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
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
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.
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
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.
Contact MacRoberts' Construction Group
As one of the largest and best known construction groups in
Scotland, we can provide outstanding breadth and depth of
experience to our clients. No other firm in Scotland has such
strong connections with all sectors of the Scottish construction
industry or has more accredited construction law specialists.
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