British Overseas Bank & Henderson v. Stewart Milne Group

Towards the end of 2018, a Scottish court threw a spanner in the works of those seeking to limit their liability in collateral warranties, by ruling that a prescription period (limitation period) in a collateral warranty was not impacted by the presence of ‘no greater liability’ and ‘equivalent rights’ clauses, which would otherwise have had the effect of ‘time barring’ the claim.

Both clauses will be familiar to clients throughout the UK, as a way of trying to ensure that any limitations or defences that are exercisable in an appointment document are brought into play in relation to any claim by a beneficiary in the warranty.  In addition to the long-standing commercial use of such clauses to achieve this very goal, there was also judicial support for this position in the case of the TCC’s decision in Swansea Stadium Management Company Limited v City & County of Swansea.  In this case, the TCC held that such clauses did bind the beneficiary of the warranty to the limitation period under the building contract.

Last month, the Scottish appeal court seemed to agree with the TCC and reversed the decision of the lower court, bringing contracts entered into under Scots law more in line with the position in England and Wales – for now.  It appears that the judgement may well be the subject of an appeal to the UK Supreme Court, and it is timely to look at the arguments in the appeal and consider the likely effect on contract negotiation north of the border.

The facts

In August 2008, Stewart Milne Group Limited (‘Stewart Milne’) contracted with Northburn Developments Ltd (‘Northburn’) to design and construct a development of retail units, service yards and car parking at a new development in Inverurie.  The contract was a typical design and build form, requiring collateral warranties to be provided to parties acquiring an interest in the development.  The development was constructed during 2009 and achieved practical completion the same year.

It later became apparent that the site suffered from flooding at the northern edge of the car park.  A report into the problems alleged that the cause of the flooding was due to the car park having an inadequate gradient to manage ordinary surplus water and that standard remedial measures had not been taken.

In June 2013, Janus Henderson Ltd (‘Henderson’) bought the site and later in August received collateral warranties from Stewart Milne.

In June 2018, Henderson sued Stewart Milne for the costs of remedying defects in the car park, relying on the collateral warranty that existed between them.

The key issues

Stewart Milne’s defence was one of ‘prescription’ (or that the claim was time barred) and they argued that any liability they had under the building contract to the employer, Northburn, would have been extinguished by the time the warranty beneficiary, Henderson, brought their claim.  Consequently, given that the intention of the ‘no greater liability’ and ‘equivalent rights’ clauses was to frame their liability to the warranty beneficiary in the same terms as to the employer, any liability they might have to the beneficiary was also extinguished.

Henderson argued that the liabilities under the warranty were entirely separate and that the prescription period should have started to run upon execution of the warranties, in which case their claim would be in time.

The decision and the appeal

At first instance, the Scottish court held that in Scots law, the collateral warranty created a new prescription period in which time the beneficiary of the warranty could bring a claim.  The court held on the facts and the particular wording used in the warranty, that the clauses were not enough to cut short a new statutory limitation provision.

This month, the appeal court in Scotland has reversed this decision, bringing contracts entered into under Scots law more in line with the position in England and Wales and is a welcome result for consultants north of the border.

The appellate court was very concerned about attempting to give effect to the parties’ primary commercial purposes, rather than worrying too much about the ‘niceties of wording’.  They set a great deal of store behind the underlying purpose of collateral warranties which was to “…place the beneficiary and the contractor in an equivalent position to the original developer and the contractor…” and not to “…extend the obligations of the beneficiary of the warranty beyond those undertaken in favour of the original developer”.  The details of the wording, they argued, should not obscure this basic aim.

The Court also considered the commercial importance of time-bar provisions, which they recognised were vital in ensuring that ‘stale claims’ could not resurface long after records had been lost and memories had grown vague.  They also considered the relevancy of the burden of maintaining Professional Indemnity insurance and the need to have the opportunity to be able to draw a line under one’s liability for work at a certain point.

Comment

• The result of the appeal now sees the position in Scotland more akin to England and Wales. Taking into account this decision and the TCC’s decision in the Swansea case, we can be more certain that the court will give effect to a ‘no greater liability’ clause supporting an argument that the beneficiary of a collateral warranty was bound to the same limitation period as the parties under the building contract.  Similarly, we can now be more confident of the incorporation within the warranty of other defences that are contained within the underlying appointment.

• The decision reflects the current state of the art in relation to the Scottish law – it should be noted that there is an expectation that the decision of the Scottish appeal court will itself be appealed to the UK Supreme Court. Amongst other grounds, the appeal court’s reliance on the ‘purposive approach’ to contractual interpretation goes against recent Supreme Court rulings, where the Supreme Court took a more literal approach to adjudicating as to what the contract actually said, rather than what the parties intended.  It may be that the UK Supreme Court concerns itself more with the “niceties of wording” rather than the commercial intention of the parties.

• It should also be borne in mind that the Scottish legislative position on prescription will be subject to a number of changes, when the Prescription (Scotland) Act 2018 comes in to force. The most relevant to us, will be the changes to the commencement of the prescription periods, which should have the effect of allowing time ‘to run’ from an earlier point.  The precise changes are beyond the scope of this article and we may issue guidance when the Act finally comes into force.