Prescription of claims under collateral warranties in Scotland

The Inner House of the Court of Session has reversed a decision which allowed a retail park owner to rely on a collateral warranty to sue a contractor for the construction of an allegedly defective car park more than nine years after it was completed.

On appeal, the court held that claims brought under the collateral warranty expired at the same time as they would expire if they were brought under the building contract to which the collateral warranty relates.

Allegedly defective car park

Stewart Milne Group (SMG) completed the design and construction of Inverurie Retail Park in 2009. British Overseas Bank Nominees Ltd, acting as nominees of a depositary of the Janus Henderson UK Property PAIF, (BOBNL) then acquired the retail park in June 2013 and SMG granted a collateral warranty in their favour as the first purchaser of the site in August 2013.

Defects then emerged, manifesting in flooding of the car park. BOBNL raised proceedings against SMG in June 2018 – nine years after practical completion was achieved but within five years (which is the statutory time limit for raising contractual claims) of the date that the collateral warranty was granted.

BOBNL argued that the collateral warranty created new rights in their favour and that a fresh statutory prescriptive period of five years in respect of those rights started when the collateral warranty was delivered. SMG countered that the collateral warranty simply gave BOBNL the same rights that the employer had under the building contract and that SMG was entitled to rely on the same defences that would be available under the building contract, including an argument that any claim had prescribed.

Assignation v. collateral warranty

At first instance, Lady Wolffe found it to be significant that the building contract was not assigned to BOBNL. She considered that if parties intended to give BOBNL equivalent rights to the employer then that could have been achieved by an assignation which would have put BOBNL directly “in the shoes” of the employer. Instead, a new contractual relationship was created by the collateral warranty. Lady Wolffe held that this meant BOBNL acquired equivalent rights to those of the employer but with a new prescriptive period:

“…while the content of the duties assumed under the Collateral Warranty was equivalent to those owed to [the employer] under the Building Contract, the enforcement of the obligation (eg to make reparation for breach of duty) was not tied to its enforceability by [the employer] under the Building Contract.”

This result was surprising to many. As SMG argued, it would seem remarkable that a claim which would have been time-barred if it had been raised by the employer under the building contract could be competently brought, at a much later date, by the holder of a collateral warranty relative to the same building contract.

“The notion of equivalence is central”

On appeal, the Inner House held that the fundamental purpose of a collateral warranty is to place the beneficiary in an equivalent position to the original developer, not to extend the obligations of the contractor. The judgment notes that it would make no commercial sense to place purchasers, tenants and security holders in a more favourable position than the original employer, therefore rights of action under a collateral warranty should be subject to the same qualifications, limitations and defences as were available to the contractor in respect of the original building contract. SMG’s liability for any defects in the car park was therefore held to have been subject to the same prescriptive period, with the same terminus, as would have applied to the original developer. As the original developer’s claim would have been extinguished by prescription, BOBNL’s claim under the collateral warranty was subject to a contractual time limitation.

Comment

The appeal decision clarifies that the beneficiary of a collateral warranty holds no greater rights than the employer under the building contract to which the collateral warranty relates and the contractor is entitled to the same defences against a collateral warranty holder.

This brings the position in Scotland into line with the English position as the TCC held in Swansea Stadium Management Co Ltd v City & County of Swansea and Interserve Construction Ltd that the collateral warranty in that case had retrospective effect such that the 12-year limitation period commenced at practical completion and was the same period as under the building contract, regardless of when the collateral warranty was granted.

The law of prescription in Scotland should be significantly more straightforward when the Prescription (Scotland) Act 2018 is brought into force but, until then, those involved in construction projects should remain alert to the possibility of claims time-barring at an early stage and should seek urgent legal advice as soon as defects are discovered.

Get in touch

The decision will be welcome to contractors who may be obliged to provide collateral warranties under a building contract. Or do you think that a beneficiary should be entitled to rely on the statutory prescriptive period in relation to collateral warranties such as the one in this case, regardless of the commercial intention?

If this is an issue which concerns you, please get in touch to discuss it with a member of our team.