BRITISH OVERSEAS BANK NOMINEES LTD, RECLAIMING MOTION BY BRITISH OVERSEAS BANK NOMINEES LTD AND OTHERS AGAINST STEWART MILNE GROUP LTD [2019] ScotCS CSIH

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	Scottish Court of Session Decisions
You are here: BAILII >> Databases >> Scottish Court of Session Decisions >> BRITISH OVERSEAS BANK NOMINEES LTD, RECLAIMING MOTION BY BRITISH OVERSEAS BANK NOMINEES LTD AND OTHERS AGAINST STEWART MILNE GROUP LTD [2019] ScotCS CSIH_47 (10 September 2019) URL: http://www.bailii.org/scot/cases/ScotCS/2019/2019_CSIH_47.html Cite as: 2019 SLT 1253, 186 Con LR 80, [2020] PNLR 2, [2019] CSIH 47, 2020 SCLR 151, 2019 GWD 30-477, [2019] ScotCS CSIH_47, 2020 SC 24

Defender and Reclaimer: GJ Walker QC, AN McKenzie; Anderson Strathern LLP

[1] The parties’ dispute relates to the construction of a collateral warranty granted by a

design and build contractor in favour of purchasers of a development from the original

developer. The development, which was situated at Souterford Road, Uryside South,

Inverurie, comprised the construction of eight new retail units together with a garden centre

slab, tenant fit-out works and associated car parking, service yards and related external

works. The developer, who was the employer in the design and build contract, was

Northburn Developments Ltd (“Northburn”). The defender was the design and build

contractor. The construction contract between Northburn and the defender was dated

20 and 21 August 2008, and was in the form of the SBCC Design and Build Contract for use

in Scotland (DB/Scot), 2005 Edition, October 2007 Revision, as amended by a document

entitled “Amendments to the SBCC Design and Build Contract for use in Scotland 2005,

incorporating Amendment 1 (issued April 2007) and October 2007 Revision”.

[2] The contract between Northburn and the defender imposed obligations on the

defender to use, in general terms, proper skill and care in the design and construction of the

works. It further contained an obligation on the defender to grant collateral warranties in

favour of any person who might subsequently acquire an interest in the development as a

purchaser or tenant. The pursuers are nominees for National Westminster Bank plc, which

operates as a depositary of the Janus Henderson UK Property PAIF. In June 2013, the

pursuers, acting in that capacity, and Northburn concluded missives for the sale of the site

and development to the pursuers. The pursuers took entry on 27 June 2013. In terms of

those missives, Northburn was obliged to deliver to the pursuers various collateral

warranties, including a collateral warranty in the pursuers’ favour executed by the defender

as the design and build contractor. A collateral warranty by the defender in favour of the

pursuers was in due course executed and delivered to the pursuers; it was dated 24 June and

[3] The development had been constructed during 2009. It subsequently became

apparent that the car park at the site, which had been designed and constructed by the

defender, suffered from flooding at its northern boundary. The present action relates to the

alleged flooding. The pursuers aver that the defender was in breach of obligations that it

had undertaken in the collateral warranty to carry out and complete the building works, to

perform all of its duties under the building contract, and to design the works and select

materials with reasonable skill and care such as would be expected of a prudent and

experienced designer of the relevant discipline. The flooding, it is averred, resulted from

defective design and construction of the car park by the defender. The pursuers aver in

particular that if the car park had been properly designed and installed it would not suffer

from flooding in ordinary course; that the gradient of the car park as constructed was

inadequate to manage ordinary surplus water; and that standard remedial measures had not

been taken. They claim the cost of remedying those alleged defects. For present purposes it

is unnecessary to consider the details of the pursuers’ claim. What is material is that the

pursuers’ averments refer to an investigative report on flooding in the car park prepared by

Colliers International, a consultancy firm, dated May 2013. Both the pursuers’ averments

and the terms of that report disclosed that that the flooding was apparent by that date.

[4] The present action was raised on 21 June 2018, more than five years after Colliers’

report. The defender has tabled a plea of prescription, to the effect that under specific

clauses of the collateral warranty, clauses 2.3 and 3.1, any liability arising under the duties in

the building contract had been extinguished by operation of prescription by the time that the

present action was raised. The collateral warranty in favour of the pursuers is of course a

separate contract from the design and build contract between the defender and Northern.

