Collateral warranty: under the spotlight

The terms of collateral warranties have come under the spotlight again – this time looking at defences available against claims brought under them. Generally the principle is accepted that the giver of a warranty should have no greater liability to the beneficiary than it would have had to the client under the original appointment or building contract to which the warranty relates. A variety of clauses have been inserted into warranties to achieve that principle. But quite what the principle means in practice depends on both the drafting of the clause in question and the law governing the warranty – as illustrated by a couple of recent cases.

Last June Mrs Justice O’Farrell considered the terms of a warranty given by Interserve to the management company running Swansea Stadium (Swansea Stadium Management Company Ltd vs (1) City & County of Swansea and (2) Interserve Construction Ltd [2018] EWHC 2192). It was executed as a deed in April 2015 and a claim was brought under it in April 2017. However, practical completion had taken place in March 2005 – more than 12 years before proceedings commenced.  The question therefore arose whether the claim under the warranty would fail because of being brought too late.

Generally the principle is accepted that the giver of a warranty should have no greater liability to the beneficiary than it would have had to the client under the original building contract 

The court found the warranty had retrospective effect, so that any breach of the underlying building contract would have given rise to a claim under the warranty at the same time, even though the warranty was entered into at a later date. In addition it found that the key clause “the contractor shall have no greater liability under this [warranty] than it would have had if the beneficiary had been named as joint employer with the employer under the contract” meant that Interserve’s liability to the management company under the warranty was coterminous with its liability to the employer under the building contract. The argument raised on behalf of the management company that this clause affected only the nature and scope of Interserve’s liability, but not its duration, was rejected. As a result the management company’s claims for defects in the works were found to be time barred.

Quite what the principle means in practice depends on both the drafting of the clause in question and the law governing the warranty

Fast forward six months to the judgment of Lady Wolffe in British Overseas Bank Nominees Ltd and WGTC Nominees Ltd (nominees and trustees for the Janus Henderson UK Property PAIF) vs Stewart Milne Group Ltd [2018] CSOH 125. Stewart Milne constructed a car park in 2009 that the claimants bought in June 2013, obtaining a warranty from Stewart Milne in August 2013. Defects became apparent, in respect of which the claimants commenced proceedings in June 2018. Under Scottish law, any claims under the underlying building contract would be prescribed (time-barred) five years after practical completion (so in June 2014), so the question arose as to whether Stewart Milne could rely on this to defeat the claim against it under the warranty.

The defence clauses in this case were slightly different from in the Swansea Stadium case. Here the key clauses provided both that Stewart Milne “shall have no greater duty to the [claimants] under this [warranty] than it would have had if the [claimants] had been named as the employer under the building contract” and that it “shall be entitled in any action or proceedings by the [claimants] to raise the equivalent rights in defence of liability as it would have against the employer under the building contract”. 

In this case the court found that interpreting the warranty as having retrospective effect would not lead to the prescription (time limitation) for claims under the warranty starting any earlier than the date of the warranty itself. On that basis the five-year period started in August 2013 and the claim commenced in June 2018 was in time.

The court found the contractual defence clauses did not assist Stewart Milne. The first meant that the content and scope of Stewart Milne’s duties were equivalent to those owed to the employer but it did not affect the duration of those duties. On the second clause the court gave a perhaps surprisingly narrow interpretation, finding it did not affect the question of prescription as that arose by operation of law and therefore did not constitute a defence under the building contract. 

Might the result have been different if the first clause had referred to “liability” rather than “duty”?  Or if the phrase in the second clause had read “equivalent rights in defence of liability as it would have against the employer in respect of claims arising under the building contract”? Perhaps.

But the clearest way of dealing with the issue would be to refer specifically to duration in the defence clause. An alternative in England would be to provide for third party rights rather than warranties – as under the Contracts (Rights of Third Parties) Act 1999 the same limitation period can be relied on whether the claim is brought by the promisee or the third party.

Victoria Peckett is partner in, and co-head of the construction and engineering team at, CMS UK