Among the wide variety of construction related news over the last two weeks, some of it positive and much of it interesting, the topic of construction insolvency was a feature through the insolvencies of Dunne Group and HOC (UK) Limited and the Court of Session decision in the case of Albyn Housing Society Limited v Active Air Conditioning Limited.
Facts of the case
Albyn Housing Society Limited (the "Housing Society") engaged Rok Building Limited (the "Main Contractor") to construct 23 houses and flats. The Main Contractor then engaged a sub-contractor to design and install heat pumps and associated works and a sub-contractor collateral warranty was granted in favour of the Housing Society by Active Sustainable Energy Solutions Limited ("ASESL"), being a subsidiary company of the defender Active Air Conditioning Ltd ("AACL").
The Housing Society subsequently claimed that the heating system was defective and remedial works were instructed to be undertaken. The Main Contractor had gone into insolvency and the Housing Society sought recourse under its sub-contractor collateral warranty with ASESL. However, it became clear that ASESL was dormant and had, in fact, never traded.
The Housing Society therefore sought rectification of the sub-contractor collateral warranty under s8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, claiming that AACL was the true sub-contractor and that the sub-contractor collateral warranty should therefore be amended to make AACL the contracting party (rather than ASESL).
What was the intention of the parties?
The judge found in favour of the Housing Society, concluding it was the intention of the parties that AACL was the sub-contractor (not ASESL) for reasons including:
- ASESL was dormant at the time the sub-contractor collateral warranty was granted and had never traded.
- ASESL was a subsidiary of AACL and AACL's trading name was "Active Sustainable Energy Systems".
- AACL was originally referred to as the sub-contractor in correspondence with the Housing Society.
Commentary
The Albyn Housing Society Limited case highlights both the commercial benefits of having sub-contractor collateral warranties in a situation where the main contractor has become insolvent and the importance of taking care in the preparation of such documents.
Sub-contractor collateral warranties can sometimes be regarded as a "nice to have" but it is important to consider that they can provide step-in rights during the construction period and contractual protection for an extended period of time following completion of a project and therefore, in the event something goes wrong, they can become a key document.
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Disclaimer
The material contained in this article is of the nature of general comment only and does not give advice on any particular matter. Recipients should not act on the basis of the information in this e-update without taking appropriate professional advice upon their own particular circumstances.
