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Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> BRITISH OVERSEAS BANK NOMINEES LTD, RECLAIMING MOTION BY BRITISH OVERSEAS BANK NOMINEES LTD AND OTHERS AGAINST STEWART MILNE GROUP LTD [2019] ScotCS CSIH_47 (10 September 2019)
URL: http://www.bailii.org/scot/cases/ScotCS/2019/2019_CSIH_47.html
Cite as: 2020 SC 24, [2019] ScotCS CSIH_47, [2020] PNLR 2, [2019] CSIH 47, 2020 SCLR 151, 2019 GWD 30-477, 186 Con LR 80, 2019 SLT 1253
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FIRST DIVISION, INNER HOUSE, COURT OF SESSION
Lord President
Lord Brodie
Lord Drummond Young
[2019] CSIH 47
CA64/18
OPINION OF THE COURT
delivered by LORD DRUMMOND YOUNG
in the Reclaiming Motion by
BRITISH OVERSEAS BANK NOMINEES LTD AND OTHERS
Pursuers and Respondents
against
STEWART MILNE GROUP LTD
Defender and Reclaimer
Pursuers and Respondents: DM Thomson QC; Brodies LLP
Defender and Reclaimer: GJ Walker QC, AN McKenzie; Anderson Strathern LLP
10 September 2019
[1] The parties’ dispute relates to the construction of a collateral warranty granted by a
design and build contractor in favour of purchasers of a development from the original
developer. The development, which was situated at Souterford Road, Uryside South,
Inverurie, comprised the construction of eight new retail units together with a garden centre
slab, tenant fit-out works and associated car parking, service yards and related external
works. The developer, who was the employer in the design and build contract, was
Northburn Developments Ltd (“Northburn”). The defender was the design and build
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contractor. The construction contract between Northburn and the defender was dated
20 and 21 August 2008, and was in the form of the SBCC Design and Build Contract for use
in Scotland (DB/Scot), 2005 Edition, October 2007 Revision, as amended by a document
entitled “Amendments to the SBCC Design and Build Contract for use in Scotland 2005,
incorporating Amendment 1 (issued April 2007) and October 2007 Revision”.
[2] The contract between Northburn and the defender imposed obligations on the
defender to use, in general terms, proper skill and care in the design and construction of the
works. It further contained an obligation on the defender to grant collateral warranties in
favour of any person who might subsequently acquire an interest in the development as a
purchaser or tenant. The pursuers are nominees for National Westminster Bank plc, which
operates as a depositary of the Janus Henderson UK Property PAIF. In June 2013, the
pursuers, acting in that capacity, and Northburn concluded missives for the sale of the site
and development to the pursuers. The pursuers took entry on 27 June 2013. In terms of
those missives, Northburn was obliged to deliver to the pursuers various collateral
warranties, including a collateral warranty in the pursuers’ favour executed by the defender
as the design and build contractor. A collateral warranty by the defender in favour of the
pursuers was in due course executed and delivered to the pursuers; it was dated 24 June and
28 August 2013.
[3] The development had been constructed during 2009. It subsequently became
apparent that the car park at the site, which had been designed and constructed by the
defender, suffered from flooding at its northern boundary. The present action relates to the
alleged flooding. The pursuers aver that the defender was in breach of obligations that it
had undertaken in the collateral warranty to carry out and complete the building works, to
perform all of its duties under the building contract, and to design the works and select
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3
materials with reasonable skill and care such as would be expected of a prudent and
experienced designer of the relevant discipline. The flooding, it is averred, resulted from
defective design and construction of the car park by the defender. The pursuers aver in
particular that if the car park had been properly designed and installed it would not suffer
from flooding in ordinary course; that the gradient of the car park as constructed was
inadequate to manage ordinary surplus water; and that standard remedial measures had not
been taken. They claim the cost of remedying those alleged defects. For present purposes it
is unnecessary to consider the details of the pursuers’ claim. What is material is that the
pursuers’ averments refer to an investigative report on flooding in the car park prepared by
Colliers International, a consultancy firm, dated May 2013. Both the pursuers’ averments
and the terms of that report disclosed that that the flooding was apparent by that date.
