Protected by a Collateral Warranty?

The outcomes in the cases of Scottish Widows Services v Harmon/CRM Facades and Scottish Widows Services v Kershaw Mechanical Services are a wake up call that liability can be incurred in providing collateral warranties.

Scottish Widows Services were assigned the lease to Port of Hamilton, as well as the collateral warranties provided to the original Tenant by the contractor and architect for the development. The roof of the building was leaking so Scottish Widows Services sought damages from the contractor and architect, for issues/defects in a development they had leased.

Scottish Widows Services knew of the defects before they acquired its interest and as such were in a position where they didn’t have any obligation under the lease to repair these defects. They did however chose to carry out the repairs of the own volition. They then sought to recover, but where they entitled to?

The contractor and architect argued that the losses where self-inflicted as Scottish Widows Services knew the position when they were entering into the lease. Scottish Widows Services then accepted the premises in the condition it was in at the start of the lease (including the defects). It was also argued that the repairs were done for Scottish Widows Services’ convenience and not as a legal obligation. These arguments did not carry any weight with the court as the breach of collateral warranty remained the dominant cause of loss.

Scottish Widows Services only had to prove that they incurred reasonable costs in fixing the defects, which were a result of the breach of the collateral warranty. A beneficiary of a collateral warranty is not normally party to the terms of the original contract or appointment, they are unlikely to have an existing or future relationship with the granters of the warranty, so they are likely to pursue any legal remedy robustly.

Kyle Moir

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