The recent case of The Engine Yard Edinburgh Limited and Allenbuild Limited v Bayne Stevenson Associates Limited [2024] CSOH 13 provided useful guidance on prescription in the context of delivery of collateral warranties, and whether the common law will step in to assist a claimant where a warranty has not been delivered.
Background to Dispute:
Allenbuild Limited ("Allenbuild") was the design and build contractor for a project known as The Engine Yard Edinburgh. The Engine Yard Edinburgh Limited ("The Engine Yard") was the developer that owned the land on which the project was built.
Allenbuild appointed Bayne Stevenson Associates Limited ("Bayne Stevenson") as structural engineer for the project. The Engine Yard was not a party to this appointment which was executed on 14 April and 22 May 2017 ("the Appointment"). Clause 6.1 of the Appointment provided for the delivery of collateral warranties:
"The Engineer shall promptly execute in a self-proving manner and deliver a Collateral Warranty in the form annexed or in such other form as the Contractor reasonably requires within 7 days of written request in favour of the Employer and/or any lessee and/or purchaser and/or provider of finance for the Project acquiring from the Employer an interest in or charge over the Project Development or any part of the Project."
On 25 August 2022 (more than 5 years after the Appointment was executed) Allenbuild made a written request to Bayne Stevenson for provision of a collateral warranty in favour of The Engine Yard but no such warranty was delivered to either Allenbuild or The Engine Yard.
The Engine Yard and Allenbuild raised a court action against Bayne Stevenson seeking damages for the cost of remedial works carried out to the project in 2021 & 2022. The Engine Yard sought a declarator that the terms of the Appointment intended to confer benefits upon them in respect of provision of a collateral warranty by Bayne Stevenson in their favour and that this created a third party right (ius quaesitum tertio) such that the Engine Yard had the right to sue Bayne Stevenson for the execution and delivery of a collateral warranty (despite them not being a party to the Appointment).
Bayne Stevenson argued that any right to require the production of a collateral warranty in favour of The Engine Yard had prescribed as no relevant claim (court action) had been made within 5 years of the execution of the Appointment. Further, no third-party rights as claimed had been created by the terms of the Appointment. Bayne Stevenson argued that the structure of the parties' contracts pointed away from any intention to create third party rights. The Appointment conferred a right on Allenbuild to request a collateral warranty in favour of The Engine Yard. It did not give The Engine Yard any automatic rights.
Judgment:
In reaching its decision, the Court addressed the key issues of ius quaesitum tertio and prescription in turn:
ius quaesitum tertio
The Court considered that the contractual structure pointed away from an intention to create third party rights. There were three contracts among the parties, two expressly excluded third party rights and the third did not mention them. This was said to "…[form] an awkward background into which to imply a ius quaesitum tertio…" The Appointment was "only one part of a pattern of linked contractual rights and obligations…it cannot be said with any confidence that that the implication of a ius quaesitum tertio would not undermine the essential structure of the arrangements which those parties decided to put in place."
The Court also considered that Allenbuild had its own interest in being able to demand a collateral warranty in favour of The Engine Yard. This meant that it was not obvious that clause 6.1 was for the benefit of The Engine Yard.
The Court accordingly rejected the proposition that a ius quaesitum tertio had been created.
Prescription
The Court held that there was a presumption that the obligation to deliver a collateral warranty was 'pure and enforceable' at once (i.e. when the Appointment was executed). Allenbuild could not have demanded performance of the obligation if it had not already been in existence. There was nothing in the Appointment to displace the presumption that this obligation existed from the date of its execution.
The Court compared this situation with that of a loan repayable on demand. In the latter, the obligation to pay exists from the outset and the demand for payment affects only the performance of an existing obligation. It does not create a new one.
It therefore follows that as a period of five years had passed without interruption since execution of the contract, Allenbuild's right to require that Bayne Stevenson deliver a collateral warranty executed in favour of The Engine Yard had prescribed.
Key Takeaways
Ingather collateral warranties within five years from the date when the right to a warranty is created or you might lose the right. In the absence of a collateral warranty it will be difficult to pursue a remedy against the defaulting party.
The Courts will be reluctant to create third party rights where there is an existing contractual structure in place between the parties.
Anyone with any questions on the issues raised in this article should get in touch with us to discuss.