[4] The present action was raised on 21 June 2018, more than five years after Colliers’
report. The defender has tabled a plea of prescription, to the effect that under specific
clauses of the collateral warranty, clauses 2.3 and 3.1, any liability arising under the duties in
the building contract had been extinguished by operation of prescription by the time that the
present action was raised. The collateral warranty in favour of the pursuers is of course a
separate contract from the design and build contract between the defender and Northern.
The collateral warranty is dated 24 June and 28 August 2013, and the present action was
raised within five years of the granting of the collateral warranty. Consequently, if the
relevant prescriptive period runs from the date when the collateral warranty was granted,
the present action was raised within the prescriptive period. The defender contends,
however, that under the terms of the collateral warranty it was subject to the same
prescriptive period as applied under the original design and build contract. The existence of
the flooding in the car park was known by the time of Colliers’ report, and the prescriptive
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period must therefore run from no later than May 2013. According to the defender, the fact
that the collateral warranty was only granted in June and August 2013 is immaterial,
because it is the prescriptive period incorporated into the design and build contract that is
applicable, not the period that would have been imposed under the statutory law of
prescription. Put shortly, the defender’s contention is that its obligations under the
collateral warranty are subject to a contractual time limitation rather than the general law.
[5] The action proceeded to a debate before the Commercial Judge on the question of
whether the defender is correct in its argument based on the application of a conventional
period of time limitation. The Commercial Judge held that the pursuers’ construction was
correct and that the defender’s plea of prescription accordingly fell to be repelled. The
defender has reclaimed against her interlocutor to that effect.
Contractual construction
[6] The fundamental issue in the present case turns on the construction of the Collateral
Warranty Agreement granted by the defender in favour of the pursuers. 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 correct approach is described in a
substantial number of cases; for present purposes it is perhaps sufficient to note the
[7] The result of these cases is that contractual provisions must be construed in
accordance with the objective intention of the parties: the intention that reasonable persons
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would have had in the parties’ position had they possessed the same background
knowledge. It is also appropriate to rely on commercial common sense. The exercise of
construction should be both purposive and contextual. Purposive interpretation means that
the court should attempt to give effect to the primary purposes that, objectively, the parties
intended at the time of the contract. Determining those purposes will obviously turn on the
wording used, but that wording must be considered in in such a way as to give effect to the
primary objectives of the contract rather than giving undue influence to minor provisions or
niceties of wording. In our opinion the underlying commercial purpose of a collateral
warranty is of importance in the present case. 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, not to extend the obligations of the contractor to the
beneficiary of the warranty beyond those undertaken in favour of the original developer.
Details of the wording used should not obscure that basic objective.
[8] Contextual construction means that the wording used in the contract must be
construed against the background known to the parties at the time. Context can take many
forms. First, with building projects, the roles of the various persons involved, in the totality
of the contracts governing the project, including subcontractors, are an important
component. Secondly, the collateral warranty itself, like any other contract, must be
construed as a whole. Thirdly, the general legal context will usually be relevant. In the
present case that includes the rules of prescription, and also the rules of law relating to
contractual defences and limitations. It also includes the primary legal reasons that
collateral warranties are used: the principle of privity of contract, the impact of the decision
caused by the failure of a contractor or a member of the design team to use proper care and
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skill from falling into a so-called “black hole”, so that the person suffering the loss is unable
to obtain compensation.
Collateral warranties
[9] The development of the collateral warranty, and the reasons for its use, are discussed
[17] -[18]. Collateral warranties are now widely used in all major construction projects. They
were developed following the decision of the House of Lords in Murphy v Brentwood Council,
supra. Prior to that decision it was clear that, by virtue of the doctrine of privity of contract,
a contractual duty of care could only arise as between persons who were in a direct
contractual relationship with each other. Thus the contractor in the building contract would
owe contractual duties of care to its original employer, but would not owe any such duty to
persons such as a subsequent purchaser or tenant of the development. It had been thought
on the basis of decisions of the House of Lords in cases such as Anns v Merton London
delictual duty of care might arise in such circumstances. In Murphy, however, it was held
that, while contractors and others engaged in building projects might be liable in delict or
tort to third parties who are injured or whose property is injured in consequence of the
negligent performance of work, that duty does not extend to an owner of the property on
which the work was carried out or any person whose rights in the property are derived from
the owner, such as a tenant. 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; common law duties to use reasonable skill and care did not
extend to such loss. Consequently, if the owner of the building or any person deriving title
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from the original owner were to have any right to recover damages for the negligent design
or construction of the building, that right must be founded in contract.
