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Collateral warranties, joint and several liability and net contribution clauses

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Collateral warranties, joint and several liability and net contribution clauses

25 March 2010

Scottish Widows Services Ltd v Harmon/CRM Facades Ltd & Ors.
Scottish Widows Services Ltd v Kershaw Mechanical Services Ltd & Ors.

These actions arise out of the project to construct a new head office for Scottish Widows Fund and Life Assurance Society in the late 1990s.  The pursuer in each action, Scottish Widows Services Ltd, sued to enforce certain collateral warranties granted by works package contractors (the main contract for the project being a management contract) and the project architects.  These collateral warranties had originally been granted to third parties and had respectively been assigned by those third parties to the pursuer in 2003.  The pursuer's case was essentially that the building had been defective as a result of breaches of the collateral warranties: it should be entitled, either as assignee or, alternatively, in its own right, to recover the cost of repairs incurred by it.  The defects were caused by breaches of the collateral warranties which occurred before 1999.  The pursuer became sub-tenant of the building in 1999.

In a lengthy decision dealing with various attacks on the pursuer's entitlement to recover the cost of repairs, Lord Drummond-Young held, among other things, that:-

• Collateral warranties must be construed in such a way as to further their essential purpose, namely to ensure that the party who suffers a loss has a right of action against any contractor or professional who has provided defective work.
• A physical defect in a building is itself the primary loss resulting from defective performance by contractors or professionals.
• A physical defect will, however, have economic consequences which may fall on a number of parties, the main one being the cost of repair.
• The liability for repair is also a loss, and a party incurring such a loss can sue to recover it if he is in a direct contractual relationship with the person whose breach of contract has produced the loss.  The true measure of the loss is the cost of repairs.
• It is not necessary for there to be any obligation on that party to carry out the repairs, for example under a lease or sublease - it is the fact that necessary repairs have been carried out at the expense of the grantee of the collateral warranty or their assignee that gives rise to the claim.
• For joint and several liability to be established, the critical issue is whether the breach of contract by each defender contributed to a single loss sustained by the pursuer.  It is immaterial that each defender had a separate contract.  The proposition that obligations owed to separate persons cannot found joint and several liability is incorrect.
• Net contribution clauses do not require to be reflected in the conclusions of a summons as a matter of pleading, but they must be given effect to by the court at the time of decree.
• The possibility that more than one beneficiary of a collateral warranty will raise proceedings in respect of the same loss is a problem that requires a solution, but procedures can be devised to prevent double recovery.  For example, multiple proceedings raised at the same time could be conjoined; or if the defender has already made reparation to one pursuer it would have a complete defence against any subsequent pursuer, who in turn might have recourse to the earlier pursuer.

Richard Keen QC and Sean C. Smith appeared for the pursuer and Jonathan Lake QC appeared for the project architects, all of Axiom Advocates.