The collateral warranty is dated 24 June and 28 August 2013, and the present action was

raised within five years of the granting of the collateral warranty. Consequently, if the

relevant prescriptive period runs from the date when the collateral warranty was granted,

the present action was raised within the prescriptive period. The defender contends,

however, that under the terms of the collateral warranty it was subject to the same

prescriptive period as applied under the original design and build contract. The existence of

the flooding in the car park was known by the time of Colliers’ report, and the prescriptive

period must therefore run from no later than May 2013. According to the defender, the fact

that the collateral warranty was only granted in June and August 2013 is immaterial,

because it is the prescriptive period incorporated into the design and build contract that is

applicable, not the period that would have been imposed under the statutory law of

prescription. Put shortly, the defender’s contention is that its obligations under the

collateral warranty are subject to a contractual time limitation rather than the general law.

[5] The action proceeded to a debate before the Commercial Judge on the question of

whether the defender is correct in its argument based on the application of a conventional

period of time limitation. The Commercial Judge held that the pursuers’ construction was

correct and that the defender’s plea of prescription accordingly fell to be repelled. The

[6] The fundamental issue in the present case turns on the construction of the Collateral

Warranty Agreement granted by the defender in favour of the pursuers. A collateral

warranty is a contract in its own right, distinct from (although dependent on) the building

contract to which it relates. Consequently the terms of a collateral warranty should be

construed in the same way as contracts generally. The correct approach is described in a

substantial number of cases; for present purposes it is perhaps sufficient to note the

decisions in Rainy Sky SA v Kookmin Bank Co Ltd, [2011] 1 WLR 2900, HOE International Ltd v

Andersen, 2017 SC 313, Midlothian Council v Bracewell Stirling Architects, [2018] PNLR 25, and

[7] The result of these cases is that contractual provisions must be construed in

accordance with the objective intention of the parties: the intention that reasonable persons

would have had in the parties’ position had they possessed the same background

knowledge. It is also appropriate to rely on commercial common sense. The exercise of

construction should be both purposive and contextual. Purposive interpretation means that

the court should attempt to give effect to the primary purposes that, objectively, the parties

intended at the time of the contract. Determining those purposes will obviously turn on the

wording used, but that wording must be considered in in such a way as to give effect to the

primary objectives of the contract rather than giving undue influence to minor provisions or

niceties of wording. In our opinion the underlying commercial purpose of a collateral

warranty is of importance in the present case. The fundamental purpose of the collateral

warranty is to place the beneficiary and the contractor in an equivalent position to the

original developer and the contractor, not to extend the obligations of the contractor to the

beneficiary of the warranty beyond those undertaken in favour of the original developer.

Details of the wording used should not obscure that basic objective.

[8] Contextual construction means that the wording used in the contract must be

construed against the background known to the parties at the time. Context can take many

forms. First, with building projects, the roles of the various persons involved, in the totality

of the contracts governing the project, including subcontractors, are an important

component. Secondly, the collateral warranty itself, like any other contract, must be

construed as a whole. Thirdly, the general legal context will usually be relevant. In the

present case that includes the rules of prescription, and also the rules of law relating to

contractual defences and limitations. It also includes the primary legal reasons that

collateral warranties are used: the principle of privity of contract, the impact of the decision

in Murphy v Brentwood Council, [1991] 1 AC 398, and the consequent need to prevent loss

caused by the failure of a contractor or a member of the design team to use proper care and

skill from falling into a so-called “black hole”, so that the person suffering the loss is unable

[9] The development of the collateral warranty, and the reasons for its use, are discussed

in some detail in Scottish Widows Services Ltd v Harmon, 2010 SLT 1102, at paragraphs [1] and

[17] -[18]. Collateral warranties are now widely used in all major construction projects. They

were developed following the decision of the House of Lords in Murphy v Brentwood Council,

supra. Prior to that decision it was clear that, by virtue of the doctrine of privity of contract,

a contractual duty of care could only arise as between persons who were in a direct

contractual relationship with each other. Thus the contractor in the building contract would

owe contractual duties of care to its original employer, but would not owe any such duty to

persons such as a subsequent purchaser or tenant of the development. It had been thought

on the basis of decisions of the House of Lords in cases such as Anns v Merton London

Borough Council, [1978] AC 728, and Junior Books Ltd v Veitchi Co Ltd, 1982 SC (HL) 244, that a

delictual duty of care might arise in such circumstances. In Murphy, however, it was held

that, while contractors and others engaged in building projects might be liable in delict or

tort to third parties who are injured or whose property is injured in consequence of the

negligent performance of work, that duty does not extend to an owner of the property on

which the work was carried out or any person whose rights in the property are derived from

the owner, such as a tenant. The loss sustained by the owner or tenant is classified as pure

economic loss, and the House of Lords held that compensation for such loss is not

recoverable in delict or tort; common law duties to use reasonable skill and care did not

extend to such loss. Consequently, if the owner of the building or any person deriving title

from the original owner were to have any right to recover damages for the negligent design

or construction of the building, that right must be founded in contract.