[10] Among those involved in building contracts it was thought that it was generally
reasonable that the duties of care incumbent on a contractor or a member of the design team
in favour of their original employer should extend to those such as purchasers and tenants
who acquired an interest from the employer. After the property was sold or let, the loss
arising from defective design or workmanship, usually in the form of payment for remedial
work, was likely to fall on the owner or tenant for the time being. The purchaser or tenant,
however, had no contractual relationship with the contractor or design team. The original
employer had such a relationship, but as it had sold the property it suffered no loss. If no
action were taken, therefore, the loss was likely to fall into a so-called “black hole”: the party
with a right of action against the negligent contractor or designer (the original employer)
had suffered no loss, and the party that suffered the loss (the purchaser or tenant) had no
right of action. It has been remarked that in a well regulated legal universe black holes
should not exist; the reasons are obvious. It was to deal with this problem that collateral
warranties came into general use.
[11] The purpose of a collateral warranty, which is important in the present case, is
accordingly to create an express contractual provision whereby the contractor or a
subcontractor or a member of the design team undertakes a duty of care to persons such as a
purchaser of an interest in the development from the original employer, or a person who has
obtained a tenancy or security right in the development from the employer. The collateral
warranty is an independent contractual undertaking between on one hand a contractor or
subcontractor or member of the design team and on the other hand persons who acquire an
interest in the property from the original developer, who will normally have been the
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employer in the main building contract or in contracts for architectural and engineering
services.
“The purpose of a collateral warranty… is to provide a right of action between
parties who, under the standard legal structures used in construction contracts,
would not otherwise be in any contractual relationship; it thus confers title to sue on
the grantee of the warranty. A collateral warranty constitutes a contract between the
granter and the grantee. Under that contract, the granter undertakes that it will
perform specified works to a standard of competent workmanship (in the case of a
contractor), or will provide specified services and observe proper professional
standards of skill and care (in the case of an architect or engineer). If the granter fails
to perform its duties to the required standard, the grantee can raise an action to
compel such performance…. Alternatively, if the grantee suffers financial loss as a
result of the defective performance, it may raise proceedings against the granter in
order to recover the amount of that loss”: Scottish Widows at paragraph [17]
[12] The foregoing legal and commercial context in which collateral warranties have
come to be used demonstrates an important feature of their purpose. This is to provide
persons such as a purchaser or tenant or security holder with rights against the contractor,
or a subcontractor or member of the design team, that are equivalent to the rights that were
enjoyed by the original employer under the building contract and the ancillary contracts
with architects, engineers, subcontractors and others. The notion of equivalence is central.
The purpose of the warranty is not to provide purchasers, tenants and security holders with
rights greater than those held by the original employer; to do so would make no commercial
sense. Equivalence accordingly requires not merely that the beneficiary of the warranty
should have the same affirmative rights of action as the original employer; it also requires
that those rights of action should be subject to the same qualifications, limitations and
defences as were available to the contractor in respect of the original building contract.
[13] The present action relates to a design and build contract, and consequently a single
person, the design and build contractor, is responsible for both the works of construction
and the design of the development. Obviously the design works may be subcontracted by
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the design and build contractor, to architects or various types of engineer, but it is the design
and build contractor who is responsible to the original employer (the developer) for the
work of such subcontractors. Nevertheless, the fundamental purpose of the warranty
remains that of placing purchasers, tenants and others who acquire an interest in the
development in an equivalent position to the employer of the design and build contractor.
As already noted, that purpose is in our opinion of fundamental importance in construing
the terms of any collateral warranty.
