EXTRA DIVISION, INNER HOUSE, COURT OF SESSION
Lord Eassie Lord Clarke Lord Kingarth	[2011] CSIH 35 CA13/09 OPINION OF THE COURT delivered by LORD EASSIE in the cause by SCOTTISH WIDOWS SERVICES LTD Pursuers and Respondents; against (1) KERSHAW MECHANICAL SERVICES LTD First Defenders and Reclaimers; And (2) BUILDING DESIGN PARTNERSHIP Second Defenders and Reclaimers: _______

Pursuers and Respondents: The Dean of Faculty Q.C.; S Smith; Pinsent Masons

First Defenders and Reclaimers: Jones, Solicitor-Advocate; Brechin Tindal Oatts

Second Defenders and Reclaimers: Lake, Q.C.; Simpson & Marwick

20^th May 2011

[1] In this reclaiming motion the second defenders and reclaimers - to whom we shall refer simply as the second defenders - bring under review the interlocutor of the Lord Ordinary of 23 March 2010 in which the Lord Ordinary, rejecting the motion made by the second defenders that the action so far as directed against them should be dismissed as irrelevant, allowed to parties a proof before answer of their respective averments. The first defenders also reclaimed that interlocutor but when the case called for hearing on the summar roll the solicitor advocate acting for the first defenders invited the court to refuse their reclaiming motion, it now being accepted by the first defenders that the action, so far as directed against them, should proceed to inquiry, with all pleas reserved and including the averments which they had invited the Lord Ordinary to exclude from probation. The court accordingly refused the reclaiming motion which had been enrolled by the first defenders and reclaimers and their representatives thereafter played no part in the hearing of the reclaiming motion by the second defenders.

[2] The action arises out of the construction of a new corporate head office for the Scottish Widows Fund and Life Assurance Society on ground at Port Hamilton in Edinburgh. It is concerned with defects which the pursuers and respondents - to whom we shall refer simply as the pursuers - aver to have existed in the standing seam roof of the building. The action was debated before the Lord Ordinary along with another action - "the Harmon action" - relating principally to a different category of defects said to have been present in the glazing and cladding of the building. The Lord Ordinary likewise allowed a proof before answer in that action. He issued a single opinion dealing with both actions - http://www.scotcourts.gov.uk/opinions/2010CSOH42.html. Reclaiming motions by the defending parties in the Harmon action were also enrolled but the parties to those reclaiming motions (which included the second defenders in this action) were agreed that, in light of certain discussions which had taken place between parties to that action, the summar roll hearing in the reclaiming motions in that action should be discharged. That joint motion for discharge was granted.

[3] The contractual arrangements for the realisation of the construction project are somewhat complicated and are narrated more fully by the Lord Ordinary in his opinion. In summary, it appears that on 28 March 1994 Scottish Widows' Property Management Limited granted a lease of the relevant land to a company named Edinburgh Development Group Limited. Sometime later, on 15 May 1996, another company, Edinburgh Construction Services Limited - "ECSL" - engaged Laing Management Services Limited as a management contractor on their behalf to manage the procurement of the construction project. As prospective managers, Laing Management Services Limited had earlier, in March 1996, entered prospectively into a "works package" contract with the first defenders for the design and construction of the roof works in question. At a point in 1996 - the precise date is not evident from the copy letter of appointment, but is, in the event, not material - ECSL appointed the second defenders to act as architects in the project.

[4] Accordingly, so far as the second defenders were concerned, their engagement as architects in the project proceeded upon an engagement of their services by ECSL, who might be described as the developer. As is to be expected in a major project of this nature, the letter of appointment of the second defenders as architects is lengthy and detailed. For the moment, it is sufficient to note that, as architects, the second defenders agreed to grant a number of undertakings to parties other than their employer, ECSL, which are described in the letter of appointment as "collateral warranties" or "collateral agreements".

