Scottish Court of Session Decisions

Pursuer: M Hamilton; Maclay Murray and Spens LLP

Defender: Borland; Pinsent Masons LLP

24 April 2014

Introduction

[1] This is an action for breach of a collateral warranty, in which Friends Provident Life Assurance Ltd ("FPLAL") seeks damages of over £330,000 from the defender. The right of action arose in April 2007 and was therefore liable to prescribe in April 2012. FPLAL served the summons on 8 June 2011 and lodged it for calling on 26 June 2012.

[2] On 1 December 2011, FPLAL transferred its whole business and assets to Friends Life Ltd ("FLL"). The defender submits that following the transfer, FPLAL had no authority to lodge the summons for calling and the instance has fallen. It also argues that the defender has no liability under the collateral warranty. There are three questions for determination: (a) did the case validly call? (b) if not, can the defect be cured by amendment? (c) what is the measure of the defender's liability under the collateral warranty?

Material facts

[3] In May 2002, Walker Developments (Glasgow) Ltd ("WDL") employed the defender to design and build a nine story office building at 200 Broomielaw, Glasgow. The parties executed an SBCC Scottish Building Contract with Contractor's Design, May 1999 edition (March 2001 revision). Under the contract the defender undertook (a) to fulfil certain duties of care in carrying out the works, and (b) to enter into a direct contractual relationship with anyone who purchased the building from WDL.

[4] The works were completed in October 2003. On 8 June 2006, FPLAL agreed to purchase the building from WDL. The previous month, FPLAL and the defender had entered into a collateral warranty agreement. In terms of that agreement, the defender warranted: (i) that the works had been completed in conformity with the building contract; (ii) that it had complied with all the contractor's obligations; and (iii) that it had exercised all reasonable skill and care in the design of the works, and the selection of the materials. The defender also acknowledged that FPLAL should be deemed to have relied exclusively on its skill and judgement in relation to the works, and its supervision of any subcontractors and professional firms appointed on its behalf.

[5] Clause 1.2 of the collateral warranty agreement specified that the defender:

"shall owe the same but no greater duty and shall be under no greater liability in scope or quantum to the Purchaser hereunder in respect of the performance of the Building Contract than the duty it owes and the liability it has to the Client pursuant to the Building Contract."

[6] Shortly after FPLAL's purchase of the building, problems developed with the ventilation, air‑conditioning and cooling systems. FPLAL instructed Carrier Air Conditioning to investigate matters. In a report dated 16 April 2007, Carrier identified various faults and recommended that repair works be undertaken. Between 2006 and 2011, FPLAL incurred significant costs in carrying out those works. In the present action, it maintains that the defender carried out the works defectively and in breach of clause 1 of the collateral warranty. The defender denies liability and relies on a number of lines of defence on the merits. It also takes certain preliminary points which are reflected in its pleas‑in‑law. It contends that the action should be dismissed, because after 1 December 2011 FPLAL had no title, interest or authority. It also contends that the action has prescribed.

[7] For the purposes of the debate alone, counsel agreed that the prescriptive period began on the date of the Carrier report. FPLAL therefore had to raise an action on or before 16 April 2012. As indicated above, it served the present summons on 8 June 2011, some 10 months before the claim prescribed. Counsel also agreed that the summons had to call on or before 1 July 2012.

[8] In July 2011 FPLAL decided to seek the court's approval for an insurance business transfer scheme under Part VII of the Financial Services & Markets Act 2000. It applied to the Companies Court in the Chancery Division of the High Court. On 18 November 2011, Newey J granted an order sanctioning the scheme ("the Order"). In terms of the Order, FPLAL transferred its whole long term business and assets to FLL on 1 December 2011. Paragraph (i) (A) of the Order states:

"each Transferred Asset and all interest of the relevant Transferor in each Transferred Asset shall, by this Order and without any further act or instrument, be transferred to and be vested in the Transferee and the Transferee shall succeed to each Transferred Asset as if in all respects it were the same person in law as the relevant Transferor, subject to all Encumbrances (if any) affecting such Asset in accordance with the scheme"

[9] Section 112 (1)(c) of the 2000 Act empowers the court to make provision "for the continuation by ... the transferee of any pending legal proceedings." Paragraph (viii) of the Order expressly utilises that power:

"any proceedings ... which are pending or current immediately before the Effective Date ... in respect of which a Transferor is a party (including, as the ... pursuer ...) shall be ... continued by ... the transferee"

Clause 4.1 of the scheme attached to the Order is headed "continuity of proceedings" and contains similar wording.