[10] Among those involved in building contracts it was thought that it was generally

reasonable that the duties of care incumbent on a contractor or a member of the design team

in favour of their original employer should extend to those such as purchasers and tenants

who acquired an interest from the employer. After the property was sold or let, the loss

arising from defective design or workmanship, usually in the form of payment for remedial

work, was likely to fall on the owner or tenant for the time being. The purchaser or tenant,

however, had no contractual relationship with the contractor or design team. The original

employer had such a relationship, but as it had sold the property it suffered no loss. If no

action were taken, therefore, the loss was likely to fall into a so-called “black hole”: the party

with a right of action against the negligent contractor or designer (the original employer)

had suffered no loss, and the party that suffered the loss (the purchaser or tenant) had no

right of action. It has been remarked that in a well regulated legal universe black holes

should not exist; the reasons are obvious. It was to deal with this problem that collateral

[11] The purpose of a collateral warranty, which is important in the present case, is

accordingly to create an express contractual provision whereby the contractor or a

subcontractor or a member of the design team undertakes a duty of care to persons such as a

purchaser of an interest in the development from the original employer, or a person who has

obtained a tenancy or security right in the development from the employer. The collateral

warranty is an independent contractual undertaking between on one hand a contractor or

subcontractor or member of the design team and on the other hand persons who acquire an

interest in the property from the original developer, who will normally have been the

employer in the main building contract or in contracts for architectural and engineering

“The purpose of a collateral warranty… is to provide a right of action between

parties who, under the standard legal structures used in construction contracts,

would not otherwise be in any contractual relationship; it thus confers title to sue on

the grantee of the warranty. A collateral warranty constitutes a contract between the

granter and the grantee. Under that contract, the granter undertakes that it will

perform specified works to a standard of competent workmanship (in the case of a

contractor), or will provide specified services and observe proper professional

standards of skill and care (in the case of an architect or engineer). If the granter fails

to perform its duties to the required standard, the grantee can raise an action to

compel such performance…. Alternatively, if the grantee suffers financial loss as a

result of the defective performance, it may raise proceedings against the granter in

order to recover the amount of that loss”: Scottish Widows at paragraph [17]

[12] The foregoing legal and commercial context in which collateral warranties have

come to be used demonstrates an important feature of their purpose. This is to provide

persons such as a purchaser or tenant or security holder with rights against the contractor,

or a subcontractor or member of the design team, that are equivalent to the rights that were

enjoyed by the original employer under the building contract and the ancillary contracts

with architects, engineers, subcontractors and others. The notion of equivalence is central.

The purpose of the warranty is not to provide purchasers, tenants and security holders with

rights greater than those held by the original employer; to do so would make no commercial

sense. Equivalence accordingly requires not merely that the beneficiary of the warranty

should have the same affirmative rights of action as the original employer; it also requires

that those rights of action should be subject to the same qualifications, limitations and

defences as were available to the contractor in respect of the original building contract.

[13] The present action relates to a design and build contract, and consequently a single

person, the design and build contractor, is responsible for both the works of construction

and the design of the development. Obviously the design works may be subcontracted by

the design and build contractor, to architects or various types of engineer, but it is the design

and build contractor who is responsible to the original employer (the developer) for the

work of such subcontractors. Nevertheless, the fundamental purpose of the warranty

remains that of placing purchasers, tenants and others who acquire an interest in the

development in an equivalent position to the employer of the design and build contractor.

