When time began

The late 1980s saw upheaval in the law of negligence in the UK. In particular, the ability to recover losses arising from defective design and construction was reviewed very closely and the landmark decision of Murphy versus Brentwood in 1990 determined that building owners could not recover damages in negligence for losses which are purely economic in character, that is financial losses arising where the only damage caused is to the building itself.

This effectively removed a cause of action in negligence for tenants and subsequent owners and occupiers since economic loss is exactly the type of loss which such people are likely to suffer in the event of defects arising in a building, whether as repair costs or loss of rentals. In order to recover such losses, claimants now have to sue in contract – and hence the proliferation of the use of collateral warranties to establish contractual links between the interested parties.

Ideally, collateral warranties should be entered into at the same time as the main building contract. However, the reality is that they are entered into at different stages of a project as often the identity of the potential beneficiaries is not known until works progress.

In fact, many are not executed until after practical completion. Also, when new owners/occupiers acquire an interest in the building down the line, they often take the benefit of rights under existing warranties by assignment.

This raises the question of when time starts to run for the purposes of bringing an action for defective work. The case of Northern and Shell Plc versus John Laing Construction (Technology and Construction Court, 4 October 2002) illustrates that there is often confusion as to when the clock starts running for the purposes of limitation periods when dealing with a collateral warranty.

The case
Northern and Shell Plc versus John Laing Construction: In 1988 Laing was contracted to construct an office block (the Northern and Shell Tower) in London Docklands. The certificate of practical completion for external works was dated 25 August 1989 but Laing did not provide a warranty deed to the leaseholder until 16 January 1990.

Over the years the leasehold interest changed hands a number of times and the benefit of the deed of warranty was also assigned. Eventually Northern and Shell acquired both the leasehold and the warranty on 14 January 2002 and immediately issued proceedings against Laing for breach of the warranty, alleging that the building's cladding was not weatherproof, airtight or thermally secure.

Laing brought an application for summary judgement alleging that Northern's action was out of time. The warranty included the following proviso:
'This Deed shall come into effect on the day following the date of issue of the certificate of practical completion.'

Basically, a party to a deed has a 12-year period within which to bring an action for breach of contract. The 12 years start running from the date on which the cause of action accrues, which is the date of breach of contract.

Which was the relevant date?
The critical question was whether the relevant date was the date of the warranty deed or the day after the date of the issue of the certificate of practical completion. Given the date of the claim (14 January 2002), if the effective date was the date of the deed (16 January 1990) the claim was within time (by one day).

But if it was the day immediately following the date of the issue of the certificate of practical completion (as per the proviso), the claim was time-barred.

The court held that the deed took effect retrospectively so that time started to run from practical completion. His Honour Judge Thornton QC stated that a contract or deed can take effect retrospectively where this is intended by the parties, as shown by words used in the contract or as necessarily implied from the surrounding circumstances and from business efficacy.

The outcome
The result seems sensible since the promise contained in the warranty was, like most such warranty agreements, to the effect that the contractor had complied (and would comply) with its obligations under the building contract and any cause of action by the employer under such building contracts would also accrue on the date of practical completion. It is usually the intention of parties to a warranty agreement (and it is often stated in the warranty itself, although it was not in this case) that the giver of the warranty is to have no greater liability to the beneficiary under the warranty than it would do to the employer under the building contract and/or that it can raise the 'equivalent rights of defence' against the beneficiary as it could against the employer.

However, His Honour acknowledged that, in principle, parties to a warranty deed could create an obligation which ran for longer than the underlying obligation under the building contract which it supported. Presumably, express words will be required.

This will also be the result where the building contract is a 'simple contract', that is, where it is not executed as a deed, but the warranty is executed as a deed. In that case, the building contract will confer a limitation period of six years but the deed, unless limited expressly to confer a liability equivalent only to that under the building contract, will give the beneficiary a limitation period of 12 years.

The point at which time begins to run under a warranty deed will always depend upon its terms and the intention of the parties (which may be gleaned from the surrounding circumstances). As many of these warranties are now becoming long in tooth, it is highly recommended that both givers and takers of warranties should re-examine their documents to see exactly how long they confer liability/give protection for.