[5] The requirement to provide such collateral warranties or agreements is contained in clause 1.21 of the letter of appointment. Clause 1.21.1 sets out a number of parties to such collateral agreements, described in the headnote to that sub clause as "Scottish Widows Collateral Agreements". They include, among others;

"Owner" defined earlier in the letter of appointment as meaning "Scottish Widows Property Management Limited or any successor or assignee thereof as owner of the Site for the Project and the buildings and others constructed as part of the Project";

"Society" defined as meaning "Scottish Widows Fund and Life Assurance Society ..... and any successors thereof";

"Purchaser" which is defined as meaning "Scottish Widows (Port Hamilton) Limited and any successors thereof or assignee thereof as Purchaser of the interest of The Edinburgh Development Group PLC's interest (sic) in the Project";

and

"Fund" which is defined as meaning "any person providing finance in respect of the carrying out and completion of the Project including but not limited to Scottish Widows (Port Hamilton) Limited ...."

[6] In addition to agreeing to provide the "Scottish Widows Collateral Agreements", the second defenders agreed under clause 1.21.2 to provide on request by Scottish Widows (defined as being any or all of Purchaser, Fund, Society or Owner) collateral warranties to inter alia tenants in a form set out in an annex to the letter of appointment. The Lord Ordinary narrates in paragraph [24] of his opinion that those "Tenant Warranties" were intended to cater for those parts of the development which might be let to entities unconnected with Scottish Widows.

[7] It is accepted that in 1996, the precise date again not being material, the second defenders granted a collateral warranty or agreement in favour of the Society. Its full terms are contained in production 6/10 and are set out at page 765 and following of the Appendix to the reclaiming print. The relevant provisions are set out, and also discussed, by the Lord Ordinary in his opinion at paragraph [20] and subsequent paragraphs.

[8] Put shortly, the principal provisions of the collateral warranty (in which ECSL are referred to as "the Client" and the second defenders are referred to as "the Consultant") pertinent to this reclaiming motion are as follows. The purpose of, or reasons for, the collateral agreement are set out in the recitals, which are in these terms:

"WHEREAS

A. The Consultant has entered into the Appointment (hereinafter defined) with the Client in terms of which the Consultant has undertaken to carry out the Services (hereinafter defined) in connection with the Project (hereinafter defined).

B. The Society intends to occupy the development constituted by the Project and will have financial responsibilities, liabilities and/or costs in relation to the Site (hereinafter defined) and the Project and occupation and use of the Site and the Project including as a consequence of failures in respect of design and construction by indemnity or otherwise".

The main substantive provision is found in clause 3. In this clause, as in the preamble, the "Appointment" means the professional appointment entered into between ECSL and the second defenders and the "Services" means the services provided by the second defenders to ECSL for the Project pursuant to the Appointment. The clause provides:

"3.1 The Consultant undertakes and warrants to the Society that the Consultant:-

3.1.1 has carried out and shall carry out and complete the Services in conformity with the Appointment;

3.1.2 has observed, performed and complied with and shall observe, perform and comply with all the provisions and obligations on the part of the Consultant to be observed, performed and complied with all as contained in the Appointment.

3.2 The Consultant undertakes and warrants to the Society and it has been employed by the Client as Consultant in respect of the Project, the Services and the Management Contract works and that it has exercised and will continue to exercise the duties of skill, care, expertise and diligence of the type and standard specified in the Appointment for the Project;"

Clause 3.2 then contains a proviso in the following terms:

"PROVIDED ALWAYS that the Consultant's liability to the Society shall be limited to that proportion of such costs, including but not limited to related professional fees, which it would be just and equitable to require the Consultant to pay having regard to the extent of the Consultant's responsibility for the same and the quantity surveyors, civil and structural engineers, building services consulting engineers and works package contractors in respect of the Project shall be deemed to have given contractual undertakings to the Society in respect of the services which at least impose a liability on them for such costs and shall be deemed to have paid to the Society such proportion which it would be just and equitable for them to pay having regard to the extent of their responsibility".

Clause 5 of the collateral warranty in favour of the Society is headed "Continuing Effect". It provides that the provisions of the collateral warranty shall continue to have effect as between the Society and the second defenders even if the employment of the second defenders or the provision of the Services is suspended or terminated. Clause 7 of the warranty provides for assignation. It states that the Society may assign its rights under the warranty in whole or in part, but only as specified in the clause. Assignation may be made to a range of persons, in some cases with a requirement of consent on the second defenders' part. The relevant prospective category of assignee for present purposes is the fourth:

"a company which is a subsidiary of the Society (or a subsidiary of a holding company which is a subsidiary of the Society) without consent of the Consultant provided that the primary purpose of such assignation is not to transfer or assign the Society's rights in respect of this Agreement and then transfer or dispose of the assignee so it is no longer a subsidiary as aforesaid".

