Judge allows housing society’s bid to rectify collateral warranty to correct identity of granter in damages action

A judge in the Court of Session granted decree of rectification after rejecting the defender’s claim that its dormant subsidiary company was sub-contractor.

Lord Tyre heard that in 2009 the pursuer Albyn Housing Society Limited entered into a contract for the construction of 23 houses and flats in Beauly with Rok Building Ltd (Rok), which engaged a sub-contractor for installation of heat pumps and associated works.

However, a sub-contractor collateral warranty agreement entered into in favour of the housing society bore to have been entered into between the pursuer and a company called Active Sustainable Energy Solutions Limited (ASESL), a dormant subsidiary of the defender Active Air Conditioning Limited, which traded as Active Sustainable Energy Systems.

Albyn claimed that the heating and domestic hot water systems designed and installed by the sub-contractor did not conform to the required specification, and that remedial works had to be undertaken by other contractors.

In 2013, Albyn raised an action for damages against ASESL over the alleged breaches of its obligations under the collateral warranty.

But the service of the summons was met by a letter which stated that ASESL was and always had been a dormant company that never traded, and that the insurers of its parent company, namely, the defender, had the benefit of professional indemnity insurance whereas ASESL did not.

It was asserted that the action had been incorrectly raised and required to be amended “to allow us to pass this matter to the insurers and their solicitors to become involved”.

Shortly thereafter, the managing director of the defender and director of ASESL, intimated to the pursuer’s agents that an application had been made to strike ASESL off the Register of Companies.

In the light of that intimation, the pursuer sought decree against ASESL which was granted without opposition in February 2014, but ASESL thereafter went into liquidation and the pursuer made no recovery from the company.

The pursuer therefore raised an action in late 2015 seeking rectification, in terms of section 8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985, of the collateral warranty agreement by substituting the defender’s name as the sub-contractor and granter of the warranty, and also payment of the sum of £200,000.

However, the defender argued that Rok had not contracted with it, making reference to the terms of a letter which stated that the parties to the warranty were the pursuer and the sub-contractor ASESL.

It was submitted that the pursuer’s case was “irrelevant” and should accordingly be dismissed, as in order to fall within the scope of section 8(1)(a) of the 1985 Act, it was necessary for the parties to the document – rectification of which was sought – to be the same as the parties to the alleged prior agreement.

It was argued that that requirement was not met, as the pursuer’s case was that the prior agreement had been between the pursuer and the defender, whereas the written agreement was between the pursuer and ASESL.

Rejecting that argument, Lord Tyre said the defender’s contention proceeded upon a “misunderstanding” of the pursuer’s case.

He explained: “As was submitted on behalf of the pursuer, its case is not that the parties to the prior agreement and the written agreement were different, but rather that they were the same, namely the pursuer and the defender, and that the error in the document requiring rectification is the insertion in the designation of the Sub-Contractor of the name ‘Active Sustainable Energy Solutions Limited’ and ASESL’s company number, instead of the defender’s name and company number.”

On behalf of the pursuer it was submitted that the defender’s averments did not amount to a relevant defence to the pursuer’s claim for rectification of the collateral warranty agreement.

It was argued that the defender’s averments did not meet the requisite standard of “candour”, as it was a matter of admission that Active Sustainable Energy Systems was the defender’s trading name; that ASESL was a dormant company; that the health and safety information provided to Rok had identified the defender and not ASESL as the sub-contractor; that applications for payment had been made by the defender and not ASESL; that the sub-contract had required the sub-contractor to carry insurance; and that the defender carried insurance but ASESL did not.

The judge said he could find “no basis” for the bare averment that ASESL, a company that never traded, was a party to the sub-contract.

“In the absence of any such basis, I am entitled to hold that the pursuer’s case that the party to the sub-contract was the defender is well founded, and I so hold,” he added.

In a written judgment, Lord Tyre said: “In my opinion the only reasonable inference to be drawn from the available and uncontentious material is that at the date when the warranty was granted, it was the parties’ common intention that it would be granted by the company which was a party to the sub-contract, ie the defender.

“That being so, I am satisfied that the document entitled Sub-Contractor Collateral Warranty Agreement fails to express accurately that common intention, in respect that the heading contains the name Active Sustainable Energy Solutions Limited and the designation of ASESL instead of the name and designation of the defender. The requirements of section 8(1)(a) are accordingly fulfilled.”