This case created a bit of a stir in December 2018 when the Outer House of the Court of Session held that BOBNL would be able to pursue SMGL under a collateral warranty granted in 2013 notwithstanding the fact that practical completion had occurred some nine years before and it was apparent that the defect had arisen more than five years previously. This decision was reversed by the Court of Session last month, with particular ramifications for those relying on collateral warranties. 

Facts

SMGL (the defender), a building contractor, entered into a contract with Northburn Developments Ltd (Northburn) for the design and construction of a retail park in Inverurie. The build was completed in 2009. In June 2013, the site was acquired by BOBNL (the pursuer), who obtained collateral warranties from the defender dated 24 June and 28 August 2013. Prior to the pursuer’s acquisition of the site, the car park (which was part of the site) had been subject to flooding that was the subject of a report in May 2013. On 21 June 2018, the pursuer raised an action for breach of the 2013 collateral warranty in relation to this flooding.

The initial decision

The defender argued that the claim brought by the pursuer had been extinguished by prescription. The defender relied specifically on clause 3.1 of the warranty granted in favour of the defender which, as is common in collateral warranties, provided that: “The (defender) shall be entitled in any action or proceedings by the (pursuers) to rely on any limitation in the building contract and to raise the equivalent rights in defence of liability as it would have against Northburn under the building contract”. Effectively, the defender argued that the liability owed to the pursuer by way of the collateral warranty was no greater than that owed to Northburn by way of the building contract. Therefore, because the option for Northburn to bring proceedings in relation to the flooding prescribed in May 2018 (five years after they became aware of the flooding), the defender argued that the pursuer’s claim had also prescribed.

The pursuer argued that the defender’s liability as set out in the collateral warranty was independent from the defender’s liability under the building contract, arguing that the date from which prescription ran was the date(s) of the collateral warranties and not the date of the building contract.

The Court agreed with the pursuer in holding that the granting of the collateral warranty created a fresh five year prescriptive period and, if the defender intended for rights under the collateral warranty to be limited as proposed, this would need to have been clearly set out in the warranty.

The appeal

The Inner House of Court of Session took a much more holistic approach to the interpretation of the collateral warranty.

The question asked by the Court was: why was the collateral warranty put in place by the parties in the first place? The conclusion they came to was that the function of the collateral warranty was to give the purchaser (the pursuer) rights against the contractor (the defender) that were equivalent to the rights enjoyed by the employer (Northburn).

Therefore, the Court held to find in favour of the pursuer and that to extend the prescriptive period by even a couple of months longer than it was originally in reference to the building contract with Northburn would have been an unwarranted extension of the defender’s obligations. Accordingly, the Inner House reversed the judgement and found in favour of the defender.

The position going forward

In some respects, this decision is as expected. It would be problematic for grantors of collateral warranties (and may result in a restriction on these being granted) if the period of liability could effectively be extended simply by granting a collateral warranty to another party to start a fresh 5 year prescriptive period. This falls in line with the English approach in relation to limitation clauses (see Swansea Stadium Management Company Limited against City & County of Swansea, Interserve Construction Ltd [2018] EWHC 2192 (TCC)). The difficulty probably lies in the uncertainty that currently surrounds prescription and when the prescriptive period is determined to have begun. 

Parties often take the prescriptive period for a claim for breach of a construction contract as beginning on practical completion of a project however, further to Midlothian Council against Blyth and Blyth [2019] CSOH 29 the prescriptive period could start earlier than that if the party’s loss can be considered to have occurred earlier than practical completion. Some clarity in relation to prescription generally would be welcomed but that is a point for another article.

Certainly, for parties relying on collateral warranties, they should assume that they will be bound by any prescription of the claim under the construction document to which the collateral warranty relates. Therefore if defects have been known about for more than five years the likelihood is that these will not be covered by a collateral warranty regardless of the date that it is granted.  Parties relying on collateral warranties would be wise to ensure that they undertake the relevant surveys to identify if any defects do in fact exist and remember to specifically raise queries as to whether any defects or breaches of contract are known to exist.

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