Not all collateral warranties are built equal: a cautionary example from the Scottish appeal court

On 27 August 2025 the Inner House (Scottish Court of Appeal) issued its opinion in the case of Legal and General Assurance (Pensions Management) Limited (“L&G”) v Halliday Fraser Munro (“HFM”) & Ors [2025] CSIH 24.

This landmark decision represents a fundamental change to the interpretation of collateral warranties in construction contracts. The decision is of significant importance to both current claims and future projects.

In this case, the court rejected the previously held belief that a collateral warranty incorporated the same defences, including time-bar, as would be available to a claim made under the underlying appointment.

Rather, it is a question of what the parties to the collateral warranty specifically agree. In the absence of an express clause incorporating equivalent defences, the party granting the warranty cannot rely on a defence which it might have had, if the beneficiary had been named as the client under the main appointment.  Crucially, this means that, absent a clause to the contrary, a collateral warranty beneficiary will have at least five years  from the date of the collateral warranty in which to serve proceedings. This is a significant qualification to the general rule, that the prescription period in a construction defects case would generally begin at practical completion, at the latest.

Prescription, still perhaps the hottest topic in Scottish construction litigation, was also addressed in the decision.  It provided further helpful clarity on the conduct which a claimant can and, perhaps more importantly cannot, rely upon to establish induced error so as to suspend the running of prescription in terms of s6(4) of the Prescription and Limitation (Scotland) Act 1973. The case is the latest of several significant decisions in the last 18 months which have held that a defendant does not induce a claimant into an error which would justify suspension of prescription, by simply performing their contractual obligations.

Background

L&G raised an action in the Commercial Court of the Court of Session (Scottish High Court), in relation to the design and construction of  the Union Plaza office block in Aberdeen. Practical completion was achieved on 8 July 2008. In December 2013, L&G purchased the building from the previous owner.  On 6 January 2014 HFM granted a collateral warranty in favour of L&G in the terms specified in HFM’s appointment.

L&G served proceedings on 17 December 2018 in relation to various alleged defects associated with water ingress in the car park. On 2 February 2021, L&G introduced a further claim into the action for alleged defects with soffit insulation. HFM argued that both claims had been brought out of time. The first instance court rejected HFM’s arguments. HFM appealed to the Inner House (Court of Appeal equivalent).

The court considered two key questions:

1. Did the same time limits apply to claims brought under the collateral warranty,  as would have applied to a claim made against HFM under its main appointment?
2. Was L&G induced into error by the conduct of HFM such that the operation of prescription was suspended by s6(4) of the 1973 Act?

Incorporation of main contract defences into a collateral warranty

HFM relied on a previous Inner House decision (British Overseas Bank Nominees Ltd v Stewart Milne Group Ltd 2020 SC 24), in arguing that the purpose of a collateral warranty was to provide equivalent rights and defences as would exist had the beneficiary been named as the client under the appointment. This would include an ability to rely on the same time-bar period as would apply to claims made under the architect’s appointment. HFM’s position was that time-bar started to run from no later than practical completion.

The Inner House firmly rejected HFM’s argument. There is no general principle of equivalence between a collateral warranty and the main contract to which it refers. A collateral warranty is a standalone commercial agreement in its own right. It is what the parties to the collateral warranty agree that matters. Defences available under the original contract, including the time-bar period, will only be incorporated if there is an express term in the collateral warranty to that effect.

In making its decision, the Inner House distinguished the collateral warranty in British Overseas Bank from the one which had been granted by HFM. The differences are important. The collateral warranty in British Overseas Bank expressly incorporated the defences from the original contract; the HFM collateral warranty did not.

The effect of the Inner House’s decision is that in the absence of an express term, defences which might have been available under the original contract will be of no assistance to a claim made under the collateral warranty. Perhaps most importantly, the time-bar period will be reset to the date of the collateral warranty. The time-bar period applying to the original contract will not be incorporated as a contractual limitation, at least in the absence of express wording to the contrary.

What does this mean in practice?

In summary, this decision emphasises that extreme care must be taken when granting a collateral warranty. The approach adopted by the Inner House suggests that many contractual warranties will no longer provide those granting them with the level of protection that was previously believed. Claims which might previously have been considered out of time under the original contract, could still be enforceable on account of collateral warranty granted several years later.

Caution must now be exercised to select the form of collateral warranty appropriate for the project. It is now clear that there are three classes of collateral warranty: (1) those similar to British Overseas Bank; (2) those similar to Legal and General; and (3) those framed on the basis that the party granting the warranty will assume no greater liabilities than that owed under the building contract (Swansea Stadium Management Co Ltd v Swansea City and County Council [2018 EWHC 2192 (TCC)]. Only collateral warranties in the form which was litigated in British Overseas Bank will incorporate defences available under the original contract. The three forms are shown below:

British Overseas Bank clause

“2.3

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 Building Contract.

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”

Legal and General clause

3.2 No greater duties

The Consultant shall owe no greater duties or obligation to the Beneficiary under the terms of this Agreement than the Consultant would have owed to the Beneficiary had the Beneficiary been named as the Client under the Appointment save that this Agreement shall continue in full force and effect notwithstanding the determination of the Appointment for any reason”

Swansea Stadium clause

“1.

The Contractor warrants, acknowledges and undertakes that:

1. it owes a duty of care to the Beneficiary in the carrying out of its duties and responsibilities in respect of the Works

…

Provided that the Contractor shall have no greater liability under this Agreement than it would have had if the Beneficiary had been named a joint employer with the Employer under the Contract.”

The risk to contractors, architects, engineers and other construction professionals is plain to see. Failure to include a clause incorporating original contract defences meant that the court found HFM was exposed to claims until January 2019. Had the underlined section of “British Overseas Bank clause” been included, the time limit for serving proceedings would have expired by July 2013, some five and a half years earlier.  Put simply, had L&G’s collateral warranty included a “British Overseas Bank clause” the claim against it would have been out of time.

This decision shows a collateral warranty is not simply a formality to be included in a schedule to the original contract. The terms matter, as does the timing. When negotiating the terms of a collateral warranty, great care should be taken to ensure terms to be agreed do not result in an unexpected level of ongoing risk.   Those who overlook this issue could unwittingly extend the period for which they are liable for defects by several years.