Collateral warranties: Lost and found

How many lawyers does it take to change a light bulb? Not more than one or they’ll never agree on the definition of light bulb. It’s an old joke and one probably only lawyers find amusing, but the recent case of Glasgow airport vs Messrs Kirkman and Bradford brings it sharply to mind.

You might have thought there was a limited number of ways that the word “costs” could be interpreted. Just legal costs? Repair and renewal, perhaps? But if whoever had drafted a contract had meant all foreseeable losses flowing from the breach, they would have simply used the generic word “losses”, wouldn’t they? You might be surprised – and concerned if your in-house collateral warranties contain the word “costs”.

The word has been used to describe recoverable damages in countless warranties over the years, inspired by the “safe” option of following the pre-2005 version of the British Property Federation (BPF) collateral warranties. Why this word was selected for the BPF version at all remains a mystery to all but those who drafted it, and probably most of them, too. Thankfully, the 2005 BPF warranties put the matter beyond doubt and, instead, uses the all-encompassing term “losses”. Unfortunately as many bespoke warranties today still follow the wording of the earlier BPF version, which mention costs, there is a trail of confusion.

Take the Glasgow airport case. The airport appointed a contractor which, in turn, appointed an engineer to design a floor slab. Problems arose, so Glasgow airport sued the engineer for £2m under a collateral warranty that the engineer had provided.

Reflecting the original BPF wording, that warranty acknowledged an obligation on the engineer to exercise reasonable skill and care in performing its service. It went on to limit its liability in the event of a breach to “that proportion of such costs that would be just and equitable to require the engineer to pay”, continuing with a “net contribution” provision, which limited its liability to the share of damage for which it, rather than others, was responsible (a gross oversimplification of net contribution, I confess, but that is an entire subject in its own right and not really the issue here).

The engineer argued that the use of the word “costs” in the second (liability limiting) limb of the clause should also be used to interpret the first limb – the initial acknowledgement of liability. It further claimed that the word “costs” instead of “damages” must have been used for a reason, that is, to refer only to the costs of repair or reinstatement and not to all foreseeable losses which could flow from a breach.

It would be terribly unfair, it said, if it could be liable to assignees for such losses. Not surprisingly, the court gave this argument a swift smack on the head

As what might loosely be described as a supporting argument, accompanied by much barrel scraping, the engineer further claimed that the restrictive interpretation of “costs” was supported by the fact the warranty was assignable. It would be terribly unfair, it said, if it could be liable to unknown assignees for such potentially wide future losses. Inventive, sure enough. But not surprisingly, the court gave it a swift and swift smack on the head on the grounds it had no legal basis known to man.

Glasgow airport responded that liability in the warranty was stated generally and in an unrestricted manner and that to limit that, the language would have to be clear. This was anything but clear. It therefore insisted that “costs” here must mean any losses suffered by the client, subject to the normal rules of remoteness.

The court upheld the airport’s view. Although it has to be said that “costs” is a somewhat mystifying choice of word in the context and “losses” would have conveyed the point better, it is fairly evident that the second “net contribution” limb of the clause was intended to facilitate appropriate apportionment of the total damage between the culpable parties, rather than limit the categories of damage recoverable.

Being a Scottish case, this has what the English courts rather sniffily refer to as “mere persuasive value” south of the border. So, while it provides a convenient interpretation of “costs” in this context for the Scots, the rest of us are still dangling out there in legal limbo.

With that in mind, you may feel inclined to dig out your bespoke collateral warranties, have a good look at the wording and make sure it says what you actually intend.