It is not disputed that the pursuers are such a subsidiary company of the Society. Finally, clause 8.1.1 of the collateral warranty, headed "Tenant Warranties", provides as follows:

"Within twenty one days of written request from time to time, the Consultant shall execute and deliver to the Society a Tenant Warranty Agreement in terms of the draft Tenant Warranty Agreement set out in the Schedule hereto in the name of the first occupational tenant or tenants of the Project or any part or parts thereof. Ten Tenant Warranties in aggregate with any BPF Warranty Agreements which are provided or are to be provided pursuant to the Appointment will be provided free of charge but payment of £1,500 for each BPF Warranty above ten will be made".

[9] On 21 August 1997 Edinburgh Development Group Limited, who held the tenant's interest under the lease granted to them by Scottish Widows Property Management Limited, granted a partial assignation of their rights under that lease to a company named Scottish Widows (Port Hamilton) Limited. On 13 May 1998, Edinburgh Development Group Limited granted a further partial assignation of their right as tenants under the lease to Scottish Widows (Port Hamilton) Limited. By those two partial assignations Scottish Widows (Port Hamilton) Limited thus came to hold all of the tenant's interest in the lease granted to Edinburgh Development Group Limited by Scottish Widows Property Management Limited (or, at least, all of the parts of the subjects of that lease of consequence for this litigation).

[10] It is perhaps useful to interpose at this point in the transactional chronology, mention of the history of the achievement of the project and the defects with which the action is concerned. Practical completion of the Project was achieved on 23 March 1998. It is averred (Article Vof Condescendence) that prior to that date, during the winter of 1997/1998, the roofs of two blocks of the buildings suffered storm damage. Further damage occurred in the succeeding winter. It is then averred that in early 2001 the bullnose assembly on those blocks became detached in high winds; and that on the night of 27 to 28 January 2002 the bullnose became detached in high winds at several locations distributed over the four blocks of the buildings. There then follow averments of the technical nature of the claimed defects of design and construction, but those details are not material for the purposes of the debate and the reclaiming motion, it being taken that the pursuers have averred attribution of the presence of those defects to negligence on the part of the second defenders in terms sufficient to justify inquiry. The contentious matter related essentially to whether the present pursuers had relevantly averred their having suffered - put broadly - a "loss" which entitles them to recover the costs of rectification of the averred defects.

[11] Reverting to history of the transactions, the next stage is that on 8 July 1999 Scottish Widows (Port Hamilton) Limited granted a sub-lease in favour of the Society and immediately contemporaneously therewith, the Society assigned that sub-tenant's interest to the pursuers. Some four years later, on 10 July 2003, the Society assigned to the pursuers the full benefit of its interests and rights under the collateral undertaking previously granted by the second defenders in favour of the Society, together with all rights to sue or take action in respect of any breach of that collateral agreement. The pursuers thus pursue the present action being assignees of both the Society's interest under the sub-lease and the Society's rights under the collateral undertaking granted in 1996, the relevant terms of which are set out in paragraph [8] above.

[12] Clause 9 of the sub-lease by Scottish Widows (Port Hamilton) Limited in favour of the Society imposed certain repairing obligations on the Society as the sub-tenant. In his submissions to the Lord Ordinary, and also to us, counsel for the second defenders submitted, on a review of the authorities, that the terms of that clause were not apt to impose on the Society any contractual obligation to carry out the particular remedial works in question in this litigation. The Lord Ordinary deals with this matter in paragraph [32] and subsequent paragraphs of his opinion. He reached a conclusion which essentially upheld the second defenders' contention on the interpretation of the sub-lease, namely that the sub-lease did not require the Society, or their assignees - ie the pursuers - as the sub-tenants, to carry out remedial works of the kind in question. But the Lord Ordinary went on to hold that his conclusion on that issue did not matter. In the course of paragraph [34] of his opinion he says:-

