The Scottish appeal court has recently agreed with something I have been asserting for years, that a collateral warranty is impliedly limited by the scope and terms of the underlying agreement.
What is a warranty?
A warranty is a simple document designed to create contractual links between the provider of goods, works or services (the warrantor) and a party with a financial interest in the project (the stakeholder).
In its purest form, a warranty simply allows a person (the stakeholder) – who was not a party to the contract between the warrantor (W) and the original employer (E) – to bring a claim if the warrantor breaches that contract and causes the stakeholder (S) a loss.
The core purpose of a warranty is to create an additional contractual link, providing a smooth avenue for the stakeholder to bring claims. That link piggy-backs off the contract between the warrantor and the original employer.
[As described in my Introduction to How to Write Simple and Effective Collateral Warranties in Just 500 Words]
What did the court decide?
The warranty included clauses stating that:
- it did not create any greater liability that the underlying agreement, and
- allowing the warrantor to rely on any rights of defence it had arising from the underlying agreement.
The court stressed that the fundamental purpose of the warranty was to place the stakeholder in an equivalent position to the original employer in the underlying agreement; and not to extend the obligations of the warrantor.
not to provide [stakeholders] with rights greater than those held by the original employer; to do so would make no commercial senseBritish Overseas Bank v Milne
‘Equivalent position’ means that the stakeholder has the same rights as the original employer BUT subject to the same limitations as would apply between the warrantor and that employer.
What does this mean for you?
Don’t bet your business on a project.
Include sensible limits on your liability in every contract. If you end up giving warranties, those limits will form the basis of your defences and limits against any stakeholder warranty claim.
Case: British Overseas Bank Nominees Limited v Stewart Milne Group Limited  CSIH 47