When does the right to request a collateral warranty become time-barred?

A recent decision of the Court of Session appears to be the first case in England or Scotland to consider when a right to request the delivery of a collateral warranty becomes time-barred. The Court found that the relevant prescription period started with the execution of the underlying contract, rather than the date on which the warranty was requested. This meant the right to receive a warranty became barred prior to the point at which rights under the warranty, had it been granted, would have prescribed. The gap between these two dates may be many years for large projects and may affect the package of rights able to be given to purchasers in transactions taking place near the end of the limitation or prescription period. Parties would be well advised to review their construction contracts and appointments to ensure that any requests for collateral warranties are made in good time. The drafting of new contracts might also be improved to overcome the effect of this decision. 

Engine Yard Edinburgh Ltd and Allenbuild Ltd v Bayne Stevenson Associates Limited

Allenbuild Ltd was appointed as design and build contractor for the construction of apartment blocks on the site of a former tram depot in Leith. Allenbuild appointed Bayne Stevenson as structural engineers for the project, via a letter of appointment executed by Bayne Stevenson and Allenbuild only. Engine Yard, the owner of the site, was not a party to the appointment.

The appointment contained an obligation that Bayne Stevenson would execute and deliver a collateral warranty, “in such … form as the Contractor reasonably requires within 7 days of a written request in favour of [Engine Yard] and/or any lessee and/or purchaser and/or provider of finance for the Project …”.

The appointment was executed in May 2017, but a request for a collateral warranty in favour of Engine Yard was made only in August 2022, after discovery of certain defects for which Bayne Stevenson were said to be responsible. Bayne Stevenson refused to provide a collateral warranty, claiming the obligation to provide one had prescribed five years after execution of the contract.

This question, among others, came before the Court of Session for a legal debate on the parties’ pleadings.

Right to collateral warranty expired

The Prescription and Limitation (Scotland) Act 1973 stipulates that certain obligations are extinguished if no relevant claim has been made while the obligation has subsisted for a continuous period of five years.

Bayne Stevenson argued that the five year period in respect of the right to delivery of a collateral warranty started at contract execution. 

Allenbuild argued that, due to the wording of the clause, the obligation only crystallised on the date that a written request was made. In support of its position, Allenbuild drew an analogy between the wording of the clause and the case of a loan being payable on demand – an obligation which it argued only crystallised upon the making of a demand.

The Court was not persuaded by Allenbuild’s arguments – finding that the obligation to deliver a collateral warranty was enforceable from the execution of the appointment and that the reference to the making of a written request and the timescale for provision were “…clearly a stipulation to be concerned with the performance of the relative obligation rather than its subsistence”.

Conclusions and Implications

This appears to be the first case on this issue in Scotland or England and has some significant implications. Rights under collateral warranties ordinarily last for the same length of time as those under the underlying contract. For a construction contract, such rights typically arise on practical completion of a project and, subject to statutory exceptions, last for 5 years in Scotland and 6 years in England (or 12 years if executed as a deed). The finding in this case that the obligation to provide a collateral warranty commenced at the execution of the appointment meant that a gap existed between the time-barring of the right to request a warranty and the point at which rights under a warranty, had one been granted, would have otherwise become barred. Valuable rights were lost as a consequence.

Whilst the impact of this decision can be mitigated to some extent by ensuring that collateral warranties are requested at an early stage, this may not be possible where warranties in favour of tenants or purchasers are concerned. In large projects, the gap between the execution of a construction contract and practical completion of the works may span a number of years. The ability to call for warranties in favour of tenants and purchasers in such cases would cease significantly in advance of the prescription or limitation period applying to the construction contract – potentially limiting the package of rights able to be given to tenants or purchasers and, in turn, the value of the asset.

The wording of the clause considered in this case is by no means unusual. The JCT/SBCC form, for example, requires purchaser, tenant and funder warranties to be entered into “within 14 days from receipt” of a notice from the Employer. The reasoning in this decision would appear to be directly applicable to any clauses of this nature which require the provision of collateral warranties on request.

Whether the same approach is followed in England remains to be seen. The English Limitation Act refers to the accrual of a cause of action rather than the subsistence of an obligation, but there are similarities between these two concepts and similar English cases exist where the making of a demand or request has not affected the commencement of the limitation period. For example, a cause of action for a debt payable on demand accrues immediately under English law and not when the demand is made (Coburn v College). In one recent case, the fact that the due date for a final payment under a construction contract was fixed by the making of a claim for payment (under the Scheme for Construction Contracts) was insufficient to change this rule and the limitation period for the payment claim continued to accrue from completion of the works (Hirst v Dunbar). For our Law-Now on that case, please click here. 

On the other hand, a cause of action against a guarantor under English law who is obliged to pay “on demand” (and without any “primary obligor” wording) generally accrues only with the making of a demand: Bradford Old Bank Ltd v Sutcliffe. Parallels might be drawn with this line of cases and the nature of a collateral warranty clause, particularly where (as in the present case) the beneficiary and the precise terms of the warranty were to be fixed by a written request. 

In view of the present decision, parties would be well advised to check that all collateral warranties required in respect of a project have been requested well in advance of the end of the applicable prescription or limitation period taken from the date of execution of the construction contract or appointment (or the commencement of work if earlier). Those parties seeking the benefit of collateral warranties may also wish to make clear in the drafting of the relevant clauses that the obligation to provide warranties arises only upon the making of a request and not beforehand.

References:

Coburn v College [1897] 1 QB 702

Bradford Old Bank Ltd v Sutcliffe [1918] 2 KB 833

Hirst v Dunbar [2022] EWHC 41 (TCC)

Engine Yard Edinburgh Ltd and Allenbuild Ltd v Bayne Stevenson Associates Limited [2024] CSOH 13