RELEVANT CONTRACT PROVISIONS
DB / Scot. Cl. 2.1.1 (Basic obligation)
The Contractor shall carry out and complete the Works in a proper and workmanlike manner and in compliance with the Contract Documents, the Construction Phase Plan, and the Statutory Requirements and for that purpose shall complete the design for the Works including the selection of any specifications for the kinds and standards of the materials, goods and workmanship to be used in the construction of the Works so far as not described or stated in the Employer’s Requirements or Contractor’s Proposals, and shall give the notices required by the Statutory Requirements
Cl 2 Conractor'a Obligations of the Collateral Warranty Agreement
Cl.2.Contractor’s Obligations
Cl. 2.1.
The Contractor “warrants and undertakes to the Beneficiary that it has carried out and completed and will carry out and complete the Works in accordance with and subject to the terms of the Building Contract
Cl. 2.2.
“The Contractor further warrants and undertakes to the Beneficiary that the design of the Works and the selection of goods, materials, plant and equipment for incorporation in the Works have been or will be designed or selected with all the reasonable skill, care and attention to be expected of a prudent and experienced, properly qualified and competent designer of the relevant discipline with experience of developments of a similar size, scope, complexity and value to the Development all to the same effect as if the Contractor had been appointed by the Beneficiary”.
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.
BD / Scot Cl.2.11.2.
The Contractor warrants and undertakes to the Employer that the Works will, when completed, comply with any performance, specification or requirement included or referred to in the Employer’s Requirements and/or the Contractor’s Proposals or any Changes.
BD/Scot 7.3. Collateral Warranties
The Contractor shall within 21 days of a written notice given by or on behalf of the
Employer provided to the Employer, in the form set out in Schedule Part 11, duly executed in a self proving matter collateral warranty agreements from the Contractor in favour of:-
- each Funder;
- each Purchaser; and
7.4.3 each Tenant”.
Clause 3 of the Agreement, headed “Limitation of Liability”,
“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 under the Building Contract (other than counterclaim, set-off or to state a defence of no loss or a different loss has been suffered by the Employer than the Beneficiary).
3.2 No action or proceedings for any breach of this Agreement shall be commenced against the Contractor after the expiry of 12 years from the date of issue of the final statement of practical completion or the equivalent under the Building Contract”.
Link to case, click here.
CASE SUMMARY
FIRST DIVISION, INNER HOUSE, COURT OF SESSION
[2019] CSIH 47 CA64/18
Before : Lord President Lord Brodie Lord Drummond Young
BRITISH OVERSEAS BANK NOMINEES LTD AND OTHERS against STEWART MILNE GROUP LTD
Cases quoted as a reference:
- in Scottish Widows Services Ltd v Harmon, 2010 SLT 1102 (collateral warranty and reason for its use)
- Murphy v Brentwood Council, supra (Collateral warranties developed following the decision of the House of Lords).
- Junior Books Ltd v Veitchi Co Ltd, 1982
- Anns v Merton London Borough Council, [1978]
Background:
The parties’s dispute relates to the construction of a collateral warranty provided by a design and build contractor, (the Defender) to purchasers of a development (the Pursuer).
The development included retail units, a garden center, and associated works. The developer who was the Employer, Northburn, entered into a Design and Build contract with the Defender in August 2008, and the contract was in the form of the SBCC Design and Build Contract for use in Scotland.
The contract between Northburn and the Defender imposed obligations to use proper skill and care in design and construction and to provide collateral warranties to subsequent purchasers or tenants.
The development had been constructed during 2009, and the contractor eventually signed and gave the purchasers a collateral warranty, which was dated on August 28th, 2013.
The present action relates to alleged flooding issues in the car park due to defective design and construction by the contractor, as indicated in a report prepared by a consultancy firm named Collier Intern., dated May 2013. The pursuer claims the cost of remedying those defects. Legal action was raised 21 June 2018, hence more than five years after the flooding was apparent, and made known through the report made by Collier, prompting the contractor to argue prescription. The Commercial Judge ruled in favor of the purchasers, prompting the contractor’s appeal.
Claims:
1. The Pursuer claims the cost of remedying defects in construction and design.
2. The defendant has submitted a plea based on prescription, arguing under the terms of the collateral warranty any liability was subject to the same prescriptive period as applied under the original design and build contract.
Issue:
- The key issue is whether the contractual time limit or the statutory prescription period applies to the collateral warranty
1. Contractual construction
A collateral warranty is a contract in its own right, distinct from (although dependent on) the building contract to which it relates. Consequently the terms of a collateral warranty should be construed in the same way as contracts generally.
The exercise of construction should be both purposive and contextual:
– The fundamental purpose of the collateral warranty is to place the beneficiary and the contractor in an equivalent position to the original developer and the contractor,
– The wording used must be construed against the background known to the parties at the time, and the Collateral Warranty must be construed as a whole,
– The general legal context is to be analysed, in this case the rules of prescription and the primary legal reasons why collateral warranties are used (the principle of privity of contract).
2. Collateral warranties
Collateral warranties were developed following the decision of the House of Lords in Murphy v Brentwood Council, supra.
