Collateral warranties and time-bar: a new risk for contractors?

A recent decision from the Inner House of the Court of Session has reshaped the Scottish legal landscape around collateral warranties and time-bar. In Legal and General Assurance (Pensions Management) Ltd v The Firm of Halliday Fraser Munro and Others [2025] CSIH 24 the court held that a warranty granted years after a building was completed, and after it had changed hands twice, could still give rise to a fresh five-year prescriptive period. This has important implications for contractors, consultants, and developers operating under Scots Law.

Background

Union Plaza, a multi-storey office building in Aberdeen, was completed in 2008. It was originally owned by Stewart Milne Central Limited (‘SMC’), who sold it later that year to Union Plaza Limited Partnership (‘UPLP’), a related company. In December 2013, Legal and General Assurance (Pensions Management) Ltd (‘L&G’) purchased the building from UPLP, becoming the second purchaser since completion.

At the time of the purchase, L&G had no direct contractual relationship with the original design team. In January 2014, the architects, Halliday Fraser Munro (‘HFM’) issued a collateral warranty in L&G’s favour. This post-purchase warranty became the basis of the case against HFM.

L&G later identified significant defects including issues with the protective paint system, soffit insulation, and supervision. They sought damages from HFM, engineers Fairhurst, and Stewart Milne Group Ltd. The case reached the Inner House as an appeal brought solely by HFM.

The Claims and Legal Issues

L&G claimed breaches of duty relating to defective design and construction and sought over £400,000 in remedial costs. A key issue was when the five-year prescriptive period under the Prescription and Limitation (Scotland) Act 1973 began to run.

Normally, under section 6 of the Act, the clock starts when the wrongful act and resulting loss coincide, typically at practical completion. Historically, courts have treated collateral warranties as “derivative” obligations to the original contract or appointment, resulting in the same prescriptive period applying.

However, L&G contended that the 2014 warranty created a fresh obligation, triggering a new five-year prescriptive period. For the soffit insulation defects, first identified in August 2020, L&G relied on section 11(3) of the Act, which postpones prescription until the loss is or could reasonably be known. They also attempted to invoke 6(4) of the Act, arguing they were induced into error by HFM’s conduct, including representations in the warranty itself. The court rejected that argument.

HFM argued that the warranty did not give rise to a new prescriptive period and should be treated as subject to the same time-bar as the original appointment.

Court’s Findings

The Inner House dismissed HFM’s appeal and upheld the decision of the commercial judge:

• The collateral warranty was valid and enforceable despite being granted after purchase.
• Claims relating to the paint system were timely, brought within five years of the collateral warranty.
• Soffit insulation claims were potentially time-barred but could proceed to an evidential hearing under section 11(3) due to delayed discovery.
• Section 6(4) was not engaged, as no inducement of error had been proved.
• The warranty did not include wording limiting liability to the original contract (such as “no greater duty than owed to the employer”), so was treated as a fresh obligation starting in 2014.

Implications for Contractors

This outcome contrasts with earlier authority, notably British Overseas Bank v Stewart Milne Group [2019] CSIH 47, where the court found that collateral warranties generally adopt the same prescriptive period as the original contract.

Here, the absence of wording limiting liability to the original contract was critical. Unlike British Overseas Bank, HFM lacked clear contractual wording to rely on a time-bar defence they would have under its original appointment.

Contractors should therefore carefully review the terms of collateral warranties they grant. Failure to include such protections could unintentionally restart the five-year clock, creating significant ongoing risk.

Can Parties Agree to Extend Liability?

Although an appeal to the Supreme Court appears unlikely, the decision raises further legal questions. In particular, the court did not engage with section 13 of the 1973 Act, which prohibits parties from contracting to extend the statutory prescriptive period. This contrasts with English law, where parties are not so prohibited.

The court’s conclusion that a new prescriptive period arose from the warranty sits awkwardly with section 13, since the underlying breach and loss occurred in 2008. While the court characterised the warranty as a new obligation rather than an extension of an old one, that distinction may yet require further judicial scrutiny.

Key Takeaways

• Collateral warranties can trigger a new five-year prescriptive period, particularly where the warranty lacks ‘equivalent rights of defence’ wording.
• Contractors should ensure careful drafting to avoid unintended consequences.
• Section 11(3) remains important for claims involving latent defects, where a creditor’s loss could not reasonably be discovered sooner.
• Section 6(4) requires clear evidence of error induced by the debtor’s conduct and is unlikely to succeed where the alleged error arises from the granting of the warranty itself.
• The interaction between fresh warranty obligations, underlying appointment obligations and section 13 remains unresolved.

If you would like help reviewing your collateral warranty wording or advice on managing prescription-related risks, please get in touch with our construction & engineering team.