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Collateral Warranties : When might the protection end?

In the recent case of British Overseas Bank Nominees Ltd and others v Stewart Milne Group Ltd [2019] the Inner House of the Court of Session in Scotland, whose decisions are of persuasive authority in England, considered the terms of a collateral warranty granted by a design and build contractor in favour of the purchasers of a development from the original developer.

Background

Collateral warranties were developed following the decision in Murphy v. Brentwood DC [1991], which exposed the legal black hole that occurred when a property had been sold or let and there was a loss arising from defective design or workmanship. They are designed to give persons who are not parties to contracts rights of action against original contractors, consultants and sub-contactors where no such right of action would otherwise arise – the intention being that the rights given by the Warranty should be no greater or more extensive than the rights under any original contract or appointment to which they referred.

In British Overseas Bank the Defendant had entered into a design and build contract with a developer for the construction of retail units. The contract imposed obligations on the Defendant in general terms to use proper skill and care.  It required the Defendant to grant collateral warranties in favour of any person who might subsequently acquire an interest in the development as purchaser or tenant.  The warranty contained the classic language providing rights to rely upon any defence or limitation under the underlying contract and the liability to be no greater than that under the underlying contract.

The critical question was whether any action under the collateral warranty was statute barred i.e. could not be pursued by virtue of the limitation period (described as the prescription period in Scottish Law).  If the collateral warranty was governed by the prescription period under the original contract then the claim was barred.  However, if a new prescription period was created by the warranty then it was not barred.

The Court held that the warranty was a contract in its own right distinct from, although dependent on, the building contract to which it related.  As a contract the warranty had to be construed in the same way as contracts generally, and contractual provisions had to be interpreted in accordance with the objective intention of the parties.  The underlying commercial purpose of the warranty was to place the beneficiary and the contractor in an equivalent position to the original employer and the contractor; not to extend obligations of the contractor to the beneficiary.

As such, the Defendant’s liability to the beneficiary was extinguished by the same prescription period as under the underlying contract.

Comment

Most collateral warranties have similar provisions providing equivalent rights of defence and reliance on limitation and liability provisions under the original contract.

Whilst only of persuasive authority, consideration needs to be given as to whether existing warranties will have a shorter life span than previously thought. In terms of new warranties, it is also worth considering whether they should accommodate the effect of the British Overseas Bank Nominees decision and provide for a separate limitation period.

If you or your business would benefit from help and advice on collateral warranties, or if you have any other construction issue, please get in touch with Martin Collingwood, head of our construction unit, on 01482 325242 or email martin.collingwood@andrewjackson.co.uk

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