Collateral Warranties – a refresher

Collateral warranties remain an important part of the suite of construction documents. Despite the introduction of the Contracts (Rights of Third Parties) Act 1999, most funders and employers prefer the familiarity of a warranty rather than rely on a schedule. So what do collateral warranties cover? In this article, the intention is not to look at the standard form warranties issued by JCT and other organisations. Instead, we will consider some of the clauses that tend to pop up in bespoke warranties proposed by employers.

Skill and care

The collateral warranty is not intended to impose a higher duty of care than the principal appointment. Notwithstanding this, collateral warranties often include a "skill and care" clause which is more robust than the appointment. Some warranties include "fitness for purpose" obligations and they cut across the duty of care owed to the employer. If the warranty goes beyond the obligations and duties set out in the appointment, expect a call from the consultant’s advisers and insurers asking for the warranty to be ‘toned down’ so that it is consistent with the appointment.

No greater liability

Consultants will usually insist on the inclusion of a "no greater liability" clause. This is to confirm that their obligations under the warranty are consistent with the appointment. Beneficiaries should be aware that unless the clause is drafted with care, a "no greater liability clause" may allow the consultant to avoid a claim if:

• The claim under the warranty accrues after the limitation period under the appointment has lapsed
• The consultant is entitled to bring a counterclaim under the appointment
• Rely on a defence of set-off under the appointment
• It is entitled to raise a contributory negligence defence

Whenever there is a "no greater liability clause" the beneficiary should, of course, review the appointment to make sure that there are no odd clauses in it such as a short limitation period. If the appointment includes "oddities" then the consultant may be entitled to rely upon them to defeat the claim under the warranty.

If the beneficiary agrees to include a "no greater liability" clause, the warranty should make it clear that the beneficiary is entitled to bring a claim against the consultant where:

• The employer has not suffered any loss
• The employer has suffered a different loss from the beneficiary

This should help to avoid expensive legal arguments relating to the complex world of "no loss" arguments.

Another twist is that beneficiaries sometimes insist that the consultant is not obliged to vary the terms of the appointment or settle a dispute under it without the beneficiary’s consent because it may affect the beneficiary’s ability to bring a claim under the appointment. It’s a point which the consultant and its advisers should be aware of.

Step-in rights

Funders lie behind many property developments and they are keen to protect their investments against a number of risks. One such risk is that the developer goes bust. If that happens the funder will insist that it has the right to ‘step-in’ to the construction documentation, so that it can complete the project with minimum extra expense.

The "step-in" clause usually sits in the collateral warranty. In the main it is not controversial. One area of tension, however, relates to the liabilities which the funder agrees to be responsible for. The consultant will ask for a ‘blanket’ cover. The funder will often argue that this does not provide certainty at the time it steps-in. The funder, therefore, will often insist that before it steps-in, the consultant is obliged to provide the funder with details of outstanding fees and expenses. If anything is omitted from the list, the funder may be entitled to argue that it’s not responsible for that omission.

Assignment

Warranties often limit the number of assignments, as the consultant wants to manage its exposure to potential claims. The consultant, therefore, will attempt to limit the number of assignment. The beneficiary wants flexibility and it will seek to include a high number of assignments. It’s important that number of assignments is fair to both parties. For example, where there is an intra-group transfer or a change in statute means that the warranty has to be assigned, should this count towards the limit?

Adjudication

For some time advisers argued that warranties were not construction contracts. It was, therefore, not possible to rely on the Construction Act. In Parkwood Leisure Limited v Laing O’Rourke Wales & West Limited, the Court stated that in certain circumstances a collateral warranty could be deemed to be a construction contract. The Court made it clear that not all warranties are construction contracts. This will be determined by the terms of the relevant warranty. If the consultant warrants that it has “carried out and shall carry out and complete” services, then Parkwood suggests that the warranty will be a "construction contract". Most bespoke warranties include a similar clause and it will be interesting to see how the market responds to its use.

Other quirks

A collateral warranty is a contract. It, therefore, has to have consideration. Most warranties are deeds, so that’s okay. If the warranty is not a deed, then you should make sure the warranty includes a consideration clause: "I’ll pay you £10 for the benefit of this warranty".

Some contractors will insist that the warranty makes it clear the beneficiary is not entitled to recover delay damages, where those damages have been paid to the employer. Often specialist contractors, such a lift contractors, will insist that the beneficiary is only entitled to recover the cost of repairing the defective workmanship. Beneficiaries will argue that these clauses are deleted.

Consultants usually ask for a net contribution clause and a separate cap on liability. Stuart Pemble’s article deals with the issues relating to net contribution clauses. A cap on liability is often acceptable, provided that it sits outside of any other cap included in the appointment.

Conclusion

Collateral warranties remain popular. Consultants and beneficiaries should be aware that they contain a number of potential pitfalls. It’s important to make sure that they appreciate what they are signing up to. If not, this may affect the beneficiary’s ability to rely on the warranty or the consultant’s ability to resist a claim and/or rely on the terms of its PI cover.