Shining a light on the right to collateral warranties


Manus Quigg is a partner and Claire Rice is a senior associate at law firm Brodies

A recent Scottish case over a building project in Edinburgh has shone a spotlight on prescription and third-party rights in the context of delivery of collateral warranties.

Allenbuild was the design-and-build contractor and the Engine Yard Edinburgh Ltd was developer and landowner on the project.

In 2017, Allenbuild appointed Bayne Stevenson Associates as structural engineer to deliver collateral warranties on the project, but the Engine Yard was not a party to this appointment.

“The court considered that the contractual structure pointed away from an intention to create third-party rights”

On 25 August 2022, Allenbuild made a written request to Bayne Stevenson for provision of a collateral warranty in favour of the Engine Yard. No warranty was delivered to either Allenbuild or the Engine Yard.

The Engine Yard and Allenbuild raised a court action against Bayne Stevenson seeking damages for the cost of remedial works that were carried out on the project. The Engine Yard sought a declarator that the terms of the appointment intended to benefit it by providing a collateral warranty in its favour and that this created a third-party right for it to sue Bayne Stevenson for the execution and delivery of a collateral warranty, despite it not being a party to the appointment.

Bayne Stevenson argued that no third-party rights had been created by the terms of the appointment, as the structure of the contracts pointed away from any intention to create third-party rights. The appointment did confer a right for Allenbuild to request a collateral warranty in favour of the Engine Yard, but did not give the Engine Yard any automatic rights. In any event – and crucially – Bayne Stevenson argued that any right to require the collateral warranty had prescribed, as no relevant claim had been made within five years of the execution of the appointment.

In its decision, the court considered that the contractual structure pointed away from an intention to create third-party rights. There were three contracts among the parties – two expressly excluded third-party rights and the third did not mention them. The court said this formed “an awkward background into which to imply a ius quaesitum tertio [third-party right]”.

The court also considered that Allenbuild had its own interest in being able to demand a collateral warranty in favour of the Engine Yard, so it was not obvious that the inclusion in the contract of a clause providing for the delivery of collateral warranties was for the benefit of the Engine Yard. The court accordingly rejected the proposition that a third-party right had been created.

Prescription

The court held that there was a presumption that the obligation to deliver a collateral warranty was ‘pure and enforceable’ at once (i.e. when the appointment was executed). Allenbuild could not have demanded performance of the obligation if it had not already been in existence, and there was nothing in the appointment to displace the presumption that this obligation existed from the date of its execution.

The court compared this situation with that of a loan repayable on demand – the obligation to pay exists from the outset and the demand for payment affects only the performance of an existing obligation. It does not create a new one.

It therefore followed that Allenbuild’s right to require that Bayne Stevenson deliver a collateral warranty executed in favour of the Engine Yard had prescribed.

For contractors, this means that if an executed collateral warranty is not obtained within five years from the date that the right to a warranty was created, the beneficiary may lose their right to obtain one. Without a collateral warranty, it will be difficult to pursue a remedy against the defaulting party.

The case also shows that courts will be reluctant to create third-party rights where there is an existing contractual structure in place between the parties.

Brodies acted for Bayne Stevenson in the case 



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