Limitations under collateral warranties

Collateral warranties are typically drafted on bespoke terms. There is no inherent rule that a warrantor will benefit from limitations in the underlying contract as against the beneficiary under any collateral warranty; warranties are subject to their specific terms.

Due to the bespoke nature of most warranties, there is no uniform approach to the negotiation of limitation clauses within such warranties. In our experience, collateral warranties can contain one or more of the following: a no greater duty or an equivalent rights in defence clause; a net contribution clause, an exclusion of liability for consequential loss and/or a limitation on liability for the cost of repair.

A recent Scottish decision of the Inner House is a timely reminder on the importance of understanding the scope and purpose of such limitation clauses.

Legal and General Assurance (Pensions Management) Ltd v The Firm of Halliday Fraser Munro and others [2025] CSIH 24

The case concerned a defects claim brought by the purchasers, Legal & General (L&G), of an office building in Aberdeen against the architect, Halliday Fraser Munro (HFM), pursuant to a collateral warranty HFM granted to L&G on purchase in 2013 (the works achieved practical completion in 2008).

The second defence ground submitted by HFM was that the claim was time barred (under the Scottish law of prescription) because the warranty benefited from the same 5-year limitation period applicable to the underlying appointment. HFM relied on the "no greater duty" clause (described below) incorporated in its warranty.

In opposition, L&G submitted that the grant of the collateral warranty resulted in a refreshed limitation period due to the absence of any express contractual limitation provision to the contrary – the Scottish Court agreed. The collateral warranty was a distinct contract creating its own rights and obligations.

The limitation clause in the HFM Warranty

Clause 3.2 of the warranty stated that:

HFM "shall owe no greater duties or obligations to [L&G] under the terms of this Agreement than [HFM] would have owed to [L&G] had [L&G] been named as the Client under the Appointment save that this Agreement shall continue in full force and effect notwithstanding the determination of the Appointment for any reason."

HFM argued that the above clause went not just to the scope of the duties or obligations owed by it, it also encompassed the duration of those duties or obligations.

The Scottish Court disagreed. The Court focused on the language of the clause and the operative word being the "duty" of HFM under the warranty being "no greater" than that owed to the employer under the appointment. There was no suggestion that the limitation clause stated nor implied anything about the preservation or importation of defences (including any limitation defence available under the appointment) nor did the clause refer to any "liabilities" owed to L&G being curtailed. The clause dealt with equivalence of duties – nothing more.

Alternative or additional limitation clauses in warranties  

In a cautionary tale, the Court distinguished the warranties referred to by HFM in other Scottish and English cases from the terms of the HFM warranty.

Equivalent rights in defence

The first warranty examined by the Court was featured in the Scottish case of British Overseas Bank v Stewart Milne Group [2019] SC 24 and contained what is commonly referred to as an "equivalent rights in defence" clause (extract below): 

"The Contractor shall be entitled to any action or proceedings by the Beneficiary to rely on any limitation in the Building Contract and to raise the equivalent rights in defence of liability as it would have against the Employer under the Building Contract (other than counterclaim, set-off or to state a defence of no loss or different loss has been suffered by the Employer than the Beneficiary)." British Overseas Bank v Stewart Milne Group [2019] SC 24.

The Court distinguished the above clause with HFM's "no greater duty" clause. The clause placed the parties to the warranty into the equivalent position as applicable to the parties to the underlying contract by providing the warrantor with the same rights and defences as it would have under that contract.

By contrast, the Court held that HFM's no greater duty clause "address equivalence of duties; they do not deal with equivalence of defences." The absence of an "equivalent rights in defence" clause was fatal to HFM's case.

No greater liability clause

The Court also referred to the "no greater liability clause" identified in the collateral warranties which were featured in the English judgments in Safeway Stores v Interserve Project Services [2005] EWHC 3085 (TCC), 105 Con LR 60 and Swansea Stadium Management Company Limited v City & County of Swansea (1) and Interserve Construction Limited [2017] WC2A 2LL (extract below):

"The Contractor shall owe no duty or have any liability under this deed which are greater or of longer duration than that which it owes to the Developer under the Building Contract." Safeway Stores v Interserve Project Services [2005] EWHC 3085 (TCC), 105 Con LR 60.

"…Provided that the Contractor shall have no greater liability under this Agreement than it would have had if the Beneficiary had been named as joint employer with the Employer under the Contract." Swansea Stadium Management Company Limited v City & County of Swansea (1) and Interserve Construction Limited [2017] WC2A 2LL.

In the Swansea case, the English Court held that the intention of the "no greater liability" clause was to ensure that any liability under the warranty was coterminous with any liability to the employer under the underlying contract. The English Court rejected a narrow interpretation of the Swansea clause that it only concerned the nature and scope of the obligations. The differentiating factor in Swansea was that the clause referred to the warrantor's "liability" and not just "duties and obligations" as was the case with the HFM warranty. In addition, unlike the HFM warranty, the absence of an "equivalent rights in defence" clause was not determinative in Swansea.

Similarly in the Safeway case, the limitation clause (set out above) referred to "liability" in the warranty being equivalent to that in the underlying contract, permitting the warrantor to enforce against the beneficiary the same rights of set-off as it would have had against the employer under the underlying contract. Practitioners acting for employers or developers now draft warranties carefully to avoid a repeat of this outcome.

What does this mean in practice?

Contractors and consultants must ensure that, if the intention is to achieve true equivalence of liability in both time and amount, the terms of any warranty contain a properly drafted "equivalent rights in defence" clause and/or a "no greater liability" clause before committing to its form. Similarly, employers preparing construction documents should ensure that the collateral warranties reflect the agreed liability positions reached during negotiation.

The availability of collateral warranties from the supply chain in favour of beneficiaries, whether these are funders, tenants or purchasers, is a critical factor in maximising the marketability of any development.