Effect of the notice of making good defects under a JCT contract

In Swansea Stadium Management Company Ltd v City & County of Swansea and another [2019] EWHC 989 it was held that a notice or certificate of making good defects is conclusive that identified defects have been made good.

Both standard and bespoke forms of construction contract typically require the employer or contract administrator to issue a notice that confirms when defects notified during the defects liability period have been made good. This notice then permits the final release of retention under the contract.

Under the JCT 2016 suite this notice is called the ‘Certificate of Making Good’ in the Standard Building Contract and the ‘Notice of Completion of Making Good’ in the Design and Build Contract.

Facts

In September 2003, City & County of Swansea and another (the “Council”) entered into a building contract with Interserve Construction Limited (“Interserve”) to design and build the Liberty Stadium in Swansea. The building contract was based on an amended JCT Standard Building Contract with Contractor’s Design, 1998 edition.

Swansea Stadium Management Company Ltd (“SSMC”) was a leaseholder and operator of the stadium. Under the lease, SSMC’s repair obligations excluded liability for latent defects. SSMC also had the benefit of a collateral warranty from Interserve in respect of the building works.

Practical completion under the building contract was achieved on 31 March 2005. The defects liability period ran for 12 months from practical completion and in May 2011, a Notice of Completion of Making Good defects was issued by the Employer’s Agent under the building contract. This notice confirmed that the defects which the Council had required to be made good had been made good as of the date of the notice.

In July 2006 SSMC, the Council and the clubs entered into an agreement whereby the Council agreed to take all reasonable steps to enforce its rights under the building contract in respect of latent defects.

In April 2017, SSMC commenced proceedings in respect of latent defects in the flooring and paintwork against:

• Interserve under the collateral warranty alleging that:
  1. the original works had been defective; and
  2. it had failed to identify and rectify defects as required under the building contracts defects liability regime; and
• the Council under the agreement alleging that it was in breach of an agreement to take all reasonable steps to enforce its rights under the building contract.

Court’s decision

In an earlier decision, SSMC’s first claim against Interserve was struck out as it was time barred.

The court held that the effect of the Notice of Completion of Making Good defects was to bring an end to clauses relating to identifying and rectifying defects under the building contract. Accordingly, following the issue of the Notice of Completion of Making Good, any defects were deemed to have been made good, even if they had not been. The court confirmed that the fact that SSMC relied on a collateral warranty did not change anything as Interserve’s liability under the warranty was contemporaneous with its liability to the Council under the building contract.

The court confirmed that the Notice of Completion of Making Good defects did not prevent a subsequent claim for failing to make good defects and that any such claim would have to be brought pursuant to the obligations under the building contract. For example, a breach of an obligation to complete the works in a proper and workmanlike manner or to design the works with reasonable skill and care. Therefore, issuing the Notice would not deprive an employer of any claims under a building contract if there were outstanding defective works. However, in this case, claims under the building contract were time barred.

Practical points to consider

• The effect of the Certificate of Making Good / Notice of Completion of Making Good defects under a JCT contract is that:
  • any defects notified under the defect’s liability period have been made good, but
  • a claim can be bought in respect of the core obligations of the building contract.
• Where there is an obligation to carry out and complete the works in a building contract, the cause of action for a failure to complete the works in accordance with the building contract accrues at the date of practical completion. There is therefore a danger, for limitation purposes, of certifying practical completion when there are a large number of outstanding defects that may take years to rectify.
• Altering a standard form building contract can have practical effects on a project. Where changes are made, parties should put in place procedures to ensure obligations on the contractor and/or employer are met.
• A tenant should be cautious before taking on a lease with repairing obligations where there are outstanding defects at practical completion. A tenant should also make sure there is clarity in relation to the extent of its repairing obligations.
• When a party to a building contract agrees to enforce its contractual rights for the benefit of a third party there may be practical difficulties in enforcing such rights. For example, that party may not be in the best position to monitor and report such rights if it is not operating or occupying the building. A “no loss” defence from a contractor alleged to be in beach of the building contract could also arise.