COLLATERAL WARRANTIES

One of the most misunderstood and misapplied sequences during a construction development is the use and application of collateral warranties. These are documents that are ordinarily left to the end of a project and can sometimes cause quite a number of difficulties, when especially subcontractors or other parties have left the project and perhaps have been paid.

It is quite common for solicitors to be instructed to review the wording of a collateral warranty but usually only take receipt of that draft without the underlying contract. It is important to note that a collateral warranty creates a contract and that the collateral warranty or Third Party Rights provisions, allow for others not party to the contract to derive benefits from it. Defective design or workmanship by a professional consultant or contractor could cause the parties with different interests in a construction project different losses. While an employer is likely to have a contract with the party responsible for a defect, other affected parties may not.

Without a contract, a party affected by this defective design or workmanship may not be able to recover its losses from the professional consultant or contractor responsible. It would be an extraordinary suite of documents if all parties were to directly contract with one another.

In order to review and/or consider the collateral warranty, the underlying contract should be considered as the initial agreement between the parties; very important for the Fund and/or those who perhaps will be a first purchaser or tenant. This is especially true when considering the rights granted under the contract itself (as there certainly will be no greater obligations), as well as when considering the sub contracts which may be required during the currency of the project. In all instances, the collateral warranty should be drafted back to back and considered in tandem with the contract.

In addition, and this applies to the actual contract itself, the insurance provisions must be quite certain. Those entering into such agreements would be well advised to have their insurers review the terms of the contracts and the levels of insurance required. Ordinarily, this is important for all parties, from the warrantor’s position, in such an event or breach where losses arise, it will hopefully rely upon its insurance provisions instead of being potentially sued directly. It is certainly in the interests of the Beneficiary to ensure that the terms of any policy insurance meets those as required.

Often parties including, for example, the contractor as the procurer of the collateral warranties from the relevant sub-contractors when there is an express requirement in the main contract itself to do so. Such provisions may include a condition precedent where there is an amount withheld if upon being given seven days’ notice the contractor fails to procure and deliver the warranties as required under the contract. It is not uncommon that contractors fail or forget to include those provisions or clauses in its own sub-contracts leading to much difficulty.

This is made all the more problematic on account of the fact that at the start of a main contract, it may not be known who the sub-contractors will be. It is important therefore at this stage that the disciplines at least are captured, and in the instance where the Beneficiary is not known, that the class or classes are identified.

It is important to understand whether the collateral contract is to be signed or to be executed as a Deed and whether the underlying contract has been executed in the same manner as this affects limitation. Lastly, it is still the position that consultants, sub-contractors and contractors will all have to sign the collateral warranty! You will be surprised at how many do not!

Author Henry Hathaway is a Partner with Silver Shemmings Ash and is a graduate of Trinity College Dublin (Civil Engineering) Tel: 00 44 207 167 6602 - Email: henryhathaway@silverllp.com