Case Update: The importance of clear drafting in collateral warranties and time bar

The Scottish Court of Session recently published an appeal decision regarding the time bar period which is applicable to a claim by a beneficiary under a collateral warranty.

In our previous article here we wrote about how the appeal court determined that, even where a collateral warranty is granted after the date of purchase of a property, it stills give the beneficiary the right to make a claim against the granter.

In this article we take a further look at the decision, where the Court said that the wording contained in a collateral warranty was to be taken as a reflection of what was agreed between the parties, and it was reluctant to look beyond the wording to read in agreement as to further matters. In addition, there is no presumption that a collateral warranty should ‘normally’ be subject to the same time-bar as the underlying contract. This has implications for the drafting and use of collateral warranties in practice, placing emphasis on the terms expressly agreed by the parties and the language used in the provisions reflecting that agreement.

The facts

In December 2013, Legal & General Assurance (Pensions Management) Limited (“L&G”) purchased Union Plaza in Aberdeen (the “Property”). L&G were the second purchaser of the Property. L&G were 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 first decision

In their defence made to the Outer House of the Court of Session, 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”. As set out in our previous article on this case, the Court rejected this argument entirely.

Halliday also raised a time bar defence, arguing any liability which they may have owed to L&G had been extinguished by time bar i.e. short negative prescription. The Court also rejected this argument. Halliday appealed to the Inner House.

Halliday’s position

Clause 3.2 of the collateral warranty read – “No greater duties. [Halliday] shall owe no greater duties or obligations to [L&G] under the terms of this agreement than they would have owed to [L&G] had [L&G] been named as the Client under the Appointment save that this Agreement shall continue in full force and effect notwithstanding the determination of the Appointment for any reason”.

Halliday argued this wording meant the time bar period applicable to an employer’s claim under the architect appointment, would also be applicable to a claim by L&G under the collateral warranty.

Halliday cited the well-known case of British Overseas Bank v Stewart Milne Group [2019] CSIH 47, saying this sets out that a “no greater duties” provision is sufficient to incorporate into a collateral warranty the same time-bar period as the underlying appointment. In other words, that a “no greater duties” provision goes beyond the scope of the granter’s obligations and also captures the duration of those obligations. Halliday argued that clause 3.2 constituted such a provision and that the Court was bound to follow the decision in British Overseas Bank. Therefore, the court action in this case was raised too late and any liability which they may have owed to L&G was time-barred.

L&G’s position

L&G argued that the wording of clause 3.2 did not have the effect Halliday claimed. L&G said that a collateral warranty should be subject to the usual rules of contractual interpretation and the contractual limitation period should be determined on the basis of the particular language used. Here, the wording was not sufficient to incorporate the time bar period which applied to a claim made by the employer under the architect appointment. The wording applied to the scope of the Halliday’s obligations but did not extend to the duration of those obligations or the timescales to enforce them. L&G argued that the “no greater duties” clause was not determinative and did not permit, expressly or by implication, Halliday to rely on defences which would have been available to them in a claim by the original employer. Absent an express provision which incorporates this approach, the granting of a collateral warranty would result in a fresh prescriptive period.

With reference to British Overseas Bank, L&G said this case was fundamentally different. In British Overseas Bank, there was a specific provision within the collateral warranty allowing the contractor to rely on any defence against the beneficiary, which would have been available to it in a claim brought under the original appointment. L&G highlighted that there was no such clause here.

On this basis, L&G said the court action was served timeously in respect of a number of the defects. They claimed the remaining soffit defects, introduced out with five year time bar of the collateral warranty, were discovered later and so were subject to the saving provisions contained in section 6(4) of the 1973 Prescription and Limitation (Scotland) Act in relation to “induced error”.

The Appeal Decision

Time bar

The Court agreed with L&G that the time bar which applied to a claim by the original employer under the architect appointment was not incorporated into the collateral warranty. Halliday’s appeal was dismissed.

With reference to British Overseas Bank, the Court said it had no difficulty with the standard approach taken to the interpretation of contracts. However, it did not follow from the fact that parties agreed there should be equivalence of obligations between the architect appointment and the collateral warranty, that they also agreed there should be equivalence of defences. With a reminder that a collateral warranty is a commercial contract, the Court considered this was a matter for the parties to agree upon and record explicitly.

The Court said it did “not consider that there is as a matter of law any ‘normal’ rule or principle amounting to a presumption or default position governing the time-bar in collateral warranties. The matter depends on what parties have agreed in the particular collateral warranty”. It went on to say that “there is no principled reason why the defences that would have been available under the original contract should automatically be imported into the collateral warranty in the absence of a specific provision to that effect.”. The Court also underlined where the purpose of a clause in a contract is to create a time bar, that clause must be clear and unambiguous.

The Court highlighted here that clause 3.2 of the collateral warranty did not refer to the equivalence of defences, only to equivalence of duties. The absence of any such express term was considered significant. The Court placed particular emphasis on the wording as demonstrating what was agreed by the parties and it was reluctant to read in any further agreement in respect of the equivalence of defences.

On that basis, the date of granting the collateral warranty was the earliest date at which time bar could begin, and the court action had been raised by L&G in time.

“Induced error”

In relation to the soffit defects however, the Court rejected L&G’s arguments. L&G claimed under section 6(4) of the 1973 Act they were induced into error, by Halliday’s representations in the collateral warranty that they had complied with their obligations under their appointment, which caused L&G to refrain from making a claim. This would have extended the time-bar period available to L&G. The Court said, “it is circular and illogical to contend that the provisions which are alleged to have been breached have themselves led the respondents to refrain from making a claim”. Put another way, the wording in the collateral warranty did not cause L&G to refrain from making a claim. The Court also cast doubt on whether section 6(4) is aimed at conduct as everyday as providing and accepting payment for services, as has been discussed in other cases.

Takeaways

In December 2025 Halliday sought to appeal again to the UK Supreme Court. The Inner House refused. This decision therefore remains a key authority on the interpretation and time-bar of collateral warranties. The takeaways for drafting and using collateral warranties in practice are:

• With a reminder that collateral warranties are commercial contracts, the wording contained in the collateral warranty here was reflective of what had been agreed. This will offer comfort to parties entering into collateral warranties that the courts are reluctant to look beyond the wording to read in agreement as to further matters.
• There is no presumption or default position governing time-bar in collateral warranties. It depends on what the parties have agreed in the particular collateral warranty.
• Arguing that “induced error” should lead to more time under the Scottish time-bar legislation is difficult and it will likely not apply to everyday situations.
• Matters of equivalence of duties and defences, along with all other commercial elements, are a matter for the parties to agree.
• For drafters, this is a reminder to ensure that drafting is clear and explicitly reflects such agreement. In particular, if the purpose of a clause is to create a time-bar, that clause must be clear and unambiguous.

If you would like to discuss anything raised in this article, please get in touch with Lauren McMurchie  or Antonia Zydek, or your usual Burness Paull contact. 

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