Collateral warranties

The Inner House of the Court of Session (Scottish Court of Appeal) recently issued its decision in Legal and General v Halliday Fraser Munro & Ors [1].  This is the latest in a series of recent decisions (in England and Scotland) regarding status, scope and time limits applicable to collateral warranties[2].

Background

The case concerns a multi-storey office building in Aberdeen – Union Plaza.  It was built in 2008 – PC achieved 8 July 2008.  Halliday Fraser Munro were the architects.  They entered into an appointment in 2007, pursuant to which they were obliged to provide collateral warranties in favour of any future purchasers of the property.

Legal and General purchased Union Plaza in December 2013, and on 6 January 2014, entered into a collateral warranty with HFM.

At the time L&G purchased Union Plaza, they had been made aware of some water ingress at the property, caused by structural defects in the basement.  They were advised that although the problem had been rectified, water ingress was still an issue.  Remedial works were carried out in 2018, which identified inherent defects in the design and application of the protective paintwork systems in the basement.  

L&G commenced proceedings against the Contractor who built Union Plaza, the structural engineer and HFM.

Issues for the Court

The case involved two main arguments advanced by HFM:

1. HFM said that because L&G had purchased Union Plaza before HFM issued the collateral warranty, any loss which L&G had suffered was not caused by a breach of the collateral warranty; and

2. Any obligation on HFM to make reparation (i.e. pay damages) to L&G had been extinguished through the operation of prescription of five years.

The Collateral Warranty

The collateral warranty between HFM and L&G was in standard terms. Of particular relevance:

• Clause 3.1: HFM acknowledge that L&G shall be deemed to have relied upon HFM’s reasonable skill and judgment, and HFM have used and shall use all reasonable skill and care in the performance of its services.
• Clause 3.2: HFM owe no greater duties or obligations to L&G under the collateral warranty than they would have owed to their client under their original appointment.

Argument 1: Breach of the Collateral Warranty did not cause L&G’s loss

This argument was predicated on the fact that L&G sustained loss in December 2013 when they purchased a defective building.  That loss could not, therefore, have been caused by any breach of a collateral warranty entered in January 2014.

The Court gave short shrift to the argument.

Under Clause 3.1 of the collateral warranty, HFM promised to L&G that they had performed their duties under their appointment with reasonable skill and care.  The fact that the collateral warranty post-dated L&G’s acquisition of the building had no bearing on HFM’s fulfilment of that promise.  Had HFM fulfilled its promise, L&G would not have incurred investigation and remedial costs.  The court therefore concluded that those costs were a loss caused by HFM’s breach of the collateral warranty.

In reaching this conclusion, the court referred to the commercial purpose of the collateral warranty: that a warrantor should be liable to a beneficiary for any failure to use reasonable skill and care under the underlying appointment.  Any other interpretation would deny meaningful effect to the collateral warranty.

The court opined that the purpose of collateral warranties was to stop claims from falling into a legal “black hole”, and if HFM’s approach was correct, that is exactly what would become of the losses sustained by L&G.  

Argument 2: Time Bar

Before getting into the legal arguments advanced by HFM and L&G, it is helpful to explain how prescription operates in Scotland.  Prescription is a rule of law in Scotland, the effect of which is to extinguish obligations – i.e the obligation ceases to exist.  This is to be distinguished from limitation (which will be familiar to those operating in England), which restricts when a claimant can bring an action on an obligation.  Both have the effect of operating as a ‘time bar’.

In Scotland, in actions for breach of contract, the obligation to make reparation (i.e. pay damages) is extinguished if it subsists for a continuous period of 5 years without a relevant claim having been made, or the subsistence of the obligation having been acknowledged[3].

In this case, HFM said that the effect of Clause 3.2 of the collateral warranty (“no greater duties or obligations”) was to incorporate, by way of contractual time bar, the same prescriptive period as would have applied to a claim by its client under the original appointment.  A collateral warranty, HFM said, should normally be subject to the same time bar as would have been applied to the underlying appointment.  The result was that time bar under the original appointment had already expired before the warranty came into effect, because more than 5 years had elapsed from the date of PC.  It followed that the claim in the proceedings brought by L&G under the collateral warranty had also prescribed.

The Court disagreed.

The Court found that a collateral warranty was a distinct contract, creating its own rights and obligations, and subject to the same rules of interpretation as any other commercial contract.  If the language of the contract is unambiguous, the court must apply it.

To that end, there was nothing in the collateral warranty to suggest that the parties intended that it should be subject to the same period of prescription as would have applied under the original appointment.  Similarly, there was no ‘normal’ rule or principle amounting to a presumption or default position that collateral warranties would be subject to the same prescriptive period as the underlying appointment.

The effect of Clause 3.2 of the collateral warranty was to limit the scope of the duties and obligations owed by HFM to L&G to those owed to the original client.  It did not follow, however, that where the parties had agreed that there should be an equivalence of duties and obligations, they must also be taken to have agreed that there should be equivalence of defences.  That is a matter for agreement as between the parties.

There may be circumstances where an employer or developer will want to secure generous terms in collateral warranties to maximise marketability of the development.  This might mean seeking to ensure that subsequent purchasers are not subject to the same time bar as would have applied under the original contracts.  This is likely to be at odds with the granter of a collateral warranty, who will want to restrict its liabilities.

Absent any express wording limiting the duration of HFM’s liability to L&G, the Court found that the earliest possible date for commencement of the 5 year prescriptive period was 6 January 2014, when the collateral warranty was granted.  L&G commenced proceedings on 17 December 2018.  This was therefore within the 5 year prescriptive period.  There was no time bar.

Conclusions

Parties providing collateral warranties need to properly understand the status of these documents.  They are standalone contracts containing standalone rights and liabilities.  Where a granter of a collateral warranty wants to limit its exposure to that of the underlying appointment, it will need to include:

• A “no greater duties or obligations” clause, of the kind in Clause 3.2 of HFM’s collateral warranty; and
• An “equivalent rights in defence” clause, which says that in any claim brought by the beneficiary of a collateral warranty, the warrantor can rely on any defence that would be available to it if the claim had been brought under the original contract or appointment.

The two clauses should not be conflated, and as illustrated in L&G v HFM, the inclusion of one, does not imply the inclusion of the other.

Collateral warranties are valuable documents.  Their importance should not be underestimated – particularly in the current economic climate, where stability of the supply chain cannot be assumed.  Parties need to properly understand:

(a) When collateral warranties can be requested – and when they must be provided;
(b) The terms of the collateral warranties; and
(c) Limits to the scope of duties and duration or extent of liability under a collateral warranty.

If you have any questions about collateral warranties, or making claims under them, please speak to Katherine Doran or your usual contact at TLT.

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[1] Legal and General Assurance (Pensions Management) Ltd v Haliday Fraser Munro & Ors [2025] CSIH 24

[2] For example, my colleague Alyson Cowan has written on the Supreme Court’s decision in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP [2024] UKSC 23 (Return to normality - collateral warranties are (usually) not construction contracts - TLT LLP).  

[3] Prescription and Limitation (Scotland) Act 1973 Section 6(1)

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at October 2025. Specific advice should be sought for specific cases. For more information see our terms and conditions.