“No greater liability” clauses in collateral warranties – a Scottish approach

United Kingdom

A recent decision of the Scottish Court of Session has found claims by a beneficiary under a collateral warranty not to be subject to the period of prescription (or limitation as it is known in England) applicable under the relevant building contract. This decision was reached notwithstanding the inclusion of “equivalent rights of defence” and “no greater liability” clauses in the collateral warranty and achieves a result opposite to that reached bv the English TCC in similar circumstances late last year.

British Overseas Bank Nominees Limited v Stewart Milne Group Limited

In August 2008, Stewart Milne entered into a building contract to design and construct a car park at a retail park in Inverurie, Aberdeenshire under an SBCC Design and Build Contract (2005 Edition, October 2007 Revision) with bespoke amendments. The works reached practical completion in 2009. Janus Henderson acquired the site in June 2013 and were granted a collateral warranty from Stewart Milne in August 2013.

The form of warranty within the building contract, and that provided to Janus Henderson, stipulated that Stewart Mile would have “no greater liability to the Beneficiary under this Agreement than it would have had if the Beneficiary had been named as the employer under the Building Contract”. The warranty also contained an “equivalent rights of defence” clause as follows:

“[Stewart Milne] shall be entitled in any action or proceedings by the Beneficiary to rely on any limitation in the Building Contract and to raise the equivalent rights in defence of liability as it would have against the Employer under the Building Contract (other than counterclaim, set-off or to state a defence of no loss or a different loss has been suffered by the Employer than the Beneficiary).”

The car park suffered from ponding and flooding at the northern boundary and Janus Henderson brought proceedings against Stewart Milne in June 2018 for breach of the collateral warranty. The prescriptive period under the building contract (similar to a limitation period in England) expired five years after practical completion on 19 June 2014. However, the proceedings were brought within five years from the granting of the collateral warranty.

Stewart Milne argued that the “no greater liability” and “equivalent rights of defence” clauses meant that Janus Henderson’s rights expired with the passing of the prescriptive period under the building contract. Janus Henderson contended that its rights under the warranty were not affected by the prescription period under the building contract, but were subject to a fresh five year prescription period beginning with the grant of the warranty.

No greater liability and equivalent rights of defence

The court concluded that neither the “no greater liability” nor “equivalent rights of defence” clauses provided a defence to the claim. As regards the former, Stewart Milne had emphasised the reference to it being in the same position as if the Beneficiary (i.e. Janus Henderson) had been named as employer under the building contract. However, the court did not consider this wording to mean:

“that the pursuers or their claims should be treated in all respects as ‘standing in the shoes’ of [the employer under the building contract].  … having regard to the terms and context of this phrase (in that part of the Collateral Warranty defining the Contractor’s obligations), this phrase was intended to mean no more than the content and scope of [Stewart Milne’s] duties were equivalent to those it owed to [the employer].”

As regards the “equivalent rights of defence” clause, the court accepted that prescription would amount to a “defence of liability” but found that this would not be a defence arising “under the Building Contract” within the meaning of the clause. Neither of these clauses therefore had the effect of binding Janus Henderson to the prescriptive period under the building contract.

The court left undecided whether, if these clauses had the effect contended for by Stewart Milne, this would be inconsistent with Section 13 of the Prescription and Limitation (Scotland) Act 1973 (“Prescription Act”). That section provides that the five year prescriptive period in cases of breach of contract cannot be contracted out of.

Contrasting the English position

Stewart Milne relied on the recent English TCC decision in Swansea Stadium Management Company Limited v City & County of Swansea as supporting its position. That case concerned a similar fact pattern and a “no greater liability” clause with similar joint employer wording. By contrast with the present decision, the TCC in that case held that such a clause did bind the beneficiary to the limitation period under the building contract. In rejecting an argument that the clause was limited to the scope and content of the contractor’s obligations under the warranty (and not its duration), the TCC noted:

“… that interpretation would not be an accurate reflection of the words used. The reference in the proviso to the Claimant's position being as if it "had been named as joint employer" is a clear indication that the parties intended the Claimant to stand in the shoes of the employer.”

The Scottish court in the present case considered such English authorities to be of limited assistance due to the differences in approach to questions of limitation and prescription between the two jurisdictions. For example, in England whether a contract or warranty is to be interpreted retrospectively can affect the commencement of the limitation period, whereas that is not possible in Scotland. The English cases in this area therefore have a greater focus on whether the contract or warranty can be interpreted retrospectively.

Conclusions and Implications

This decision provides a significant counterpoint to the Swansea Stadium decision. Whilst the legislative differences between the two jurisdictions may go some way to explaining the different decisions reached, tension would appear to remain between the differing approaches to interpretation of very similar “no greater liability” wording in each case.

The present decision also gives rise to a number of implications for the drafting of collateral warranties for parties in either jurisdiction:

  • Significant differences exist as to how warranties should be drafted and analysed in England and Scotland. Parties should tread carefully where there is any doubt as to the applicable jurisdiction.
  • Close attention should be paid to the phrasing of any “equivalent rights of defence” clauses bearing in mind that a variety of defences may not be caught by terms such as “under” or “pursuant to” the underlying building contract. 
  • The tension between this case and the Swansea Stadium decision means that “no greater liability” clauses should also be carefully considered. Where limitation or prescription defences are intended to be included, that intention should be made clear through the use of language referring to the “duration” of any liability as well as its extent.
  • Contractors operating in Scotland should be aware that even well drafted clauses may not be able to overcome Section 13 of the Prescription Act. It may not therefore be possible to bind a beneficiary to the period of prescription applicable under the underlying building contract. An assignment of rights provides a surer way of achieving such a result where the beneficiary is a subsequent purchaser.

References:

British Overseas Bank Nominees Limited v Stewart Milne Group Limited [2018] CSOH 125. 

Swansea Stadium Management Company Ltd v City & County of Swansea [2018] EWHC 2192 (TCC).