As already noted, that purpose is in our opinion of fundamental importance in construing

[14] Construction contracts and contracts with professionals in the building industry are

almost invariably governed by standard forms. In these, it is normal to find that express

duties of skill and care are set out. At the same time, however, those duties will invariably

be qualified by a range of limitations or defences. These may include, for example,

limitations on the standards of care and standards of workmanship that are required, or

provisions that qualify the right to payment. An arbitration clause is almost invariably

found. The limitations may also include express time-bar provisions. In the present case an

example of this is found in clause 3.2 of the Collateral Warranty Agreement, discussed

below at paragraph [24], which provides that no proceedings for breach of the agreement

may be commenced against the contractor after 12 years from issue of the final statement of

practical completion. In addition to such express provisions, however, the general statutory

[15] The reasons for imposing a time bar on rights of action are well known. Three

reasons are of particular importance in relation to construction contracts. First, with the

passage of time, there is an obvious risk that evidence will be lost; the contractual

documentation may have been destroyed or mislaid, and the recollection of witnesses will

inevitably deteriorate. Thus it may be impossible to reconstruct the circumstances of the

original project. This may obviously prejudice the building owner’s presentation of a claim,

but it may also prejudice the ability of the contractor or member of the design team to

present an effective defence. Secondly, there must come a point in the conduct of affairs

when finality is achieved, so that the persons involved can move on without the risk of

latent claims against them. This is particularly important when potential liabilities are the

subject of insurance. For example, an architect or engineer will invariably have professional

indemnity insurance, and must be able to say with certainty that before a certain point there

are no possible claims against it. Thirdly, in relation to construction contracts, buildings

typically have a long life, and there is therefore a significant risk that claims for negligence

might be made in respect of latent defects that only appear many years after the work was

carried out. By that time, of course, the danger of loss of evidence may be acute, and the risk

[16] Because of the importance of time-bar provisions to contractors and designers, we

are of opinion that a collateral warranty should normally be subject to the same time bar as

applied to the original building contract. By the “same” time bar, we mean a time bar that

has effect on the same date. We cannot conceive of any policy reason to the contrary.

Obviously it is possible for the parties to a collateral warranty to agree on a different time

bar from that under the building contract, subject to the mandatory nature of the statutory

law of prescription, but in construing contractual provisions the norm must, we think, be

that the same time bar should apply to all the potential liabilities of the contractor and the

[17] The importance of contractual defences and limitations of liability is illustrated by

the facts of the present case. The design and build contract between Northern and the

defender is governed by the SBCC Design and Build Contract for use in Scotland (DB/Scot),

2005 Edition, October 2007 Revision, amended as indicated in paragraph [1] above. This is

one of the standard forms of contract developed (and revised periodically) by the Scottish

Building Contracts Committee, which represents the various commercial and professional

groups that are interested in building contracts and ancillary contracts for matters such as

architectural and engineering services and has the benefit of expert legal advice. The SBCC

generally aims at striking a balance among the various parties involved in a building

contract, although inevitably it does so at a general level having regard to normal or typical

features of the type of contract in question rather than specific features of a particular

project. Nevertheless, the balance that is struck in the standard forms of building contract

includes not merely the affirmative duties and responsibilities but also a range of limitations

and defences on liability. These features of the contract must in our opinion be considered

[18] Section 2 of DB/Scot deals with the carrying out of the Works (a defined term, which

refers to the works particularly described in the Contract Documents, including any changes

that are made). Clauses 2.1 and 2.2 set out the contractor’s obligations. The basic obligation

is found in paragraph 2.1.1, which provides as follows (words with capital letters being

“The Contractor shall carry out and complete the Works in a proper and

workmanlike manner and in compliance with the Contract Documents, the

Construction Phase Plan, and the Statutory Requirements and for that purpose shall

complete the design for the Works including the selection of any specifications for

the kinds and standards of the materials, goods and workmanship to be used in the

construction of the Works so far as not described or stated in the Employer’s

Requirements or Contractor’s Proposals, and shall give the notices required by the

Clause 2.2, which deals with materials, goods and workmanship, provides that these should

be of the standards described in the Employer’s Requirements or the Contractor’s Proposals.

