Collateral warranties are a standard feature of Scottish construction projects. They give beneficiaries such as funders, purchasers, tenants and other third parties a direct contractual right against a contractor, consultant or subcontractor, even though the beneficiary was not a party to the underlying building contract or appointment.
Generally, a contractual link is necessary for a beneficiary to recover the losses it incurs due to defects in construction works that come to light after the works are completed.
For the party granting the warranty, however, the duration of its exposure to the risk of recovery can be a significant issue.
How long does liability under a collateral warranty last?
The duration for which a granting party is exposed to any liabilities cannot be answered by looking solely at the collateral warranty.
A collateral warranty typically specifies that no claims can be raised after the expiry of a limitation period, usually 10 or 12 years (sometimes less) from either practical completion of the relevant works, or completion of the relevant services. The limitation period, however, operates as a maximum.
Under the Prescription and Limitation (Scotland) Act 1973 (the ‘Act’), an obligation to make reparation or pay damages for breach of a contract (such as a collateral warranty) will commonly prescribe (i.e. be extinguished) after 5 years. That 5-year period is extendable in certain, limited circumstances, but only up to a maximum of 20 years. The limitation period in the collateral warranty operates to reduce that maximum period.
When does the prescription period begin?
A collateral warranty will specify when the limitation period runs from, but it does not specify when the 5-year period under the Act starts from. Identifying the start date can therefore be difficult.
Several factors can determine when the prescription period begins, such as when the breach of the collateral warranty occurred, when the loss flowing from that breach occurred and when the claimant knew, or could reasonably have known, that loss had occurred. These facts, rather than the date on which a defect in the works was finally diagnosed, will be decisive.
Consequently, a collateral warranty stating that liability lasts for 12 years does not automatically mean every claim remains alive throughout that period. Prescription may extinguish an obligation earlier, while a properly drafted contractual cut-off may bar a claim sooner. Conversely, later loss, interruption of prescription or the precise nature of the breached obligation may complicate the position.
Can assignation provisions impact the duration of exposure?
Assignation provisions can allow the rights granted to the beneficiary to pass to later purchasers, tenants or funders. This not only changes the identity of the claimant years after completion of the works, but also potentially extends the liability of the granter to years after the original beneficiary ceased to have an interest in the works.
How can Thorntons help?
Long-term exposure is best managed at the drafting stage. Granters should avoid obligations that exceed the underlying contract in scope or duration. Beneficiaries should ensure the collateral warranty gives them and their assignees adequate protection.
A collateral warranty is a substantive risk document and project-specific advice remains essential. Our construction legal experts can help you draft and negotiate collateral warranties, as well as SBCC, JCT, NEC and FIDIC contracts.
