British Overseas Bank Nominees Ltd v Stewart Milne Group Ltd

[2019] CSIH 47 

In 2008, SM entered into a contract with Northburn to design and build retail units and other works. BOBN purchased the development in June 2013 and, as required under the building contract, SM entered into a collateral warranty in favour of BOBN. In May 2013, following a flood at one of the development car parks, a report was produced which eventually led BOBN to commence proceedings against SM in June 2018, claiming that the flood was a result of SM’s defective design. Clause 3.1 of the warranty said that SM were entitled in any action brought by the Beneficiary (BOBN) to rely on any limitation rights in the building contract and to raise the equivalent rights in defence of liability as it would have against the original employer. The prescriptive period (or limitation period in England) under the building contract expired in June 2014, five years after practical completion. The claim was started just within five years from the granting of the collateral warranty. At first instance the court held that BOBN’s rights under the warranty were subject to a fresh five-year prescriptive period from the date of the warranty. Therefore the claim was brought in time.

SM appealed, arguing that the fact that the collateral warranty was only granted in June was 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. Its obligations under the collateral warranty are subject to a contractual time limitation rather than the general law. Lord Drummond Young noted that an important purpose of collateral warranties was:

“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.” 

Whilst it was possible for parties to a warranty to agree a different time bar period, because of the importance of time-bar provisions to contractors and designers, a collateral warranty should normally be subject to the same time bar as applied to the original building contract. Here the warranty was intended to confer on SM the same defences against BOBN as would be available against the original employer. That meant that any claim by BOBN must be subject to the same prescriptive period. SM’s liability to the original employer was extinguished by prescription/limitation at the latest five years after the report was obtained about the drainage problems in the car park.

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