Both the Employer’s Requirements and the Contractor’s Proposals are typically lengthy

documents which reflect the enormous amount of detail, at a practical level, that is required

in any building project other than the simplest. Clause 2.11.1 (as amended in April and

October 2007) provides that the Contractor accepts entire responsibility for the design of the

Works, all designs contained in the Employer’s Requirements and Contractor’s Proposals,

and all design work prepared before or after the date of the Contract and whether carried

out by or behalf of the Employer or the Contractor. Clause 2.11.2 (as amended) then

“The Contractor warrants and undertakes to the Employer that the Works will, when

completed, comply with any performance, specification or requirement included or

referred to in the Employer’s Requirements and/or the Contractor’s Proposals or any

[19] The obligations of the design and build Contractor are, however, subject to important

limitations. Some of these are found in the contract; for example if a particular component is

specified in the Employer’s Requirements but turns out not to be fit for purpose, the design

and build contractor will not be liable because it is obliged by the terms of section 2 of

DB/Scot to follow those Requirements. Other limitations on liability are found in the general

law. For example, a material failure to perform by the employer may justify use of the

general contractual defence of retention. Set off and other similar defences will also apply.

[20] The contract between Northburn and the defender, in the amendments issued in

April 2007 and pursuant to the revision of October 2007 (see paragraph [1] above) contains a

section, section 10, dealing with assignation, third-party rights and collateral warranties.

This section inserts a new clause 7.4 into the standard form of contract DB/Scot in the

“The Contractor shall within 21 days of a written notice given by or on behalf of the

Employer provided to the Employer, in the form set out in Schedule Part 11, duly

executed in a self proving matter collateral warranty agreements from the Contractor

The expression “Purchaser” is defined (clause 5.23 of the Amendments) as “each first and

second purchaser of the whole or each part of the Works”. The collateral warranty in the

present case was granted pursuant to clause 7.4.2, in favour of the pursuers as a Purchaser of

[21] The Collateral Warranty Agreement is a contract between the defender, described as

“the Contractor”, and the pursuers, described as “the Beneficiary”. It begins, in recital (A),

by referring to the Building Contract between Northburn and the defender and in recital (B)

to the fact that the Beneficiary had entered into an agreement with Northburn to purchase

the Development. In recital (D) it is narrated that the pursuers, as Beneficiary, had relied on

and would continue to rely upon the defender’s reasonable skill, care and attention in

respect of all matters covered by the warranty insofar as they related to the Works to be

[22] Clause 2 of the Collateral Warranty Agreement is headed “Contractor’s obligations”.

Clause 2.1 narrates that the Contractor “warrants and undertakes to the Beneficiary that it

has carried out and completed and will carry out and complete the Works in accordance

with and subject to the terms of the Building Contract”. Clause 2.2 contains a warranty as

“The Contractor further warrants and undertakes to the Beneficiary that the design

of the Works and the selection of goods, materials, plant and equipment for

incorporation in the Works have been or will be designed or selected with all the

reasonable skill, care and attention to be expected of a prudent and experienced,

properly qualified and competent designer of the relevant discipline with experience

of developments of a similar size, scope, complexity and value to the Development

all to the same effect as if the Contractor had been appointed by the Beneficiary”.

The closing words of that clause demonstrate the fundamental intention underlying a

standard collateral warranty that the beneficiary of a warranty should be placed in the same

position as the employer under the building contract to which the warranty relates; that is

[23] The principle of equivalence is made more explicit in clause 2.3, which provides:

“The Contractor shall have no greater duty to the Beneficiary under this Agreement

than it would have had if the Beneficiary had been named as the employer under the

Clause 2.3, particularly in juxtaposition with clause 2.2, is in our opinion important. It

indicates that the defender’s duties to the pursuers as Beneficiary of the Collateral Warranty

Agreement are to be restricted to the duties incumbent on the defender in terms of the

building contract. The clear intention is that the liabilities undertaken by the defender under

the Warranty are to be equivalent to, but no greater than, the defender’s liabilities under the

Building Contract. This is hardly surprising; indeed, for reasons discussed previously, it

represents obvious commercial common sense. The Collateral Warranty is designed to place

the Beneficiary in the same position as if it were the employer under the building contract,

and thus to avoid the risk that loss will fall into a “black hole” because of the absence of any

contractual relationship between the contractor and the beneficiary. It is not, however,

intended to place the Beneficiary in a more favourable position than the original employer.

There is no commercial reason for doing so, and if the Collateral Warranty had the effect of

conferring greater rights on the Beneficiary it could readily be regarded as unfair to the

[24] The Collateral Warranty Agreement goes further in ensuring that defences that

would be available to the contractor under the Building Contract remain available as against

the Beneficiary of the Warranty. Clause 3 of the Agreement, headed “Limitation of

“3.1 The Contractor 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).

