Albyn Housing Society Limited v Active Air Conditioning Limited T/A Active Sustainable Energy Systems

In a rare case involving both collateral warranties and rectification of contract, the Court of Session recently issued a judgment in the case of Albyn Housing Society Limited v Active Air Conditioning Limited t/a Active Sustainable Energy Systems.

This case highlights once again the importance of getting the details right when entering into contracts. In this case, the “detail” which was wrong was the name of the party to the contract.

Background

In 2009, Albyn entered into a contract with Rok Building Limited to construct houses in Beauly. Rok employed a subcontractor for installation of heat pumps and other works. The subcontractor was requested to enter into a collateral warranty in favour of Albyn.

The collateral warranty was issued in the name of Active Sustainable Energy Solutions Limited (ASESL). That company was dormant and always had been. It had no profits, income or assets, no accounting transactions and no paid employees. It did not have the benefit of professional indemnity insurance.
Clearly, this was not what Albyn had in mind when seeking the reassurance of the collateral warranty, particularly given that by the time of the action, the building contractor, Rok, was in liquidation and Albyn could have no right of recourse against it.

Following an unsuccessful attempt to pursue ASESL, Albyn rethought its strategy. It raised an action seeking rectification of the collateral warranty along with a claim for damages for alleged breaches of obligations under the subcontract.

Rectification of contracts is a remedy which is little used but is provided for by section 8 of the Law Reform (Miscellaneous Provisions) (Scotland) Act 1985. That allows the court to rectify a document if the court is satisfied that the document fails to express accurately the common intention of the parties to the agreement at the date when it was made.

Albyn argued that the true intention of the parties when entering into the collateral warranty was that the party granting that warranty would be Active Air Conditioning Limited t/a Active Sustainable Energy Systems (ASES) and not the company name which appeared on the warranty, ASESL.

Decision

The court considered the whole facts and circumstances around entering into of the collateral warranty. ASES was the trading name of the defender in the action whereas ASESL was at all times a dormant company. The health and safety information provided to Rok identified ASES as the subcontractor. The same was the case with applications for payment which had been made by ASES. The subcontract insurance was carried by ASES.

In these circumstances, the court was satisfied that the collateral warranty did not accurately express the common intention of the parties, namely that the contracting party would be ASES. On that basis, the court was prepared to substitute the name of ASES into the collateral warranty as the grantor of that warranty. This allowed Albyn to continue with the pursuit of its case against that entity although the case continues on the defence on the merits and a plea of prescription which remain outstanding.

Comment

It is perhaps easy to see how this mistake was made at the time of entering into the contract given the similarity in the names of the companies involved. However, as this case demonstrates, it is important to ensure that not only the wording of the collateral warranties (and other contracts) properly represents the intentions of the parties but also that the full complete and accurate details of the contracting parties are also included.

When dealing with companies, it is helpful to include the company number since this will survive, even if the company itself changes its name, and makes it easy to identify the correct contracting party.
Relying on an action for rectification of contract is not only an expensive option but is not always a certain route given the onerous tests which require to be fulfilled in order to establish that the contract, signed by both parties, does not in fact reflect the true intention of those parties.