"At the start of the [sub]-lease it had become apparent that the building was not wind and watertight because of defects in the glazing and shortly after the start of the lease it became apparent that the roof was defective; that caused the building not to be wind and watertight. Normally a landlord would have an obligation to repair such a defect, but such an obligation was excluded by the opening words of clause 9.1. The result was that the subtenants, the Society, were left with a building in a manifestly unacceptable condition with no right of recourse against their landlords, Port Hamilton, or against the owner of the building. In such a situation the only remedy available to the subtenants was to perform the necessary remedial works themselves. On the pursuers' averments the works were in fact paid for by the pursuers, who were assignees of both the Society and Port Hamilton. Port Hamilton had no obligation to the Society to carry out repairs, but obviously they too would have an interest to ensure that the defects were made good as they were the tenants under the head lease of the building. I am accordingly of opinion that it is immaterial where the obligation to make [good] the defects lies as between Port Hamilton and the Society; the defects had to be made good, for practical reasons, and it is the expense of making them good that gives rise to a claim under each of the [second defenders' and Harmon's] collateral warranties. Ultimately the repairing obligations in the lease and sublease are of negative significance: if there is no obligation to carry out repairs, the subtenant or tenant is compelled to do so simply to have a building fit for occupation. It is the fact that necessary repairs have been carried out at the expense of the grantees of the collateral warranties or their assignee that gives rise to a claim."

The pursuers did not lodge any cross grounds of appeal respecting the Lord Ordinary's conclusions on the interpretation of clause 9 of the sub-lease to the Society and in his submissions to us the Dean of Faculty made clear that the pursuers did not challenge that construction of the sub-lease. The pursuers' case did not depend upon the Society, or the pursuers as the Society's assignees, having a contractual liability under the sub-lease to effect the remedial works; their case proceeded upon the practical need, as occupiers or subtenants, to carry out the works and the terms of the collateral agreement or warranty granted by the second defenders in favour of the Society, the benefit of which had been fully assigned to the pursuers.

[14] In these circumstances we do not consider it necessary to visit the terms of clause 9 of the sub-lease, or the authorities relevant to the interpretation of that clause, both of which are fully dealt with by the Lord Ordinary in his opinion.

[15] That said, much of the argument deployed by counsel for the second defenders had, at its base, the view that the pursuers' case depended upon the pursuers and their cedents having had a contractual responsibility in terms of the sub-lease to rectify the averred defects. Thus the principal argument for the second defenders began with the proposition that any breach of duty on the part of the second defenders preceded the date of practical completion on 23 March 1998. At that point the only party who could claim to have suffered loss by reason of such a breach was the owner of the building. Reference was made in particular to GUS Property Management v Littlewoods Mail Order 1982 SC (HL) 157 and McLaren Murdoch & Hamilton v The Abercrombie Motor Group 2003 SCLR 323. Accordingly, as at the date of practical completion, the Society had no possible claim because they had not, and could not have, suffered any possible loss. The Society was not the owner, or the tenant of the building at the time of practical completion. So what, asked counsel, had changed? To that rhetorical question counsel offered the answer that the Society briefly got a tenant's interest in a sub-lease with a limited liability for repairs, which the Society instantly assigned and so had suffered no loss. Assuming, contrary to what the Lord Ordinary had found on the construction of the relevant provisions of the sub-lease, the pursuers or their cedents were contractually required to expend money on the relevant repairs by virtue of that sub-lease, they incurred that contractual requirement by a voluntary decision to enter upon that contractual, locational relationship. They themselves had suffered no loss; the loss represented by the averred defects in the building resided elsewhere, namely with the building owner.

[16] It was recognised, said counsel, that the building owner, who had suffered the economic loss represented by the defects in the building, might assign its claim against the second defenders for its loss in respect of those defects. But any claims assigned to the pursuers were assigned by the Society as sub-tenants of Scottish Widows (Port Hamilton) Limited or as grantees under the collateral warranty or agreement. The Society was thus the wrong cedent; for they were not the building owner. It was, counsel further submitted, for that reason that the pursuers now sought to side-step that difficulty by basing their claim on either a contractual, or even a merely practical, requirement to carry out the repairs.