[14] Construction contracts and contracts with professionals in the building industry are
almost invariably governed by standard forms. In these, it is normal to find that express
duties of skill and care are set out. At the same time, however, those duties will invariably
be qualified by a range of limitations or defences. These may include, for example,
limitations on the standards of care and standards of workmanship that are required, or
provisions that qualify the right to payment. An arbitration clause is almost invariably
found. The limitations may also include express time-bar provisions. In the present case an
example of this is found in clause 3.2 of the Collateral Warranty Agreement, discussed
below at paragraph [24], which provides that no proceedings for breach of the agreement
may be commenced against the contractor after 12 years from issue of the final statement of
practical completion. In addition to such express provisions, however, the general statutory
law of prescription applies to every building contract.
[15] The reasons for imposing a time bar on rights of action are well known. Three
reasons are of particular importance in relation to construction contracts. First, with the
passage of time, there is an obvious risk that evidence will be lost; the contractual
documentation may have been destroyed or mislaid, and the recollection of witnesses will
inevitably deteriorate. Thus it may be impossible to reconstruct the circumstances of the
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original project. This may obviously prejudice the building owner’s presentation of a claim,
but it may also prejudice the ability of the contractor or member of the design team to
present an effective defence. Secondly, there must come a point in the conduct of affairs
when finality is achieved, so that the persons involved can move on without the risk of
latent claims against them. This is particularly important when potential liabilities are the
subject of insurance. For example, an architect or engineer will invariably have professional
indemnity insurance, and must be able to say with certainty that before a certain point there
are no possible claims against it. Thirdly, in relation to construction contracts, buildings
typically have a long life, and there is therefore a significant risk that claims for negligence
might be made in respect of latent defects that only appear many years after the work was
carried out. By that time, of course, the danger of loss of evidence may be acute, and the risk
to an insurer is also serious.
[16] Because of the importance of time-bar provisions to contractors and designers, we
are 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. We cannot conceive of any policy reason to the contrary.
Obviously it is possible for the parties to a collateral warranty to agree on a different time
bar from that under the building contract, subject to the mandatory nature of the statutory
law of prescription, but in construing contractual provisions the norm must, we think, be
that the same time bar should apply to all the potential liabilities of the contractor and the
design team.
The Design and Build Contract between Northburn and the defender
[17] The importance of contractual defences and limitations of liability is illustrated by
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the facts of the present case. The design and build contract between Northern and the
defender is governed by the SBCC Design and Build Contract for use in Scotland (DB/Scot),
2005 Edition, October 2007 Revision, amended as indicated in paragraph [1] above. This is
one of the standard forms of contract developed (and revised periodically) by the Scottish
Building Contracts Committee, which represents the various commercial and professional
groups that are interested in building contracts and ancillary contracts for matters such as
architectural and engineering services and has the benefit of expert legal advice. The SBCC
generally aims at striking a balance among the various parties involved in a building
contract, although inevitably it does so at a general level having regard to normal or typical
features of the type of contract in question rather than specific features of a particular
project. Nevertheless, the balance that is struck in the standard forms of building contract
includes not merely the affirmative duties and responsibilities but also a range of limitations
and defences on liability. These features of the contract must in our opinion be considered
as a totality.
[18] Section 2 of DB/Scot deals with the carrying out of the Works (a defined term, which
refers to the works particularly described in the Contract Documents, including any changes
that are made). Clauses 2.1 and 2.2 set out the contractor’s obligations. The basic obligation
is found in paragraph 2.1.1, which provides as follows (words with capital letters being
defined terms):
“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”.
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Clause 2.2, which deals with materials, goods and workmanship, provides that these should
be of the standards described in the Employer’s Requirements or the Contractor’s Proposals.
Both the Employer’s Requirements and the Contractor’s Proposals are typically lengthy
documents which reflect the enormous amount of detail, at a practical level, that is required
in any building project other than the simplest. Clause 2.11.1 (as amended in April and
October 2007) provides that the Contractor accepts entire responsibility for the design of the
Works, all designs contained in the Employer’s Requirements and Contractor’s Proposals,
and all design work prepared before or after the date of the Contract and whether carried
out by or behalf of the Employer or the Contractor. Clause 2.11.2 (as amended) then
provides as follows:
“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”.
