Case Update – Can you rely on a collateral warranty granted after purchase?

The Scottish Court of Session recently published an appeal decision which will offer comfort to beneficiaries of collateral warranties, particularly purchasers of property.

In the Reclaiming motion in the case of Legal and General Assurance (Pensions Management) Limited against The Firm of Halliday Fraser Munro and Others, the Inner House  determined that, even where a collateral warranty is granted after the date of purchase of a property, that collateral warranty will still afford the beneficiary the right to make a claim against the granter. 

The Court also considered questions of prescription under collateral warranties and gave important guidance on the meaning of different drafting, which we will look at in our next article on this decision.

The Facts

In December 2013, Legal & General Assurance (Pensions Management) Limited (“L&G”) purchased Union Plaza in Aberdeen (the “Property”). L&G was the second purchaser of the Property. L&G was then granted collateral warranties from the architect and main contractor in January 2014 and assigned a collateral warranty granted by the engineer in favour of the first purchaser. When alleged defects arose throughout the superstructure and basement of the Property, L&G relied on these collateral warranties to bring claims against the parties.

The Outer House Decision

In their defence, the main contractor and the architect, Halliday Fraser Munro (“Halliday”), argued that, as the collateral warranties in favour of L&G had been granted after the date of purchase of the building, any breach of that collateral warranty “did not and could not have caused [L&G] to suffer loss”.

The Court rejected this argument entirely, stating that “[t]here is no reason why any person who becomes liable for the cost of repairing a defect in a building should not be entitled to sue for that cost provided he is the beneficiary of an appropriately worded collateral warranty granted by the person responsible for the defect”.

Halliday appealed against this decision to the Inner House.

The Inner House Decision

Again, Halliday argued that the loss forming the subject of L&G’s claim had already occurred at the time that L&G purchased the building and, therefore, prior to the granting of the collateral warranty. They argued that because the collateral warranty did not exist at the time of the loss, that loss could not be attributed to any breach of the collateral warranty. The purpose of the collateral warranty was to create a contractual link between entities who would otherwise have no such connection. It did not provide a guarantee against or an indemnity in respect of losses occurring before it was entered into.

L&G countered that the language of the collateral warranty was intended to give rise to liability on Halliday’s part to L&G in such circumstances, regardless of when the L&G acquired their interest in the allegedly defective Property.

The Court determined that this argument “fails to give effect to the clear terms and underlying purpose of the collateral warranty”, noting that its scope and effect fell to be determined by the normal rules and principles of contractual interpretation.

The Court stepped through the process as follows:

1. the original appointment agreement underlying the collateral warranty contains a duty of care which Halliday must apply when carrying out the services;
2. by way of the collateral warranty, Halliday undertakes to L&G that Halliday has applied such a standard of care;
3. if L&G can prove that Halliday has failed to do so, it follows that Halliday is in breach of their appointment agreement and has failed to carry out the undertaking made to L&G. Therefore, the Court decided that L&G was entitled to raise a claim for that failure against Halliday under the collateral warranty.

In short, the Court said that “if the warranted fact, circumstance or outcome turns out not to be true, the person who warranted that it was true will be liable for breach of their promise in warranting it”.

In line with the decision in the Outer House, the Inner House rejected Halliday’s argument and made clear the view that any other interpretation would be to deny meaningful effect to the collateral warranty.

Comment

This decision reinforces the understanding that the purpose of a collateral warranty is to create a contractual link between a beneficiary and granter, where such link would otherwise not exist and that the purpose of this link is to allow a beneficiary who has suffered loss as a result of the actions of the granter to take legal action against them. Halliday’s approach, which was roundly rejected in both the Outer and Inner House decisions, would result in losses from remedial costs falling into a legal “black hole”, an outcome which the collateral warranty was intended to prevent.

The Inner House has taken a clear view that a collateral warranty granted in favour of a purchaser will not be restricted or nullified due to the fact that it was entered into after the date of the purchase. The fact that the collateral warranty post-dated L&G’s purchase of the Property had no bearing on whether Halliday had fulfilled its obligations under that collateral warranty.

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