Collateral Warranties: Assignment And Rights Of Action To Sue For Breach Of Contract

In the following Scottish case the court had to consider the validity of various assignments of collateral warranties to the sub-tenant of a property and the enforcement of those collateral warranties against the parties who originally provided them. The package of collateral warranties available reflected the complex contractual arrangements put in place by the parties. The case is interesting for the pragmatic and commercial approach taken by the judge on enforcement of collateral warranties.

Scottish Widows Services & Anor v Harmon/CRM Facades Ltd [2010] ScotCS CSOH 42

The employer appointed a management contractor (LMS) and an architect (BDP) to design and construct a new head office for the Scottish Widows Fund and Life Assurance Society (the Society) at Port Hamilton, Edinburgh.

One of the constructed building blocks suffered defects as a result of storm damage the effect of which rendered the building no longer wind or watertight. The defects were attributable to the glazing works contractor (Harmon), the roof works contractor (Kershaw) and BDP.

The lease structure of the land appears to be that the original lesee of the land (EDC) assigned its rights to the land to its funder, Scottish Widows (Port Hamilton) (Port Hamilton). Port Hamilton in turn granted a sub-lease to the Society and the Society simultaneously assigned its rights to Scottish Widows Services Ltd (the Sub-Tenant).

The Society received a collateral warranty from BDP, LMS, Harmon and Kershaw.

Port Hamilton received a collateral warranty from Harmon as well as a separate guarantee from Harmon's parent company (WSA) which guaranteed the obligations of Harmon under the collateral warranty (the Guarantee).

The Society and Port Hamilton assigned to the Sub-Tenant the collateral warranties received from BDP and Harmon and the Guarantee from WSA. In relation to Kershaw the Sub-Tenant received an assignment from LSA of Kershaw's works contract.

The remedial works to repair both the glazing/cladding and roofing defects to the building (at a cost of almost £6 million) were carried out by the Sub-Tenant following the assignment of the sub-tenancy from the Society.

Following the assignments of the various collateral warranties, Guarantee and Kershaw works contract, the Sub-Tenant was in possession of a complete package of rights upon which to sue those parties who were responsible for the defects in the building.

Were BDP and Harmon in breach of their collateral warranties?

The Sub-Tenant sought to recover the cost of the remedial works on the basis of the collateral warranties which the Society and Port Hamilton assigned to the Sub-Tenant from BDP, Harmon and the Guarantee by WSA.

In particular the Sub-Tenant argued as follows:

The BDP collateral warranty: in relation to Harmon's defective glazing works BDP were responsible for the preparation of performance specifications and tender documents and for carrying out technical checks of the design in so far as that was within the normal expertise of an architect. BDP failed to carry out such inspections and tests and were similarly in breach of their contractual obligations under the collateral warranty which had been assigned from the Society to the Sub-Tenant.

In relation to Kershaw's defective roofing works, BDP were responsible for regular...