3.2 No action or proceedings for any breach of this Agreement shall be

commenced against the Contractor after the expiry of 12 years from the date of issue

of the final statement of practical completion or the equivalent under the Building

Once again, it is apparent that the intention, construed objectively, of the Collateral

Warranty Agreement is to place the parties to the Warranty in an equivalent position to that

of the employer and contractor under the design and build contract between Northburn and

the defender. That means that the beneficiary obtains the rights that Northburn had against

the defender but subject to the defences and limitations that the defender would have had

against Northburn. The objective is clearly to achieve equivalence; that follows from both

the purpose of the Collateral Warranty, considered in context, and commercial common

[25] As already indicated, the critical question is whether clause 3 of the collateral

warranty, which imposes limitations on the liability of the defender, incorporates a

contractual prescriptive period that corresponds to the prescriptive period that applied to

the defender’s liabilities to Northburn, or whether the general law of prescription operates

in such a way that a new prescriptive period runs from the date when the collateral

warranty was granted, on the basis that that is a new and distinct contract. If the former is

the correct interpretation, the pursuers’ claim is barred by a conventional time-bar provision;

if the latter, only the statutory period of prescription is relevant, running from the date when

the Collateral Warranty was granted, and that had not expired when the action was raised.

As a matter of principle we are of opinion that parties should be at liberty to agree in their

contract to impose a time limit on claims that is shorter than the statutory prescriptive

period. The statutory prescriptive period is essentially a default provision; if parties choose

in their contract to have claims under that contract cut off after a shorter period they may do

so. Indeed, that is a potential result of clause 3.2 of the Collateral Warranty, which imposes

a time limit of 12 years from the date of practical completion on any claims that may arise.

A period of 12 years from practical completion may expire before a latent defect becomes

manifest, or within five years after the date on which it becomes manifest, in which case the

contractual time bar will operate before the statutory time bar. That clause is clearly

designed to provide a long-stop bar against any claims against the defenders. The policy

reasons for doing so are obvious: it provides the parties with closure, and avoids any risk

arising from the loss of evidence as a result of the passage of time.

[26] Similar considerations apply to clause 3.1 of the collateral warranty. This entitles the

Contractor, the defender, in any 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”. As we have already indicated,

that wording must be read in the context of the structure of contracts applying to the

development, and in the legal context: this includes both the general principle of privity of

contract and the restrictions placed on delictual claims for the defective construction or

design of a building. The fundamental purpose of the present collateral warranty appears

from that context. The collateral warranty is intended to deal with the “black hole” problem

by providing a purchaser of the development (or a tenant or a funder of the development:

see paragraph [21] above) with rights against the defender, the design and build Contractor,

that are equivalent to the rights enjoyed by the original developer, Northburn. The notion of

equivalence, however, requires that the rights transferred should be subject to all defences

and limitations that applied to Northburn. The intention of clause 3.1 was to incorporate

those defences and limitations into the relationship between the defender and any

Beneficiary such as the pursuers, to provide equivalence between the rights available to

[27] When the wording of clause 3.1 of the Collateral Warranty Agreement is read in the

light of the context and the underlying purpose of a collateral warranty, it is clear in our

opinion that it incorporates a conventional prescriptive period that corresponds to the

statutory period of prescription that applied to Northburn in any claim under the original

building contract. Clause 3.1 entitles the defender “to rely on any limitation in the Building

Contract” and “to raise the equivalent rights in defence of liability” as it would have had

under the building contract. Those words must be given a purposive meaning. Their

purpose is clearly to achieve equivalence between the obligations and liabilities undertaken

by the defender under the building contract with Northburn and the obligations and

liabilities undertaken under the collateral warranty. The right to plead that a claim has

prescribed is plainly a right “in defence of liability”: that is the function of prescription. It

might also be regarded as a “limitation” in the Building Contract, as it restricts the rights of

the original developer, Northburn, to make claims against the contractor. In either event, the

wording of the clause is plainly sufficient to include a defence of prescription. On a

contextual and purposive interpretation, and having due regard to commercial common

sense, the effect of clause 3.1 is to incorporate the same prescriptive period as applied to any

claim by Northburn, albeit that that prescriptive period is created by the parties’ contractual

arrangements rather than by the operation of statutory prescription under the Prescription

and Limitation (Scotland) Act 1973, as amended. If further confirmation were required,

clause 2.3 of the Collateral Warranty Agreement incorporates the principle of equivalence in

express terms, by providing that the Contractor is to have “no greater duty to the

Beneficiary ... than it would have if the Beneficiary had been named as the employer under

the Building Contract”. That provision puts matters beyond doubt.

