Social housing providers should particularly be aware of a recent case in the context of subcontractor and novated consultant warranties in their favour. Zoe Stollard and Priscilla Hall discuss how, without careful drafting, the benefit of a later collateral warranty may expire at the same time as the earlier underlying Building Contract.
In British Overseas Bank Nominees Ltd v Stewart Milne Group  ScotCS CSIH_47 Stewart Milne Group (the “Defender”) entered into a building contract (the “Building Contract”) in 2008 with Northburn Developments (the “Developer”) to design and build 8 retail units with a garden, tenant fit-out works and associated car parking (the “Works”).
The Works completed in 2009 but the car park was prone to flooding. An investigative report by Colliers International in May 2013 attributed the flooding to defective design and construction. Despite this, the site was sold to British Overseas Bank Nominees Ltd (the “Pursuers”) on 27 June 2013 and the Defender delivered to the Pursuer a collateral warranty dated 24 and 28 June 2013 (the “Collateral Warranty”). 5 years later (on 21 June 2018), the Pursuers brought an action against the Defender for the cost of remedying the defective car park and the Defender’s breach of its obligations under the Collateral Warranty to design and construct the Works in accordance with its obligations under the Building Contract.
The legal debate
Two main crucial points for legal debate were put before the Judge. Firstly, how - given the contractual structure of the development – the Defender’s right under the Collateral Warranty to rely on the “limit of liability” and “equivalent rights of defence” (as it would have had against the Developer under the Building Contract), should be construed. Secondly, with regard to the limit of liability, whether the Defender was subject to the same prescriptive period under the Collateral Warranty as under the Building Contract (or whether a new prescriptive period runs from the date of the Collateral Warranty).
It was concluded that, the purpose of a Collateral Warranty is to prevent any loss arising from the failure of the contractor from falling into a ‘black-hole’. As such, its principles derive from the notion of ‘equivalence’ and act to provide purchasers, sub-contractors and so on with rights equivalent to those held between the contractor and the original employer, as if directly contracting with them. Such rights are to be no greater and, potentially most significantly, no more diluted.
When applied in practice, this means, under the Collateral Warranty, the Pursuers were entitled to the same level of rights against the Defender as the Developer (and nothing more). This helped the Court to determine the second legal debate: In light of the commercial context and purpose of the Collateral Warranty, the only logical interpretation was for the prescriptive period to mirror that afforded to the Developer under the Building Contract. As a result, the Pursuers were time-barred from bringing a claim under the Collateral Warranty.
This case brings a welcomed harmony between two legal systems, bringing Scottish common law in line with England and Wales. As established in Swansea Stadium Management Co. Ltd v Swansea City and County Council ( EWHC 2192 (TCC)), the “no greater liability” clause was a clear indicator that SSMC was to be in the same position vis-à-vis its claim against the contractor as the employer would be under the building contract.
It also acts as a gentle reminder to our social housing clients relying on collateral warranties (e.g. from material / design subcontractors and novated consultants) to report defects “as soon as they become aware”, before it is too late. This places greater emphasis on: due diligence prior to issuing notices of practical completion; and the importance of a third party certifier. It also highlights the importance of careful drafting and the need for accurately reflecting the party intentions in the first instance.
In the absence of express party intention of a specific limitation period, the collateral warranty may be subject to the same prescription as the original building contract.