warranty.

Both duration and scope of liability covered

The court agreed with Interserve that the “no greater liability” clause suggested a retrospective interpretation of the warranty was required. The court rejected SSMC’s argument that the clause was concerned only with the nature and scope of the obligations giving rise to any liability and did not extend to the duration or timing of any claim. SSMC submitted that the purpose of the clause was to ensure Interserve was not agreeing to more onerous obligations than it had under the building contract. SSMC also noted that a limitation defence under the Limitation Act does not extinguish liability but only provides a procedural bar to legal proceedings. Liability still existed under the building contract, therefore, even though it was statute barred. Allowing a later limitation date under the warranty would not result in any greater “liability” for Interserve but would merely affect the procedural means by which such liability could be enforced.

In rejecting this argument, the court emphasised the reference in the clause to the position had SSMC “been named as joint employer” under the building contract. Despite the use of the word “liability” and the procedural operation of the Limitation Act, this reference was a clear indication that Interserve’s liability was to be back-to-back with its liability to Swansea Council under the building contract. This supported giving the warranty retrospective effect.

Conclusion and implications

This decision provides helpful clarification as to the extent to which a simply drafted “no greater liability” clause will allow limitation defences to carry across into a collateral warranty from the underlying building contract or appointment. This can be of considerable importance where a collateral warranty is executed after completion of the works (as was the case here). The court’s decision suggests that these clauses are not to be interpreted by reference to technical legal distinctions but rather by reference to their purpose of achieving back-to-back liability with the relevant building contract or appointment.

“No greater liability” clauses are sometimes drafted more specifically to make clear that there is to be no liability “of longer duration” than under the building contract or appointment. Parties may wish to retain such language as a precaution, but the present case suggests that it is unnecessary provided the clause refers to the beneficiary under the warranty being in the same position as it would have been in had it been named as a joint employer in the relevant building contract or appointment. It is interesting to note the court’s emphasis on this “joint employer” wording as giving the beneficiary back-to-back liability with the employer, when most practitioners include such “joint employer” wording solely for the purpose of avoiding “no loss” arguments.

A similar result can also be achieved through the use of an “equivalent rights of defence” clause and those granting collateral warranties will often request both forms of protection. An “equivalent rights of defence” clause would have more clearly defeated SSMC’s argument about limitation being a procedural bar to proceedings rather than extinguishing liability, and for this reason it is likely that parties granting collateral warranties will continue to seek both.

References: Swansea Stadium Management Company Ltd v City & County of Swansea [2018] EWHC 2192 (TCC)