What should you do if you are presented with a collateral warranty?
a) Sign it without thinking;
b) Consult a dictionary; or
c) Contact your insurance broker.
As you would expect, we would advocate c).
If you are working on a particularly complex project you might be asked to sign a collateral warranty. A collateral warranty (also known as a deed of covenant or side deed) is an agreement by you to take on contractual duties to someone other than your client. For example, if you are engaged directly by the developer (who is your client), you might also be asked to sign a collateral warranty in favour of the developer’s financier, or the Contractor, or the government department for whom the project is being performed.
Usually, we caution against signing collateral warranties as they are likely to infringe on the ‘assumed liability’ exclusion under your professional indemnity policy wording which effectively provides that the policy does not cover liability which is imposed on you by contractual agreements in excess of a consultant’s usual liability. However, we recognise that sometimes you may be required to sign collateral warranties on complex projects.
Swansea Stadium Management v City & County of Swansea & Anor  EWHC 2192
The recent England and Wales High Court decision of Swansea Stadium Management v City & County of Swansea & Anor  EWHC 2192 provides some useful guidance on how a court may interpret limitation provisions in collateral warranties as being co-terminous with the building contract.
In this case, the construction company, Interserve, was successful in its application to have part of the claim made against it struck out on the basis that the limitation period had expired when the proceedings were commenced. The court found that that the collateral warranty operated retrospectively and that the cause of action for the collateral warranty was linked to the building contract, which was when the construction reached practical completion. The limitation period (that being 12 years from the date of the cause of action) had therefore expired when the proceedings were commenced.
A brief outline of the facts of the matter are as follows.
On 17 June 2004, the Council engaged Interserve to carry out the design and construction of Liberty Stadium. On 1 April 2005, a letter was sent on behalf of the Council to Interserve confirming that the works had reached practical completion on 31 March 2005 under the building contract.
On 22 April 2005, the Council granted a lease to Swansea Stadium Management for a period of 50 years. Around this time, all three parties entered into a deed of collateral warranty. The collateral warranty included clauses about Interserve’s duties and liabilities to Swansea for the works but it did not contain any express commencement or expiry date or any express limitation period. Nor did it contain an express term as to the date on which any cause of action for breach was deemed to have occurred. However, importantly, the collateral warranty included a proviso to clause 1 that read “Provided that [Interserve] shall have no greater liability under this Agreement than it would have had if [SSMC] had been named as joint employer with the Employer under the Contract.”
On 4 April 2017, Swansea Stadium Management issued a claim against both the Council and Interserve for damages in the sum of 1.3 million pounds in respect of alleged defects including paint delamination and associated corrosion of the exposed steel structural elements of the stadium as well as inadequate resistance for foot traffic of the surface of the concourse and mezzazine floor which had caused visitors to slip and fall.
Swansea claimed that the defects were caused by breaches in the building contract and that those breaches constituted breaches of the Collateral Warranty by Interserve. Interserve responded by making an application to the court that these claims were time barred.
One of the complications of contractual and statutory time bars is that, while some of them begin from a clear, fixed date, most of them begin from a much vaguer date, which is the date when the “cause of action” arose. That means the date when the person making the claim first became aware they had a right to make that claim. The applicable limitation period here was 12 years, running from the date the cause of action arose.
The date of practical completion and when the cause of action arose was disputed between Swansea and Interserve. Swansea argued that the earliest date limitation could run from was the date the collateral warranty was entered into and because the collateral warranty was provided after the date of practical completion, the claims were not barred by limitation. Swansea also argued that as there was to be ongoing works carried out after 31 March 2005, practical completion had not occurred. However, the court found that the deeming provision in the building contract was decidedly clear and that practical completion occurred for all purposes of the contract in April 2005.
The court determined that the parties intended that any cause of action or limitation period under the collateral warranty mirrored that of the building contract due to the inclusion of the “no greater liability” clause in the collateral warranty and for the more general reason that the collateral warranty was intended to provide a direct right of action by Swansea against Interserve for the obligations under the building contract. For these reasons, the court held that the breach of the collateral warranty occurred by 31 March 2005. This means that Swansea had until 31 March 2017 to make their claim. Unfortunately for Swansea their claim was made 4 days later and was therefore barred.
How does this decision affect your professional indemnity insurance?
The decision illustrates that a limitation period under a collateral warranty will likely be interpreted as being co-terminous with the underlying contract provided it is the express or implied intention of the parties. Although this is an English decision, we would expect the Australian courts to adopt a similar approach.
As we mentioned above, ordinarily your professional indemnity insurance does not provide you with cover for collateral warranties. However, we understand that there are certain extensions available in the current insurance market which provide some cover for collateral warranties. Amongst the many other conditions and limitations of these extensions, we note that insurers are often specifying that the indemnity or cover provided is no greater and does not last any longer than that provided in the agreement for the provision of professional services to which the collateral warranty relates.
This judgment therefore is consistent with the terms under the extensions currently available for collateral warranties. If you are about to commence work on a project which requires you to enter into a collateral warranty, we again suggest you take option c) and speak with your Planned Cover account manager. It would also be prudent have your solicitors include in the collateral warranty a clause like the one in this case, stating that your liability to the third party beneficiary under the collateral warranty is no greater or longer lasting than your liability to your client under your consultancy agreement.