This case created a bit of a stir in December 2018 when the Outer House of the Court of Session held that BOBNL would be able to pursue SMGL under a collateral warranty granted in 2013 notwithstanding the fact that practical completion had occurred some nine years before and it was apparent that the defect had arisen more than five years previously. This decision was reversed by the Court of Session last month, with particular ramifications for those relying on collateral warranties.
SMGL (the defender), a building contractor, entered into a contract with Northburn Developments Ltd (Northburn) for the design and construction of a retail park in Inverurie. The build was completed in 2009. In June 2013, the site was acquired by BOBNL (the pursuer), who obtained collateral warranties from the defender dated 24 June and 28 August 2013. Prior to the pursuer's acquisition of the site, the car park (which was part of the site) had been subject to flooding that was the subject of a report in May 2013. On 21 June 2018, the pursuer raised an action for breach of the 2013 collateral warranty in relation to this flooding.
The initial decision
The defender argued that the claim brought by the pursuer had been extinguished by prescription. The defender relied specifically on clause 3.1 of the warranty granted in favour of the defender which, as is common in collateral warranties, provided that: "The (defender) shall be entitled in any action or proceedings by the (pursuers) to rely on any limitation in the building contract and to raise the equivalent rights in defence of liability as it would have against Northburn under the building contract". Effectively, the defender argued that the liability owed to the pursuer by way of the collateral warranty was no greater than that owed to Northburn by way of the building contract. Therefore, because the option for Northburn to bring proceedings in relation to the flooding prescribed in May 2018 (five years after they became aware of the flooding), the defender argued that the pursuer's claim had also prescribed.
The pursuer argued that the defender's liability as set out in the collateral warranty was independent from the defender's liability under the building contract, arguing that the date from which prescription ran was the date(s) of the collateral warranties and not the date of the building contract.
The Court agreed with the pursuer in holding that the granting of the collateral warranty created...