[19] The obligations of the design and build Contractor are, however, subject to important
limitations. Some of these are found in the contract; for example if a particular component is
specified in the Employer’s Requirements but turns out not to be fit for purpose, the design
and build contractor will not be liable because it is obliged by the terms of section 2 of
DB/Scot to follow those Requirements. Other limitations on liability are found in the general
law. For example, a material failure to perform by the employer may justify use of the
general contractual defence of retention. Set off and other similar defences will also apply.
The same applies to the statutory defence of prescription.
[20] The contract between Northburn and the defender, in the amendments issued in
April 2007 and pursuant to the revision of October 2007 (see paragraph [1] above) contains a
section, section 10, dealing with assignation, third-party rights and collateral warranties.
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This section inserts a new clause 7.4 into the standard form of contract DB/Scot in the
following terms:
“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:-
7.4.1 each Funder;
7.4.2 each Purchaser; and
7.4.3 each Tenant”.
The expression “Purchaser” is defined (clause 5.23 of the Amendments) as “each first and
second purchaser of the whole or each part of the Works”. The collateral warranty in the
present case was granted pursuant to clause 7.4.2, in favour of the pursuers as a Purchaser of
the whole of the development.
Terms of the Collateral Warranty Agreement
[21] The Collateral Warranty Agreement is a contract between the defender, described as
“the Contractor”, and the pursuers, described as “the Beneficiary”. It begins, in recital (A),
by referring to the Building Contract between Northburn and the defender and in recital (B)
to the fact that the Beneficiary had entered into an agreement with Northburn to purchase
the Development. In recital (D) it is narrated that the pursuers, as Beneficiary, had relied on
and would continue to rely upon the defender’s reasonable skill, care and attention in
respect of all matters covered by the warranty insofar as they related to the Works to be
carried out under the Building Contract.
[22] Clause 2 of the Collateral Warranty Agreement is headed “Contractor’s obligations”.
Clause 2.1 narrates that 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
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with and subject to the terms of the Building Contract”. Clause 2.2 contains a warranty as
follows:
“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”.
The closing words of that clause demonstrate the fundamental intention underlying a
standard collateral warranty that the beneficiary of a warranty should be placed in the same
position as the employer under the building contract to which the warranty relates; that is
the fundamental principle of equivalence.
[23] The principle of equivalence is made more explicit in clause 2.3, which provides:
“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”.
Clause 2.3, particularly in juxtaposition with clause 2.2, is in our opinion important. It
indicates that the defender’s duties to the pursuers as Beneficiary of the Collateral Warranty
Agreement are to be restricted to the duties incumbent on the defender in terms of the
building contract. The clear intention is that the liabilities undertaken by the defender under
the Warranty are to be equivalent to, but no greater than, the defender’s liabilities under the
Building Contract. This is hardly surprising; indeed, for reasons discussed previously, it
represents obvious commercial common sense. The Collateral Warranty is designed to place
the Beneficiary in the same position as if it were the employer under the building contract,
and thus to avoid the risk that loss will fall into a “black hole” because of the absence of any
contractual relationship between the contractor and the beneficiary. It is not, however,
intended to place the Beneficiary in a more favourable position than the original employer.
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There is no commercial reason for doing so, and if the Collateral Warranty had the effect of
conferring greater rights on the Beneficiary it could readily be regarded as unfair to the
contractor who grants the Warranty.
[24] The Collateral Warranty Agreement goes further in ensuring that defences that
would be available to the contractor under the Building Contract remain available as against
the Beneficiary of the Warranty. Clause 3 of the Agreement, headed “Limitation of
Liability”, is in the following terms:
“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”.
Once again, it is apparent that the intention, construed objectively, of the Collateral
Warranty Agreement is to place the parties to the Warranty in an equivalent position to that
of the employer and contractor under the design and build contract between Northburn and
the defender. That means that the beneficiary obtains the rights that Northburn had against
the defender but subject to the defences and limitations that the defender would have had
against Northburn. The objective is clearly to achieve equivalence; that follows from both
the purpose of the Collateral Warranty, considered in context, and commercial common
sense, applied to the parties’ relationships.
