The recent Opinion of Lord Drummond Young in the case of Scottish Widows Services Limited v Harmon/CRM Facades Limited (in liquidation), Building Design Partnership and W.S.A. INC and Scottish Widows Services Limited v Kershaw Mechanical Services Limited and Building Design Partnership is of significant interest to the Scottish Construction Industry.

In short, the case concerned the Scottish Widows HQ building in Edinburgh which once constructed turned out to have defects to its roof, eaves and cladding which required to be rectified by the tenant at a cost of several million pounds.

Broadly speaking, the case deals with the enforceability of collateral warranty agreements but also explores more detailed related issues, such as whether enforceability is affected by assignations of these agreements, no loss arguments, net contribution clauses, the concept of joint and several liability generally and also consultants’ potential responsibility/liability for appointing specialists.

There has been little judicial authority on any of these matters, or indeed on collateral warranties at all, and as a result construction practitioners have for years now spent unnecessary time and energy discussing largely hypothetical issues related to collateral warranty agreements ranging from whether or not these agreements are enforceable at all, to whether net contribution clauses are enforceable, to what extent no loss arguments can be used to defeat claims under collateral warranty agreements. I have often felt that many of these discussions have stemmed from lawyers getting too caught up in clever legal arguments, and ultimately losing sight of basic legal principles which would result in a logical and straightforward answer to these and many other related questions.

This judgement is therefore to be commended for adopting a common sense, straightforward approach to the resolution of these questions based on well recognised legal principles. Essentially, the judgement reaffirms that as a matter of contract law it is possible to create a right in favour of one party who may have suffered a loss due to the wrongdoing of a contractually unconnected third party. The key quote from the judgement says that “…there is no reason that any person who becomes liable for the cost of repairing a defect in a building should not be entitled to sue for the cost provided that he is the beneficiary of a collateral warranty granted by the person responsible.” In other words, collateral warranty agreements are enforceable. That is the single most important point to take from the judgement.

As to the more detailed arguments, these are quite interesting, and indeed the case report goes into these in some detail. However, the conclusions reached are straightforward and very helpful.

Firstly, there was a question raised as to whether or not a net contribution clause contained within the documentation would be effective. A net contribution clause, put simply, seeks to override the principle of joint and several liability with the result that the party granting the warranty containing the net contribution clause can only be sued for a proportion of its loss which would be just and equitable for it to bear. There has been discussion in recent years that net contribution clauses might not be enforced by the courts. In my view, this misses the point completely. Clearly, a court would enforce an arrangement entered into by contracting parties that was clear in relation to its legality and its intention. That should never really have been in doubt, and helpfully the court has reaffirmed that. The issue with net contribution clauses does not and never has, in my view, related to their enforceability, but rather their interpretation and the impact they would have on any claims made by a beneficiary. It is envisaged that this will be explored in more detail in the subsequent proof.

Another issue raised which resulted in far more extensive discussion in the judgement was whether or not a beneficiary under a collateral warranty agreement that had been granted to a different party, but subsequently assigned to the beneficiary, would face any issues with regard to its potential ability to recover on the basis that it was an assignee of the rights and not the original beneficiary. Again, this issue has, surprisingly, been the subject of much debate by construction lawyers in recent years, many of whom have suggested that if an assignor no longer has an interest in the property and has therefore suffered no loss then the effect of this is to give the ultimate beneficiary a no loss problem even though it can demonstrate a successful prima facie claim. Thankfully, the judgement again deals with this question on a first principles basis and concludes that there is no reason on the face of it that an assignee of the rights of a collateral warranty agreement should have any difficulties in recovering its loss provided of course the collateral warranty agreement has been assigned properly.

One of the more technical arguments in legal terms related to the actual loss sustained, and how to quantify the actual loss. There was some confused argument put forward on the basis that because the beneficiary under the collateral warranty agreements in this case did not have an obligation to carry out the repairs under its lease, then it had no loss. Helpfully, once again, the judgement clarified that whilst a physical defect in a building is itself the primary loss that results from defective performance, the physical defect does also have a number of economic consequences that might fall on a number of parties, the main one being the cost of repairs. The judgement clarifies that the true measure of that loss is in fact the cost of the actual repair.

Another issue discussed in the case, which should serve as a warning to professional consultants, is that if a consultant does not have the requisite technical expertise to carry out any aspect of its services, then it may be under an obligation to appoint a specialist itself in a sub-consultancy capacity, or indeed recommend that the client appoints a specialist to carry out this aspect of the services. Failure to do so might make the professional consultant itself responsible, and this will be even more likely to be the case if the consultant’s appointment agreement specifically contains wording that makes it responsible for any failure to recommend/appoint specialists, as was the case here.

At a time when we find ourselves in all sorts of economic turmoil caused partly because people were becoming too clever for their own good, it is interesting that this case provides such a clear and concise conclusion to many hypothetical legal questions which should never really have been in debate in the first place. It should serve as a reminder to developers, banks, and more importantly FRI tenants to make sure they insist on getting the right collateral warranty protections for their project, and it should also serve as a warning to contractors, consultants and sub-contractors that any collateral warranty agreements granted by them will probably be construed so as to give effect to the purpose for which they were granted, which means they need to take legal advice to make sure they understand and can accept the warranties that they are granting.