Collateral warranties: Liability and equivalent rights and defences clauses
A recent Scottish case has provided clarification on the effect of clauses often included in collateral warranties: clauses which provide for no greater duties, no greater liabilities or equivalent rights and defences.
In the case of Legal and General Assurance (Pensions Management) Ltd v The Firm of Halliday Fraser Munro and others, the Inner House, Court of Session (Scottish appeal court) upheld a decision rejecting the argument that collateral warranties incorporated the same defences, including any time-bar, available where a claim was made under the underlying contract.
The case related to Union Plaza, a multi-story office building in Aberdeen, practical completion of which was achieved on 8 July 2008. Legal and General Assurance (Pensions Management) Ltd (L&G) later purchased the building in December 2013.
As part of the purchase, the architect, Halliday Fraser Munro (HFM) provided a collateral warranty in favour of L&G a few weeks later in January 2014.
The collateral warranty notably included a clause stipulating that HFM owed no greater duties or obligations to L&G under the collateral warranty than would have been owed to L&G had they been named as the Client under the underlying appointment.
On 17 December 2018, L&G brought a claim against HFM and others in relation to alleged defects in the building, such as basement water ingress and corrosion/paint protection to steel. On 2 February 2021, L&G made a further claim in relation to alleged fire protection defects relating to soffit insulation.
HFM argued that both claims had been brought out of time as a consequence of claims under the underlying appointment being time barred as a consequence of more than five years having elapsed since the date of practical completion. The first instance court rejected HFM’s arguments and HFM appealed to the Inner House.
The issues considered by the Inner House on appeal were:
Issue 1: Was the commercial judge correct to hold that it was immaterial that the collateral warranty post-dated L&G’s acquisition of the building?
HFM argued that there was no recoverable loss because the collateral warranty was entered into after L&G bought the building. This was argued on the basis that L&G sustained loss at the time when they bought the building in its damaged condition; any breach of the collateral warranty did not cause (and could not cause) L&G to suffer loss.
The Inner House did not hesitate to reject this argument, finding that it failed to give effect to the clear terms and underlying purpose of the collateral warranty. As was made clear by the wording of the duty of care clause included in the collateral warranty, HFM had warranted to L&G that they had performed their duties as architects under their appointment with reasonable skill and care. In effect, they undertook or promised that they had done so.
Issue 2: Is the time-bar under the collateral warranty the same as under the original underlying contract?
HFM relied on a previous Inner House decision, British Overseas Bank Nominees Ltd v Stewart Milne Group Ltd [1] to argue that the inclusion of a “no greater duties” clause in a collateral warranty was sufficient to incorporate a contractual time-bar corresponding to the conventional prescriptive period which applied to the underlying appointment. In the British Overseas Bank case, the collateral warranty featured such a clause. HFM argued that such a clause went not just to the scope of the duties or obligations owed by the consultant; it also encompassed the duration of those duties or obligations.
The Inner House rejected this argument holding that a collateral warranty is a standalone contract and that defences and time limits from the underlying contract are not impliedly imported. Only an express clause conferring “equivalent rights and defences” from the underlying contract will align any time bar, and where this is not express, time runs from the date of the collateral warranty.
The Court distinguished this case from the British Overseas Bank case where the collateral warranty contained not only an express “no greater liability” clause but also an “equivalent rights and defences” clause which anchored the time bar to the underlying contract. In this case, the “no greater duties” clause in HFM’s collateral warranty addressed equivalence of duties; it did not deal with equivalence of defences.
Consequently, the Court determined that, in the absence of a contractual limitation provision, the earliest possible date for commencement of the five-year short negative prescriptive period applicable in Scots Law would be the date when the collateral warranty was granted.
The Court also went on to consider whether HFM’s conduct induced L&G into error so as to suspend prescription under section 6(4) of the Prescription and Limitation (Scotland) Act 1973 (the Act). On this point, the Court held that L&G’s December 2018 claims against HFM were within the five years period from the date of the collateral warranty and so were not time‑barred, however, L&G’s later claims introduced in February 2021, regarding the fire protection defects relating to soffit insulation, fell outside five years from the warranty date and were not saved by section 6(4) of the Act.
Drafting points
This case is widely regarded as a landmark decision under Scots Law and may be persuasive in the English Courts. The decision aligns with views taken in leading practitioners’ textbooks such as Hudson’s Building and Engineering Contracts in which it commented that, in the absence of an express time limit in a collateral warranty, the collateral warranty may create a series of fresh causes of action at the date of the warranty.
Parties entering into collateral warranties will want to carefully consider the issue of duration of contractual liability and how this is addressed in the collateral warranty’s terms, particularly where collateral warranties are being issued long after practical completion. Fundamentally, a “no greater duties” clause limits the scope/standard of duty but, on its own, will not import the defences or time limits from the underlying contract.
