Collateral warranties: How long is your liability in Scotland?

We comment on the recent Court of Session (Inner House) decision on limitation periods under a collateral warranty in Scotland. The Scottish position once again reflects the position in England

13 November 2019

The decision of the Court of Session (Outer House) in British Overseas Bank Nominees Ltd v Stewart Milne Group Ltd [2018] caused ripples in the construction industry by suggesting that, in divergence from English law, in Scottish law the duration of a warrantor’s liability under a collateral warranty:

  • ran from the date that the collateral warranty was granted; and
  • the liability period was not affected by the no greater liabilityand equivalent rights of defence clauses within a collateral warranty.

On appeal, the Court of Session (Inner House) has reversed the original decision and confirmed that the position on limitation periods under collateral warranties in Scottish law remains aligned with the position in English law, i.e. to give effect to the limitation period under the underlying contract where a collateral warranty contained ‘equivalent rights of defence’ wording.

Background

In 2008, Northburn Developments Limited (the Developer) entered into a building contract with Stewart Milne Group Limited (the Contractor) to design and build, among other things, retail units and a car park. The development was completed in 2009.

In June 2013, British Overseas Bank (the Beneficiary) purchased the development. As required under the contract, the Contractor entered into a collateral warranty with the Beneficiary. The collateral warranty contained the following common provisions:

  • Clause 2.3 'The [Contractor] shall have no greater duty to the Beneficiary under this Agreement than it would have had if the [Beneficiary] had been named as the employer under the Building Contract . . .'
  • Clause 3.1 'The [Contractor] shall be entitled in any action or proceedings by the [Beneficiary] to rely on any limitation in the Building Contract and to raise the equivalent rights in defence of liability as it would have against the Employer [the Developer] under the Building Contract . . .'

Prior to the Beneficiary’s purchase of the development a flood occurred at the northern border of the car park that resulted in the production of a report on the cause of the flood in May 2013 (the Report). In June 2018, the Beneficiary issued proceedings under the collateral warranty against the Contractor for defective design and construction.

In defence of the Beneficiary’s claim the Contractor argued that the Beneficiary was out of time and the prescriptive (limitation) period had expired either on:

  • June 2014, being five years after practical completion of the development; or alternatively
  • May 2018, being five years after the date of the Report.

The Beneficiary argued that its claim was not subject to the limitation period under the building contract because, under Scottish law, the collateral warranty granted by the Contractor gave rise to a new limitation period commencing on the date that the collateral warranty was entered into.

The Court of Session (Outer House) agreed with the Beneficiary and held that the collateral warranty created new obligations between the Contractor and the Beneficiary that brought in train a new limitation period. The Beneficiary had therefore raised the action in time and within the limitation period set out within the collateral warranty.

The Contractor appealed this decision and argued that it was immaterial when the collateral warranty was granted because it was the limitation period incorporated into the building contract that was applicable.

Decision of Court of Session (Inner House)

Giving judgment on this issue Lord Drummond Young held that:

  • the express terms of the collateral warranty that entitled 'the [Contractor] "to rely on any limitation in the Building Contract" and "to raise the equivalent rights in defence of liability" as it would have had under the building contractmust be given a purposive meaning; and
  • the fundamental purpose of the collateral warranty was '. . . clearly to achieve equivalence between the obligations and liabilities undertaken by the [Contractor] under the building contract with [the Developer] and the obligations and liabilities undertaken under the collateral warranty'.

Accordingly, the Court of Session (Inner House) held that the collateral warranty did not extend the obligations of the Contractor to the Beneficiary beyond those under the building contract.

In reaching its decision, the Court of Session (Inner House) highlighted the importance of collateral warranties to the construction industry and, for reasons of public policy, the need to provide contractual certainty in respect of limitation periods to the parties to a construction project.

The Court of Session (Inner House) also affirmed that parties are able to agree to limitation periods within a collateral warranty that are different to statutory limitation periods ensuring that the position on limitation under Scottish law remains aligns with the position under English law.

This article was written by Tom Weld and Zara Din.

Key contact

Richard Adams

Richard Adams Partner

  • Construction and Engineering
  • Infrastructure
  • Construction Disputes

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