[10] Following the transfer on 1 December 2011, the pursuer did not alter the pleadings to reflect the fact that FLL now had the title and interest to pursue the action. When the summons was lodged for calling on 26 June 2012, the calling slip stated that FPLAL carried out that step. Mr Borland informed me that the letter of intimation to the defender's solicitors was to the same effect. It was not until 28 February 2013 that FLL's solicitors informed the defender's solicitors about the Order. On 17 April 2013, the defender inserted "no title" averments into its pleadings.

Was the summons validly lodged for calling?

[11] The requirement for a case to call is an important one. It is the judicial step which brings the action into court. Three rules apply to calling. First, a summons must call within a year and a day after the expiry of the period of notice, otherwise the instance falls: RC 13.13 (6). Second, it is incompetent for the court to relieve a pursuer of a failure to lodge a summons for calling. If the period expires without the summons being called, the action "ceases to be a living process": Brogan v O'Rourke 2005 SLT 29, para 29. Third, service of the summons is not of itself enough to interrupt prescription: Prescription and Limitation (Scotland) Act 1973, section 4 (2)(a). Even although the date of service is the relevant date, the summons must call: Johnston Prescription and Limitation (2^nd ed), para 5.09.

[12] In submitting that the purported calling was invalid, Mr Borland relied upon Lords of the Treasury v Campbell's Trs (1836) 14 S 657. In that case, the Lord Advocate raised an action on behalf of the Commissioners of Woods and Forests, who sought to set aside a trust deed. The ground of reduction was that it had been executed in prejudice of the Crown's right as ultimus haeres. The summons was served in July 1835 and lodged for calling in November 1835. Between those two events Parliament passed a statute that had an important effect on matters. In September 1835 it declared that the Lords Commissioners of His Majesty's Treasury had the title to sue in such actions: 5 and 6 William IV c.58. The preamble to the Act explained that it had been passed to remove doubts that had existed about the title of the Commissioners of Woods and Forests to pursue such actions.

[13] After the case had called, the Lords Commissioners of His Majesty's Treasury sought to be sisted as the pursuers in the action. At first instance, the Lord Ordinary granted their motion. The Second Division, however, reversed his decision and dismissed the summons. Lord Medwyn thought that the correct course was for the Lords Commissioners to raise a fresh summons, because the right of the original pursuers had been "entirely taken away." According to Lord Justice Clerk Boyle, "It is impossible to resuscitate this action." Lord Glenlee's succinct opinion comprised only three sentences:

"I have no doubt at all. Calling is a judicial step, and the Commissioners of Woods and Forests had no title to take any judicial step at all. The summons is sopite."

[14] Mr Borland submitted that the material facts of the present case and Lords of the Treasury were identical and that I was bound to follow it. On his analysis, the Order deprived FPLAL of its authority to lodge the summons for calling. After the date of the transfer, only FLL could carry out that step. The argument was advanced with skill and conviction.

[15] In my view the decision in Lords of the Treasury can be distinguished. It concerned the situation where the wrong person lodged the summons for calling. But in the present case, FPLAL had the requisite title and interest when the summons was served. In December 2011, that title and interest was "transferred to and ... vested in" FLL. It follows that only FLL could then continue the action. It would be expected to amend in due course, so that the instance reflected the change. But the action did not become a nullity because the amendment was not made at the precise moment that the right of action was transferred.

[16] After the transfer took place, the solicitors who had previously acted for FPLAL were acting for FLL. That happened automatically by reason of the Order. It is also a matter of fact that they continued to act for the pursuer in the litigation. It is not surprising that FPLAL's name appeared on the calling slip, because that squared with the instance. But the important point is that on the date that the summons was lodged for calling, FLL had both the right of action and the conduct of the action. It stood in the shoes of the FPLAL.

[17] I therefore hold that the calling of the summons was valid. In reaching that conclusion, I take into account that the defender's approach would undermine the aim of the 2012 Act and the Order, which seek to provide a seamless transfer between the old and the new company. Neither Parliament nor the High Court envisaged that FLL had to raise a new action.

