Liam McKay: Collateral warranties, historic defects and the risks of long-term claims: a new warning from Scotland’s highest court

The level of complexity in relation to the law on time bar in construction disputes has increased once again, owing to a new decision from Scotland’s highest court. It serves as a warning to builders, architects, engineers and others that the beneficiary of a collateral warranty can potentially bring a claim before the Scottish courts in respect of historic building defects far beyond five years from the completion of the building. But what does it mean for Scotland’s construction industry, and how might the risk of such claims be managed?

What is time bar?

Time bar refers to the amount of time that a business has to bring a claim before the Scottish courts. If too much time has passed, the claim will be barred, and the court will not consider it.

The calculation of time bar depends on the facts and circumstances of each case but, in general, a claim for compensation for losses incurred in repairing a defective building must be brought within five years of construction completion. However, it is possible for the five-year period to start earlier, and to postpone or suspend the start of it. And, post-Grenfell, there are also different rules for defective construction products and for cladding.

In short, the law of time bar in Scotland is extremely complicated. It can take years to resolve the question of whether a party has managed to successfully get to court in time, even before the court even considers the actual “beef” between the parties.

How a court claim could be brought in 2018 about a building completed in 2008

Scotland’s most senior judge, Lord President Pentland, last week penned a judgment in Legal and General Assurance (Pensions Management) Limited (“LGA”) against The Firm of Halliday Fraser Munro and Others. It concerned the “Union Plaza” office block in Aberdeen, which was completed on 8 July 2008. Halliday Fraser Munro were the architects. The terms of their appointment required that they deliver a collateral warranty to any future purchaser of the block. LGA purchased Union Plaza on 20 December 2013, and Halliday Fraser Munro delivered a collateral warranty to LGA on 6 January 2014.

The collateral warranty is the focus of this judgment. It provided that, in purchasing the block, LGA was relying on Halliday Fraser Munro’s skill and judgment in respect of the provision of architectural services per the terms of Halliday Fraser Munro’s original appointment, and that Halliday Fraser Munro warranted to LGA that it had used all reasonable care and skill in performing those services.

Collateral warranties like this are designed to give comfort to the ultimate purchasers / tenants of commercial properties, that they are covered by the same contractual and legal duties that the builder, architect, or engineer owed to the original employer who hired them to design and build the premises in the first place. Importantly, the collateral warranty also stated that Halliday Fraser Munro would not owe any greater duties or obligations to LGA than were owed to the original employer.

Prior to purchase, LGA was aware of some water ingress in Union Plaza; albeit the cause of same was unknown, and it was thought to have been rectified. In November 2018, LGA obtained evidence that inferred the still-ongoing water ingress was potentially due to inherent design defects. A court action was served on behalf of LGA on Halliday Fraser Munro on 17 December 2018.

How a collateral warranty changed things regarding time bar

Halliday Fraser Munro argued that it was too late for LGA to bring this claim to court, and that the claim should be dismissed without considering the substantive issues in dispute. It argued that LGA had five years from 8 July 2008 to bring its claim.

That was because the terms of the collateral warranty provided that Halliday Fraser Munro would owe “no greater” duties or obligations to LGA than they would owe to the original employer. The original employer would only have had five years from 8 July 2008 to bring a claim for alleged breach of the duties owed to it by Halliday Fraser Munro in relation to the design of the building. Of course, LGA did not purchase the block until 20 December 2013; and the collateral warranty was granted on 6 January 2014.

Significantly, the court rejected Halliday Fraser Munro’s argument.

The court ruled that a collateral warranty is a separate contractual agreement from the original construction contract. That meant Halliday Fraser Munro’s duties to LGA stemmed from the collateral warranty, dated 6 January 2014. Those duties were enforceable within five years from that date, rather than the date of completion of the premises. As the court action was brought within 5 years of that date, the court action was not time barred.

What is happening elsewhere in the UK

Historic construction defects, and the enforcement of rights and obligations concerning same, continue to be the focus of high-profile court cases. Last year, the Supreme Court ruled that, in general, a dispute arising under a collateral warranty cannot be referred to adjudication.

Consequently, the purchaser, or tenant, of a commercial premises who is the beneficiary of a collateral warranty granted by the architect or builder cannot refer a dispute to adjudication concerning historic defects in the premises which are allegedly the fault of said architect or builder.

This was welcome news for the construction industry insofar as managing the financial risk of prospective future claims from beneficiaries of collateral warranties was concerned. However, the High Court of England and Wales subsequently ruled that the employer under a construction contract could, in certain circumstances, refer a dispute to adjudication concerning historic defects in a premises even in circumstances where the construction contract in question (and the premises) had been completed many years prior. This was, understandably, not so welcome news.

What’s next?

While it remains to be seen whether the law in Scotland will follow the High Court decision in respect of permitting employers to refer certain types of dispute about historic defects to adjudication, this new decision from Scotland’s highest civil court demonstrates that the granters of collateral warranties in Scotland should be cautious about the risk of being pursued in the Scottish courts for historic construction defects.

It is worth noting that Lord President Pentland’s judgment did say that, if the parties to the collateral warranty wished to do so, it would be open to them to agree within the terms of the collateral warranty that the period of time within with the rights and obligations created under the collateral warranty can be enforced is to mirror the period applicable to the enforcement of rights and obligations created under the original construction contract.

Overall, whilst the decision in Legal and General Assurance (Pensions Management) Limited is generally good news for purchasers and tenants of commercial premises (depending on the terms of any collateral warranty they may have in place), it may be less well received by those involved in the design and construction process who cannot simply manage the risk of future claims by thinking that, if five years have passed since completion, the risk is gone.

What is certain is the decision presents an added layer of potential legal considerations for commercial property purchasers, and the granters of collateral warranties, going forward.