Collateral warranties - more than worth the paper, but proceed with caution

There is a common perception among many involved in development projects that the requirements for collateral warranties from all those carrying out the design and build in favour of third parties is nothing more than a money generating exercise thought up by lawyers.

In this briefing we explain why they are needed and illustrate the importance of taking advice on their content by reference to recent case law.

Why they are needed?

Most developments will be carried out:

• for end use by a party other than the developer; and/or
• employing funds of a third party lender

The interest of those parties in the development being successfully completed without defects is clear.

Without the benefit of a collateral warranty package, the recourse of such parties for any defects in the project caused by the contractor and/or consultants employed would be non contractual.

Case law has established that such non contractual recourse would broadly be limited to damage caused by a defect rather than costs of correcting a defect itself – if a slate is loose the cost of repair is not recoverable but if the slate falls on a car the damage to the car would be.

This is not a satisfactory position for end users and lenders so that the absence of contractual recourse by collateral warranties will affect the fundability and marketability of a project.

If contractors and consultants want to be employed and paid they should have no problem co-operating to ensure the fundability and marketability of the project.

But proceed with caution

Parties often complain that collateral warranties are an unnecessary inconvenience that are never relied or called upon by the beneficiaries of such contractual duty of care agreements.

This may have been true in more bullish times but more and more cases are coming before the courts based on these agreements as beneficiaries seek to retrieve their position where projects have gone wrong. Some of these cases have thrown up unexpected decisions and lessons to be learned:

In the case of Oakapple Homes (Glossop) Ltd v DTR (2009) Ltd (In Liquidation), a clause which stated that the consultant granter of a warranty would have no greater liability to the beneficiary than to its employer under the relevant Appointment was held as having no bearing to restrict the amount of damages claimable by the beneficiary of the warranty.

Lesson: Consultants should seek to have included within the text of any collateral warranty the clearest statement of any intended cap or restriction on the amount of damages claimable by a beneficiary and not leave to general wording.

In the case of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd, it was held that a collateral warranty was a construction contract falling within the scope of the Housing Grants, Construction and Regeneration Act 1996 and therefore it was open for a beneficiary to resolve a dispute between the parties by way of the statutory adjudication procedure.

Lesson: Granters should avoid positive obligations to carry out works enforceable by the beneficiary except in properly provided for step in circumstances.

These cases illustrate the need for careful consideration and the obtaining of advice before signing any collateral warranty agreements. If you wish to know more about this topic or require advice please do not hesitate to contact Michael Conroy.