[28] In clause 3.1 the words in parentheses (see paragraph [24] above) contain a list of

exceptions. These relate to rights of counterclaim or set-off, or the right to state “a defence of

no loss or a different loss has been suffered by the Employer than the Beneficiary” (sic). The

reason for excluding these three categories of defence is that they are personal to the party

against whom the defence is asserted; in other words, they depend upon certain specific

aspects of the relationship between the Contractor on one hand and the original Employer

on the other hand. Counterclaim is only relevant if the Contractor and the Employer have

claims against each other, as it requires that these claims should be litigated or processed

and ultimately set off against each other. The fact that the Contractor and the Employer may

have had claims against each other is not relevant to the rights that a Beneficiary might have

against the Contractor, as the Contractor does not have the claim against the Beneficiary that

it might have had against the original Employer. The same is true of rights of set-off; once

again these can only arise if the Contractor and the original Employer had claims against

each other that may be set off, through the right of retention or the assertion of a

[29] The third exception is the defence that either the Employer has suffered no loss or it

had suffered a different loss from the Beneficiary of the Collateral Warranty. Once again,

such a defence is personal to the Employer, and does not extend to the Beneficiary. So far as

no loss is concerned, if a latent defect only becomes apparent after the property has been

sold to a purchaser, the Employer will not suffer any loss because it has transferred the

property and obtained what must be presumed to be the market price for it. So far as a

different loss is concerned, if the Employer makes a claim in respect of a defect that has

become apparent during his period of ownership, and subsequently transfers the property

to a purchaser, which then becomes aware of a defect that was previously latent, the

Employer and the purchaser will have suffered different losses. Neither can make a claim in

respect of the loss suffered by the other. This is all that the third exception is designed to

achieve; it is based on the fact that a loss may be personal (or specific) to either the Employer

or the purchaser from the Employer, the Beneficiary, and in such a case neither of those

[30] It follows that the exceptions in parentheses in clause 3.1 have no bearing on the

basic proposition that the clause is intended to ensure that, as against the Contractor, the

Beneficiary of the Collateral Warranty is provided with equivalent rights to the original

Employer. Those exceptions are cases where there is no equivalence between the Employer

and the Beneficiary, and consequently they are expressly excluded. If anything, that affirms

the general proposition, that a collateral warranty is intended to achieve equivalence of

rights as between the original owner of a development and any purchaser or tenant or

[31] For the foregoing reasons we are of opinion that the Collateral Warranty Agreement

is intended to confer on the defender as Contractor the same defences against a Beneficiary

as would be available against the original Employer, Northburn. For the reasons already

given, that means that any claim by the pursuers as Beneficiary under the Collateral

Warranty Agreement must be subject to the same prescriptive period, with the same

terminus, as would have applied to a claim made by Northburn. That prescriptive period

operates by virtue of the parties’ contract, as embodied in the Collateral Warranty

Agreement, rather than the general statutory law of prescription, but as we have indicated

that appears to be the clear meaning of the contract, properly construed.

[32] The defender’s liability to the original Employer, Northburn, was extinguished by

prescription at latest five years after the report obtained from Colliers International, which

described the drainage problems in the car park and attributed them to fault on the part of

the defender as Contractor. The effect of clause 3.1 of the Collateral Warranty Agreement is

therefore to extinguish any claim by the pursuers against the defender based on the

[33] We are accordingly of opinion the defender’s construction of the Collateral Warranty

Agreement is correct. We will allow the reclaiming motion, recall the interlocutors of the

Commercial Judge, dated 8 January 2019 and 16 January 2019 in so far as dealing with the

expenses of the debate, sustain the defender’s first plea-in-law to the extent of excluding

from probation the pursuers’ averments relating to the construction of clause 3.1 of the

Collateral Warranty (found in article 6 of condescendence, from “Clause 3.1 of the Collateral

Warranty on its proper construction” to the end of the article). We will further repel the

pursuers’ first plea-in-law (to the relevancy of the defender’s averments), insofar as it relates

to issues that were the subject of the present reclaiming motion, and the pursuers’ second

plea-in-law, which challenges the relevancy of the defender’s averments relating to clause

3.1 of the Collateral Warranty. Thereafter we will remit the case to the Commercial Judge to

proceed as accords.

Scottish Court of Session Decisions