[17] The focus placed by counsel for the second defenders, particularly before the Lord Ordinary, on the pursuers' case being centred on their having incurred a contractual responsibility to carry out the necessary repairs in question is perhaps understandable in light of the terms of the pursuers' third plea in law which reads:

"3. Separatim. Esto the Society has not suffered a loss, the pursuers themselves having incurred a liability as sub-tenants in respect of the remedial works, having suffered loss and damage as a result of the first and second defenders' breach of warranty to the Society, and being entitled as assignees to the benefit of the warranty granted by the first and second defenders to the Society, are entitled to reparation jointly and severally from the defenders therefor".

In paragraph [39] of his opinion, having rejected (in paragraph [34]) the proposition that the terms of the sub-lease required the pursuers to carry out the repairs but having opined thereafter that the absence of such contractual liability was not material, the Lord Ordinary says:

"In relation to the criticism of the formulation of the pursuers' plea in law relating to the alternative case, I agree with counsel for [the second defenders] that the measure of loss that could be recovered is that resulting from any breach of contract on the part of [the second defenders], and is not to be measured by the pursuers' liabilities under the sublease in their favour. On this matter, I refer to paragraph [34] above; the sublease explains why the pursuers carried out the works, to enable them to occupy premises that were wind and watertight, but the existence of a liability under the sublease to carry out repairs or to make good defects is not in my opinion essential to recovery. The right to recovery rather proceeds on the collateral warranty, which confers a right to sue for the physical loss caused by defects in the building and any recoverable economic consequences that the physical loss may have. On this analysis the pursuers' [third]
[1] plea in law is not particularly well framed, in that it refers to the pursuers' incurring a liability as subtenants. Nevertheless, it seems to me that the intention is clear enough: the pursuers are subtenants of the building; as subtenants they required to make good the defects in the building in order to have premises that were wind and watertight; and in doing so they incurred liabilities. I think that the plea in law can be construed in that sense, and accordingly I do not find this part of the pursuers' case to be irrelevant."

[18] We agree with the Lord Ordinary that the terms of the plea in law are not happily drafted; but we also consider that those terms can be read in the way in which the Lord Ordinary decided that they could be read. Moreover, the note of argument lodged in the course of the proceedings in this reclaiming motion by the pursuers proceeds
[2] on the basis of acceptance of the Lord Ordinary's view that the terms of the repairing obligations in the sub-lease were only of "negative" significance. Accordingly, we consider that, bearing in mind that this is an action on the commercial roll, there is no real prejudice to the second defenders arising from the argument pressed by the Dean of Faculty to the effect that the claim under the collateral undertaking in question could, and did, proceed upon a practical necessity on the occupier to remedy the defects attributed ex hypothesi of the pleadings to failings on the part of the second defenders. In his response to the submissions of the Dean of Faculty, counsel for the second defenders submitted that there were no express averments that either the Society, or the pursuers, were ever in occupation of the building at the time at which the decision or decisions to instruct and incur the cost of the repairs was or were taken. Adopting a very narrow construction of the pursuers' pleadings, that may arguably be so, but in the whole circumstances and given the existence, or the purpose of the project and the transactional history, it is not difficult to infer from the terms of the averred circumstances as a whole that the Society or the pursuers had occupancy. As the Dean of Faculty stressed, the pursuers are their assignees in respect of both the sub-lease and the benefit of the collateral warranty. In these circumstances, particularly in a commercial action, we consider that the absence of any express averment of occupancy is not a good ground for reversing the Lord Ordinary's decision to allow a proof before answer.

[19] We therefore turn to what we perceive as having become the central issue in this reclaiming motion, namely the soundness of the submission advanced on behalf of the pursuers to the effect that, irrespective of what might obtain in terms of delictual liability, the collateral undertaking granted to the Society, as occupier, gave a right to recover, in terms of that contractual undertaking, the cost of repairing defects (ex hypothesi attributable to the fault of the second defenders) by reason of the occupier's practical need to have a wind and water tight building.