While contractors and others engaged in building projects might be liable in delict or tort to third parties who are injured, the loss sustained by the owner or tenant is classified as pure economic loss, and the House of Lords held that compensation for such loss is not recoverable in delict or tort. Prior to Collateral warranties, the loss arising from defective design or workmanship after the property was sold or let, was likely to fall on the owner or tenant for the time being. While the Employer had a contractual relationship with the Contractor, the purchaser did not, and the loss, if any, was likely to fall into a so-called “black hole”: the party that actually suffered the loss had no right of action. It was to deal with this problem that collateral warranties came into general use.
A collateral warranty is a contract between two parties, the granter and the grantee. In this agreement, the granter commits to either completing specific works with competent workmanship (if they’re a contractor) or providing specified services up to professional standards of skill and care (if they’re an architect or engineer). If the granter fails to meet these obligations, the grantee has the right to take legal action to enforce compliance. Additionally, if the grantee experiences financial losses due to the granter’s inadequate performance, it can pursue legal action to recover those losses. (See Scottish Widows paragraph.17).
The core aim of collateral warranties is to ensure that parties like purchasers, tenants, or security holders have rights equivalent to those of the original employer under building contracts. This principle of equivalence dictates that while beneficiaries should have similar rights of action, they must also be subject to the same qualifications, limitations, and defenses as the contractor under the original contract.
The limitations may also include express time-bar provisions. For instance, in the Collateral Warranty Agreement discussed in this case, clause 3.2 stipulates a time limit of 12 years from the issuance of the final statement of practical completion for commencing proceedings for breach of the agreement against the contractor. Additionally, statutory prescription laws apply to every building contract.
Imposing time limits on legal actions in construction contracts is important for several reasons. Firstly, as time passes, there’s a higher chance of losing evidence, which can make it harder to understand what happened during the project and can affect both those making claims and those defending against them. Secondly, having a clear end point helps everyone involved move forward without worrying about unexpected claims, especially for those with insurance. Lastly, in construction contracts, buildings often have long lifespans, increasing the risk of claims for negligence related to latent defects emerging years after the work’s completion. By then, evidence loss is more likely, and insurers face heightened risks.
Because of the importance of time-bar provisions to contractors and designers, the court is of opinion that a collateral warranty should normally be subject to the same time bar as applied to the original building contract. By the “same” time bar, we mean a time bar that has effect on the same date.
3. The Design and Build Contract between Northern and the defender
The importance of contractual defenses and limitations of liability is shown in this case. The design and build contract between Northern and the defendant is governed by the SBCC Design and Build Contract for use in Scotland (DB/Scot), 2005 Edition, October 2007 Revision. This contract, developed by the Scottish Building Contracts Committee, aims to balance the interests of parties involved in building contracts, considering typical features rather than specific project details. It includes obligations, limitations, and defenses on liability that must be considered as a whole.
Section 2 of DB/Scot outlines the contractor’s duties regarding the Works, including design and compliance with standards. The contract places responsibility on the contractor for design and compliance, including designs in the Employer’s Requirements and Contractor’s Proposals. The contractor warrants that the completed Works will meet specified performance, specification, or requirement.
4. Terms of the Collateral Warranty Agreement
The final part of the clause Cl2.2. of the Warranty Agreement, highlights the basic goal of a standard collateral warranty: to ensure that the beneficiary is in a position equivalent to the employer in the related building contract. It is made more explicite in clause 2.3. This principle is known as equivalence.
Clauses 3.1 and 3.2. aim again to place the parties to the Warranty in an equivalent position to that of the Contractor and Employer under the Design and Build Contract, and subject to the defences and limitations that the defender would have had against Northburn.
5. Prescription and the Collateral Warranty Agreement
When we consider the wording of clause 3.1 of the Collateral Warranty Agreement alongside its context and purpose, it’s clear that it includes a standard time limit that matches the statutory one applicable to Northburn in any claim under the original building contract. This clause allows the defender to rely on limitations in the Building Contract and to assert equivalent rights in defense against liability, mirroring what it would have had under the building contract. This language is meant to ensure equivalence between the defender’s obligations and liabilities in both contracts. The right to plead that a claim has expired (prescribed) is a key defense against liability, serving as a limitation in the Building Contract. Thus, clause 3.1 is sufficient to cover a defense of prescription. Furthermore, clause 2.3 of the Collateral Warranty Agreement explicitly incorporates the principle of equivalence by stating that the Contractor’s duty to the Beneficiary is no greater than it would be if the Beneficiary were named as the employer under the Building Contract, providing additional clarity
Conclusion of the court:
The Collateral Warranty Agreement intends to provide the defender, as Contractor, with the same defenses against the Beneficiary as it would have had against the original Employer, Northburn. This means that any claim by the pursuers as Beneficiary must adhere to the same time limit as a claim made by Northburn. This time limit is established by the parties’ contract in the Collateral Warranty Agreement, rather than by general statutory law. Therefore, the defender’s liability to Northburn was extinguished by prescription, and clause 3.1 of the Collateral Warranty Agreement also extinguishes any claim by the pursuers regarding the drainage problem. The court agrees with the defender’s interpretation of the Collateral Warranty Agreement and will proceed accordingly, recalling certain interlocutors and remitting the case to the Commercial Judge.
LESSONS LEARNED:
A Collateral Warranty Agreement, is to be construed the same way as a any contract, and the questions to ask are:
– what was the purpose of the agreement?
– what was the context at the time of the agreement?