In construction contracts, it is common for parties (A and B) to agree – in a building contract or professional appointment – that B will enter into a collateral warranty with a third party (C). When B refuses to do so, there is clearly a breach of contract but what is the appropriate remedy for A? The Scottish Court of Session recently grappled with this issue and handed down an encouraging judgment for those stuck in A’s position.

The Facts of the Case

Kier Construction Limited -v- WM Saunders Partnership LLP concerned a leisure centre in Dumfries. The Council appointed Kier as main contractor, who agreed to procure collateral warranties in the Council’s favour from the consultants and sub-contractors it engaged. Simply put, a collateral warranty is a contract in which B promises C that B will abide by the terms of its contract with A. Collateral warranties provide certainty to the Cs by giving them a direct contractual relationship which they can then use to sue if necessary.

Kier appointed WM Saunders (“WMS”) as a consultant. In accordance with the building contract, Kier and WMS agreed that WMS would provide a signed collateral warranty in the Council’s favour within 14 days of Kier’s formal request. A precedent warranty was appended to Kier’s contract with WMS.

For reasons unknown, Kier neglected to obtain the signed warranty from WMS. The leisure centre was completed in 2008 but the Council subsequently became embroiled in a dispute about various defects that had arisen. It sought £5.6 million in damages from Kier, who sought to involve and hold liable WMS.

In early 2015 Kier finally asked WMS to sign the collateral warranty. WMS stated that it would only do so if Kier satisfied its outstanding fees. Kier agreed to this proposal. Despite Kier’s attempts to give effect to the deal, WMS went quiet. Kier therefore commenced court proceedings.

Legal Analysis and Decision of the Court

Kier sought “specific implement”, which is the Scottish equivalent of “specific performance” in England and Wales. Specific performance is where the Court orders a party to carry out a specific act – in this case, to execute a contract. It is relatively rare for a Court to do so because it is an equitable remedy, meaning it is always at the discretion of the Court. Such discretion is rarely exercised if it would be adequate to award damages to the aggrieved party instead.

WMS resisted the order for specific implement by advancing “an armada of arguments”. For example, it argued that it was not obliged to sign the warranty because there were certain blanks to be filled in that were not agreed:. Kier was itself in breach of contract so could not expect WMS’s compliance, and Kier had waived its rights to specific implement.

WMS’s arguments were all rejected. Lord Woolman held that the parties had clearly reached an agreement that WMS would execute the warranty. The fact that there were blanks did not matter, because they were straightforward and did not require negotiation. Any breach of the appointment by Kier was irrelevant, and Kier had not waived its rights because waiver required clear wording. Specific implement was therefore granted.

Implications

Whilst the general rule denying an equitable remedy where damages would be adequate remains good law, it may be the case that the Courts are prepared to interpret damages as being inadequate in a wider range of situations, particularly where specific performance is seen as necessary to ensure a fair outcome.

Superficially, this case shows that parties promising to give warranties will be held to that promise. Pen will be forced to paper if necessary. However, a broader lesson concerns effective contract management. All of this trouble would surely have been avoided had Kier obtained the warranty from WMS in advance of the leisure centre being completed. It is not surprising that it had difficulty in securing WMS’s compliance after defects had been revealed. Nonetheless, the decision should come as some comfort to building owners and developers, whose hopes of securing warranties in their favour have been boosted by this decision.

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