[20] In approaching that issue, we begin by noting that the terms of the tenant's collateral agreement which the second defenders undertook to provide, if requested, pursuant to clause 1.21.2 of the letter of appointment, envisage that the second defenders might become contractually bound to the occupational tenant, who is the grantee of such a collateral warranty to meet the costs of repairing defects, albeit that the tenant to whom the collateral undertaking is granted is not the building owner and has not suffered the primary loss. Clause 1 of the pro-forma tenant's warranty
[3] is in these terms:

"1. The Firm [the second defenders] warrants that it has exercised and will continue to exercise reasonable skill, care and diligence in the performance of its services to the Client under the Appointment. In the event of any breach of this Warranty:

(a). subject to paragraphs (b) and (c) of this clause, the Firm shall be liable for the reasonable costs of repair renewal and/or reinstatement of any part or parts of the Development and for the reasonable costs of all professional services associated with such repair, renewal and/or reinstatement to the extent that the Tenant is liable either directly or by way of financial contribution for the same but the Firm shall not be liable for other losses incurred by the Tenant;

....."

Paragraph (b) is a net contribution clause and paragraph (c) essentially enables the grantor of the warranty to plead any defence which it would have had against the client were the client to have brought the claim. In our view, the terms of the pro-forma tenant's warranty are thus inconsistent with the notion, which appeared to underlie the principal submission for the second defenders, to the effect that any liability of the second defenders to pay for the rectification of the defects in the building was owed only to the building owner (or its assignees of a claim qua building owner) and could not be transferred elsewhere by a collateral warranty or undertaking.

[21] With that observation we turn to the collateral undertaking granted to the Society upon which the pursuers sue as assignees of the benefit of that warranty. Subject to the net contribution clause to be found in the proviso to clause 3.2, the liability of the second defenders ("Consultant") for breach of the warranty to the Society is not given, in that clause, any specific parameters. Consistent with the essential premise underlying his submissions, namely that liability in damages for repairing the defects in the buildings was owed only to the building owner, counsel for the second defenders contended that the proper scope for recovery under this warranty must therefore be restricted to liabilities incurred by the Society, as occupier, to other third parties - such as employees or visitors who might suffer injury consequent upon a failing in the building; or in respect of claims for damage to the Society's moveable property within the building caused by the defect in issue; but its scope did not extend to the economic loss represented by any practical need faced by the occupier to rectify the actual deficiencies in the quality of the building itself.

[22] Apart from the difficulty which that argument faces in that it appears to proceed upon the notion of some legal obstacle to an architect's agreeing contractually to meet the repair costs incurred by a party other than the building owner, we consider that the terms of the preamble to the Society collateral warranty are also hostile to the second defenders' contention. For convenience, we reiterate recital B:-

"The Society intends to occupy the development constituted by the Project and will have financial responsibilities, liabilities and/or costs in relation to the Site (hereinafter defined) and the Project and occupation and use of the Site and the Project including as a consequence of failures in respect of design and construction by indemnity or otherwise."

Counsel for the second defenders understandably did not suggest that in a contractual document such as this there was any difficulty in having regard to the recitals in the preamble as having force in its overall interpretation and in our view there is nothing in the terms of the recital which would support the limited scope of the undertaking which counsel for the second defenders contended.

[23] As was stressed by the Dean of Faculty, the collateral agreement or undertaking granted to the Society envisaged the Society's having the status of a simple occupier and as such occupier incurring financial costs in the event of breach of the warranty granted by the second defenders. There is, in our view, nothing inherently impossible, or even difficult, in the notion of an architect, or other member of the professional team - or indeed the contractor or sub-contractor - granting indemnity to a named prospective occupier, or that occupier's assignees, for the costs of rectifying defects, impinging on the occupiers enjoyment, for which defects the granter is responsible by reason of breach of professional or other contractual duty. As the Lord Ordinary puts it at paragraph [56] of his opinion, while the primary physical loss may be sustained by the owner or tenant of the building at the time when the defective work was performed, that physical loss has economic consequences, and any party who suffers those economic consequences, such as a subsequent owner or tenant, may sue for that loss provided that a contractual relationship exists between the party responsible for the defective condition of the building and the person who suffers the economic consequences. In the present case, such a contractual relationship is not disputed and it is plainly averred that the pursuers, whether directly or as assignees, have incurred the costs for which recovery is sought. In these circumstances we consider that their case cannot be dismissed at this stage on the basis that it is irrelevant.

[24] In consonance with the reasoning of the Lord Ordinary we also consider that the proper course was the allowance of a proof before answer. We therefore refuse the reclaiming motion and remit to the Lord Ordinary to proceed as accords.