Collateral warranties in construction projects: Timing is key

A recent Court of Session judgment has changed the landscape of when parties may have the right to require collateral warranties from construction parties.

In The Engine Yard Edinburgh Limited and Allenbuild Limited v Bayne Stevenson Associates Limited the court considered the time bar period for the right to require delivery of a collateral warranty, under a consultant’s appointment. It found a written request for the warranty did not crystallise this right. Time bar ran from when the appointment was entered into, not from when the warranty was requested.

This decision will impact market practice and will be of interest to anyone negotiating, obtaining or delivering collateral warranties in Scotland.

Key facts

• The Engine Yard Edinburgh project was developed by Places for People Developments Limited (PPDL).
• PPDL appointed two of its subsidiaries – Allenbuild Limited (second pursuer) as design and build contractor in March 2017; and The Engine Yard Edinburgh Limited which owned the land (first pursuer), to project manage in September 2017.
• The Contractor appointed Bayne Stevenson Associates Limited (defender) as structural engineer under an appointment letter in April / May 2017.
• In what is common wording, clause 6.1 of the appointment letter required the Engineer to execute and deliver a collateral warranty in the form annexed, or such other form as the Contractor reasonably required, in favour of The Engine Yard and/or any lessee, purchaser or funder, within 7 days of written request. (Although there was actually no form annexed.)
• Issues arose which the Contractor said resulted from the Engineer’s performance. Remedial works were required “at considerable cost” during 2020 and 2021.
• The Contractor made a written request for a collateral warranty from the Engineer in August 2022, some 4 years after the appointment letter was entered into. The collateral warranty was not delivered.
• In court, the pursuers sought delivery of the collateral warranty and payment for defective performance. That court action was started more than 5 years after the appointment letter was entered into.

Defender’s position

The Engineer claimed any right to require it to execute and deliver up the collateral warranty had time barred after 5 years (“prescribed”). That 5-year time bar period comes from the Prescription and Limitation (Scotland) Act 1973, but the clock will be stopped if a court action is raised. The Engineer said the obligation under clause 6.1 ran from May 2017, when the appointment letter was entered into. As no court claim was made within 5 years, the right was time barred and therefore extinguished.

Pursuers’ position

The pursuers said a proper construction of clause 6.1 required to give effect to the natural and ordinary meaning of the words used. Those words were clear and unambiguous. They identified a “written request” as the trigger which crystallised the obligation to deliver. Therefore the time bar clock ran from August 2022, when the written request for the collateral warranty was made. As the court action had been raised within 5 years of that request, the right had not time barred.  This was reinforced by clause 6.1 allowing the Contractor to identify and request a form of wording for the collateral warranty.  The Engineer would not know the form of warranty to issue if it was not given a request first.

Judgment

The court said a contractual obligation is usually presumed to be “pure and enforceable” at once, unless the contract provides otherwise. Nothing in clause 6.1 displaced that presumption. The Contractor could have enforced the Engineer’s obligation to execute and deliver a collateral warranty as soon as the appointment letter was entered into. The potential uncertainty over the warranty terms did not render the underlying obligation unenforceable unless and until resolved. The 7-day period for delivery related to performance of the obligation, not its existence.

Therefore the obligation to execute and deliver the collateral warranty existed since the letter of appointment was entered into. This was more than 5 years ago, without the time bar clock being stopped. The Contractor no longer had the right to a collateral warranty from the Engineer.

Implications

Collateral warranties are an important part of the contractual matrix in many construction projects. Parties like employers, tenants, purchasers and funders rely on them to protect their interests, by accessing rights in underlying contracts or appointments.

This decision will change the practice and timing of obtaining and delivering collateral warranties. It also raises questions where the identity of a beneficiary, such as a subsequent purchaser, is unknown until more than 5 years after a contract or appointment is entered into.

There may be more to come on this or other decisions. Meantime key implications are:

• the specific wording in any contract or appointment requiring collateral warranties may affect the time bar consequences;
• here, the 5-year time bar ran from when the underlying appointment was entered into;
• new drafting may be negotiated, potentially starting the time bar clock at a later date;
• if a party requests a collateral warranty more than 5 years after the relevant contract or appointment was entered into, it may be refused or challenged by the granter on the basis of time bar;
• parties should check their contracts and delivery timescales, where collateral warranties have not yet been called for or executed and delivered.