In the case of Royal Bank of Scotland plc v Halcrow Waterman Ltd [2013] CSOH 173, the Outer House of the Court of Session provided a judgment which provides guidance on the interpretation of net contribution clauses within collateral warranties.

The facts of the case were far from uncommon. Royal Bank of Scotland “RBS”) was a tenant of a building in Edinburgh under an FRI lease. Lilley Construction Ltd (“Lilley”), a construction company, had been contracted to carry out building works and had entered into a further agreement with a structural engineer, Halcrow Waterman Ltd (“Halcrow”), to act as a consultant in respect of these works. RBS had the benefit of a collateral warranty with Halcrow, which included a net contribution clause limiting the structural engineer’s liability to the proportion of the tenant’s losses which would be just and equitable, having regard to the relative responsibilities of the structural engineer and all “Other Consultants” for such losses. Unfortunately, the warranty did not include a definition of the parties referred to as “Other Consultants”. By the time a defect in the building works was discovered, Lilley had become insolvent and RBS therefore pursued the structural engineer for  its ensuing losses.

Unlike the recent Carlyle case, there was no dispute as to the existence of the warranty itself. The Court was instead required to determine the interpretation of the term “Other Consultants” within the net contribution clause. Halcrow submitted that the term should be construed widely to include the building contractor, Lilley, despite the reference to “consultants” rather than “contractors”. The structural engineer’s liability could therefore be reduced by the extent to which the building contractor had contributed to the loss. Alternatively, the defender submitted that, for reasons of commercial reasonableness, the reference to “just and equitable” should be construed as restricting liability even if the building contractor had not been party to the clause.

RBS, as pursuer, submitted that, when read as a whole, the documents drew a clear distinction between the building contractor and the consultants. Whilst each consultant derived reciprocal benefits from their collateral warranties (i.e. the reduction of liability according to each consultant’s individual responsibilities), the building contractor did not benefit in the same way. Indeed, the building contractor did not need such benefits, as it would have direct contractual rights against each of the consultants, including Halcrow, with which it had entered into agreements.

The Court identified the question at the heart of the case as “who should bear the risk of the building contractor being unable to contribute to losses suffered by the tenant”. It found that there was no good commercial reason why this risk should rest with the tenant, when an ordinary understanding of the words “Other Consultants” implied that the building contractor had not been a party to the net contribution clause. To find otherwise would be to re-write, rather than merely interpret, the contract, as the building contractor was not a “Consultant”, “Other” or otherwise.

In obiter, the Court considered a specific argument raised by the pursuer which claimed that, if the building contractor had been found to be a party to the net contribution clause, a just and equitable allocation of the tenant’s losses could be 100%, as it was ultimately liable for the building works even if some of its duties were delegated to consultants. The Court suggested that the allocation of responsibility under the net contribution clause related to the responsibility for the specific losses, rather than the project as a whole, and therefore a consultant could still be required to pay the proportion for which it was responsible. In any event, this argument was not relied upon by the Court when making its decision.

Royal Bank of Scotland plc v Halcrow Waterman Ltd should serve as a reminder of the importance of clarity when identifying the parties affected by collateral warranties.