Prescription and the Collateral Warranty Agreement
[25] As already indicated, the critical question is whether clause 3 of the collateral
warranty, which imposes limitations on the liability of the defender, incorporates a
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contractual prescriptive period that corresponds to the prescriptive period that applied to
the defender’s liabilities to Northburn, or whether the general law of prescription operates
in such a way that a new prescriptive period runs from the date when the collateral
warranty was granted, on the basis that that is a new and distinct contract. If the former is
the correct interpretation, the pursuers’ claim is barred by a conventional time-bar provision;
if the latter, only the statutory period of prescription is relevant, running from the date when
the Collateral Warranty was granted, and that had not expired when the action was raised.
As a matter of principle we are of opinion that parties should be at liberty to agree in their
contract to impose a time limit on claims that is shorter than the statutory prescriptive
period. The statutory prescriptive period is essentially a default provision; if parties choose
in their contract to have claims under that contract cut off after a shorter period they may do
so. Indeed, that is a potential result of clause 3.2 of the Collateral Warranty, which imposes
a time limit of 12 years from the date of practical completion on any claims that may arise.
A period of 12 years from practical completion may expire before a latent defect becomes
manifest, or within five years after the date on which it becomes manifest, in which case the
contractual time bar will operate before the statutory time bar. That clause is clearly
designed to provide a long-stop bar against any claims against the defenders. The policy
reasons for doing so are obvious: it provides the parties with closure, and avoids any risk
arising from the loss of evidence as a result of the passage of time.
[26] Similar considerations apply to clause 3.1 of the collateral warranty. This entitles the
Contractor, the defender, in any 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”. As we have already indicated,
that wording must be read in the context of the structure of contracts applying to the
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development, and in the legal context: this includes both the general principle of privity of
contract and the restrictions placed on delictual claims for the defective construction or
design of a building. The fundamental purpose of the present collateral warranty appears
from that context. The collateral warranty is intended to deal with the “black hole” problem
by providing a purchaser of the development (or a tenant or a funder of the development:
see paragraph [21] above) with rights against the defender, the design and build Contractor,
that are equivalent to the rights enjoyed by the original developer, Northburn. The notion of
equivalence, however, requires that the rights transferred should be subject to all defences
and limitations that applied to Northburn. The intention of clause 3.1 was to incorporate
those defences and limitations into the relationship between the defender and any
Beneficiary such as the pursuers, to provide equivalence between the rights available to
Northburn and the rights available to the Beneficiary.
[27] When the wording of clause 3.1 of the Collateral Warranty Agreement is read in the
light of the context and the underlying purpose of a collateral warranty, it is clear in our
opinion that it incorporates a conventional prescriptive period that corresponds to the
statutory period of prescription that applied to Northburn in any claim under the original
building contract. Clause 3.1 entitles the defender “to rely on any limitation in the Building
Contract” and “to raise the equivalent rights in defence of liability” as it would have had
under the building contract. Those words must be given a purposive meaning. Their
purpose is clearly to achieve equivalence between the obligations and liabilities undertaken
by the defender under the building contract with Northburn and the obligations and
liabilities undertaken under the collateral warranty. The right to plead that a claim has
prescribed is plainly a right “in defence of liability”: that is the function of prescription. It
might also be regarded as a “limitation” in the Building Contract, as it restricts the rights of
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the original developer, Northburn, to make claims against the contractor. In either event, the
wording of the clause is plainly sufficient to include a defence of prescription. On a
contextual and purposive interpretation, and having due regard to commercial common
sense, the effect of clause 3.1 is to incorporate the same prescriptive period as applied to any
claim by Northburn, albeit that that prescriptive period is created by the parties’ contractual
arrangements rather than by the operation of statutory prescription under the Prescription
and Limitation (Scotland) Act 1973, as amended. If further confirmation were required,
clause 2.3 of the Collateral Warranty Agreement incorporates the principle of equivalence in
express terms, by providing that the Contractor is to have “no greater duty to the
Beneficiary ... than it would have if the Beneficiary had been named as the employer under
the Building Contract”. That provision puts matters beyond doubt.