[18] I also regard what happened as at most a technical irregularity. The court is keen to avoid such objections. In Donaghy v Rollo 1964 SC 278, the pursuer was a member of a trade union. He sought to interdict the office bearers of the trade union from using its funds for certain purposes. Shortly after the action was raised, he ceased to be a member of the union. The court allowed an amendment to sist a fellow trade union member as the new pursuer in his place. Lord Justice Clerk Grant (at page 288) put the matter in this way:

"It would be a waste of time, money and procedure if, instead of being allowed to come into this action at the late stage which it has now reached, he was sent away to start from scratch another action in similar terms and with similar objects. I am reluctant to turn litigation into a game of snakes and ladders."

Should FLL be allowed to amend?

[19] I can deal with this argument very briefly. Rule of Court 24.1(2)(b)(i) allows a party to amend the instance to correctly design a party. That is what Miss Hamilton seeks to do in this case. I shall therefore grant her motion to substitute FLL for FPLAL. If I had held that the summons did not validly call, then amendment would not be possible. There would be no live proceedings in dependence before the court.

Is the defender liable to the pursuer under the collateral warranty?

[20] Mr Borland contended that the defender had no liability to FLL under clause 1.2. He maintained that any claim available to WDL has prescribed. Accordingly, the defender can have "no greater liability" to FLL. This branch of the argument turns on the proper construction of clause 1.2.

[21] Lord Drummond Young explained the utility of collateral warranties in Scottish Widows Services Ltd v Harmon/CDM Facades Ltd 2010 SLT 1102. Developers usually intend to transfer their interest once the building works are complete. Prospective purchasers wish a remedy in the event that some problem emerges with the works. Collateral warranties provide the solution. They avoid the possibility of a legal "black hole", where the party who has suffered the loss has no right of action and the person with the right of action has not sustained any loss.

[22] Counsel agreed that the normal principles of construction should apply to clause 1.2. I therefore have to consider the language and ascertain what a reasonable commercial person would have understood the parties to have meant. Miss Hamilton also emphasised (a) that collateral warranties must be construed in a manner to ensure that the party who suffers loss has a right of action against any contractor who has provided defective work: Scottish Widows at 1104J; and (b) that a limitation clause must be clear and unambiguous: Bovis Construction (Scotland) Ltd v Whatlings Construction Ltd 1995 SC (HL) 19, 23I per Lord Jauncey.

[23] In advancing his argument, Mr Borland relied on the decision in Safeway Stores v Interserve Project Services (2005) 105 Con LR 60. That case also concerned a 'no greater liability' clause. Under a building contract, Interserve undertook to design and build a supermarket. Safeway subsequently bought the completed building from the developer, Chelverton. Problems developed on the upper tier of the supermarket car park that cost Safeway over £400,000 to repair. It claimed that the works were defective and sought to recoup that sum from Interserve under a collateral warranty.

[24] By the time of the litigation, Chelverton had gone into liquidation owing over £1 million to Interserve. On the principle of set off, Interserve could have successfully resisted any claim made by Chelverton. Ramsay J held that Interserve could owe no greater liability to Safeway than it owed to Chelverton. The claim under the collateral warranty therefore failed. Mr Borland invited me to adopt a similar approach in the present case. He submitted that the five year prescription extinguished any obligation owed by the defender.

[25] In my view that construction does not square with commercial common sense. It would deprive the collateral warranty of efficacy. If WDL had raised proceedings within the five year period, the claim would not have prescribed. Clause 1.2 envisages equivalence between the claims of WDL and the person who has the benefit of the warranty. On the defender's construction, FLL would be in a worse position than WDL.

[26] Even if I am wrong on that point, there is still a need to lead evidence to determine whether section 11 (3) of the 1973 Act is engaged. That is because the summons avers that:

"WDL were not aware, and could not with reasonable diligence have been aware, that it had suffered loss, injury and damage as a result of the defects complained of prior to them selling the Development to FPLAL"

Conclusion

[27] Mr Borland did not insist on his plea of "all parties not called" and I shall therefore repel his fourth plea‑in‑law. Otherwise I shall appoint the case to call by order to determine further procedure.