Legal Q&A: Collateral warranties
Karen Cossar, Senior Associate, CMS Cameron McKenna Nabarro Olswang
THE right to call for collateral warranties is a standard provision within professional consultant appointments, whether those are warranties for funders, purchasers, tenants or employers where an appointment has been novated. This obligation is also commonly seen in sub-appointments where subconsultants are carrying out significant design obligations.
A recent case from the Outer House of the Court of Session in Scotland, Engine Yard Edinburgh Ltd and Allenbuild Ltd v Bayne Stevenson Associates Limited (2024) COSH 13, has provided guidance that the right to demand a warranty would be caught by the laws of prescription and therefore be limited to five years from the date on which the underlying document was signed.
Background
In Scotland, the Prescription and Limitation (Scotland) Act 1973 governs prescriptive periods. It stipulates that certain obligations within construction contracts are extinguished if no relevant claim has been made within a continuous period of five years. The act cannot be contracted out of.
The right to call for collateral warranties is a standard provision within professional consultant appointments, whether those are warranties for funders, purchasers, tenants or employers where an appointment has been novated.This differs from the position in England where the Limitation Act 1980 limits the ability to sue for breach of an obligation within either six or 12 years, depending on whether or not the contract has been signed as a deed. This can be contracted out of by agreement between the parties.
In the Court of Session, the contractor (Allenbuild Limited) appointed a structural engineer (Bayne Stevenson) to carry out services as part of the project.
The appointment contained an obligation to provide a collateral warranty in favour of the named employer, who was not party to the contract, upon request.
The appointment was executed on 14 April and 22 May 2017, and the request was made for the collateral warranty on 25 August 2022 (more than five years after execution).
The structural engineer argued that it was not any obligation which it had to provide the collateral warranty had prescribed on the basis that the five year prescriptive period started on the date that the appointment was signed, rather than the date of the request to provide the warranty.
The contractor argued that due to the wording of the particular clause, the obligation did not become ‘pure and enforceable’ until the request was made.
A recent case from the Outer House of the Court of Session in Scotland, Engine Yard Edinburgh Ltd and Allenbuild Ltd v Bayne Stevenson Associates Limited (2024) COSH 13, has provided guidance that the right to demand a warranty would be caught by the laws of prescription.The court found that the obligation to deliver a collateral warranty commenced on the date that the appointment was signed and therefore the request for the collateral warranty more than five years after this date was time-barred.
How does this affect my appointments/ subconsultant appointments?
Firstly, it is important to note that this decision has been made in the Scottish courts, and it is therefore unclear where the decision would be upheld in the English courts.
Whilst the courts south of the border are not bound by decisions in Scotland, and vice versa, we know that decisions in one jurisdiction can be persuasive in the courts of the other, and there is no particular reason why an English court wouldn’t make a similar finding.
In Scotland, for appointments which have been entered into more than five years ago, the obligation to provide collateral warranties may be limited as the Prescription and Limitation (Scotland) Act 1973 cannot be contracted out of and will apply to all Scottish law governed appointments.
Therefore, where there is a request for a collateral warranty, the dates of the relevant underlying documentation should be considered.
However, as parties can agree to contract out of the limitation periods applicable by law, it would be sensible to include clear drafting in the collateral warranties clause which states when such obligation will expire.It is also important to ensure that, where appointing a subconsultant, that the obligations to deliver subconsultant warranties up the chain can be complied with. This may prove problematic where a main appointment is governed by English law, with sub-appointments being governed by Scots law.
In this instance, the obligation to provide a warranty under the subconsultant appointment may prescribe before the obligation on the consultant in the main appointment, leaving the consultant in breach of its own obligations under the main appointment.
When obtaining subconsultant collateral warranties, it is prudent to obtain such warranties as early as possible following signature of the subconsultant appointment in order to avoid potential arguments around prescription down the line.
In England, it is unclear to see whether the decision will be followed. However, as parties can agree to contract out of the limitation periods applicable by law, it would be sensible to include clear drafting in the collateral warranties clause which states when such obligation will expire.
Karen Cossar, senior associate, CMS Cameron McKenna Nabarro Olswang LLP