[28] In clause 3.1 the words in parentheses (see paragraph [24] above) contain a list of
exceptions. These relate to rights of counterclaim or set-off, or the right to state “a defence of
no loss or a different loss has been suffered by the Employer than the Beneficiary” (sic). The
reason for excluding these three categories of defence is that they are personal to the party
against whom the defence is asserted; in other words, they depend upon certain specific
aspects of the relationship between the Contractor on one hand and the original Employer
on the other hand. Counterclaim is only relevant if the Contractor and the Employer have
claims against each other, as it requires that these claims should be litigated or processed
and ultimately set off against each other. The fact that the Contractor and the Employer may
have had claims against each other is not relevant to the rights that a Beneficiary might have
against the Contractor, as the Contractor does not have the claim against the Beneficiary that
it might have had against the original Employer. The same is true of rights of set-off; once
again these can only arise if the Contractor and the original Employer had claims against
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each other that may be set off, through the right of retention or the assertion of a
counterclaim.
[29] The third exception is the defence that either the Employer has suffered no loss or it
had suffered a different loss from the Beneficiary of the Collateral Warranty. Once again,
such a defence is personal to the Employer, and does not extend to the Beneficiary. So far as
no loss is concerned, if a latent defect only becomes apparent after the property has been
sold to a purchaser, the Employer will not suffer any loss because it has transferred the
property and obtained what must be presumed to be the market price for it. So far as a
different loss is concerned, if the Employer makes a claim in respect of a defect that has
become apparent during his period of ownership, and subsequently transfers the property
to a purchaser, which then becomes aware of a defect that was previously latent, the
Employer and the purchaser will have suffered different losses. Neither can make a claim in
respect of the loss suffered by the other. This is all that the third exception is designed to
achieve; it is based on the fact that a loss may be personal (or specific) to either the Employer
or the purchaser from the Employer, the Beneficiary, and in such a case neither of those
parties can recover for the loss suffered by the other.
[30] It follows that the exceptions in parentheses in clause 3.1 have no bearing on the
basic proposition that the clause is intended to ensure that, as against the Contractor, the
Beneficiary of the Collateral Warranty is provided with equivalent rights to the original
Employer. Those exceptions are cases where there is no equivalence between the Employer
and the Beneficiary, and consequently they are expressly excluded. If anything, that affirms
the general proposition, that a collateral warranty is intended to achieve equivalence of
rights as between the original owner of a development and any purchaser or tenant or
funder who derives rights from the original owner.
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Conclusion
[31] For the foregoing reasons we are of opinion that the Collateral Warranty Agreement
is intended to confer on the defender as Contractor the same defences against a Beneficiary
as would be available against the original Employer, Northburn. For the reasons already
given, that means that any claim by the pursuers as Beneficiary under the Collateral
Warranty Agreement must be subject to the same prescriptive period, with the same
terminus, as would have applied to a claim made by Northburn. That prescriptive period
operates by virtue of the parties’ contract, as embodied in the Collateral Warranty
Agreement, rather than the general statutory law of prescription, but as we have indicated
that appears to be the clear meaning of the contract, properly construed.
[32] The defender’s liability to the original Employer, Northburn, was extinguished by
prescription at latest five years after the report obtained from Colliers International, which
described the drainage problems in the car park and attributed them to fault on the part of
the defender as Contractor. The effect of clause 3.1 of the Collateral Warranty Agreement is
therefore to extinguish any claim by the pursuers against the defender based on the
drainage problem.
[33] We are accordingly of opinion the defender’s construction of the Collateral Warranty
Agreement is correct. We will allow the reclaiming motion, recall the interlocutors of the
Commercial Judge, dated 8 January 2019 and 16 January 2019 in so far as dealing with the
expenses of the debate, sustain the defender’s first plea-in-law to the extent of excluding
from probation the pursuers’ averments relating to the construction of clause 3.1 of the
Collateral Warranty (found in article 6 of condescendence, from “Clause 3.1 of the Collateral
Warranty on its proper construction” to the end of the article). We will further repel the
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pursuers’ first plea-in-law (to the relevancy of the defender’s averments), insofar as it relates
to issues that were the subject of the present reclaiming motion, and the pursuers’ second
plea-in-law, which challenges the relevancy of the defender’s averments relating to clause
3.1 of the Collateral Warranty. Thereafter we will remit the case to the Commercial Judge to
proceed as accords.