What does the contractor warrant under a collateral warranty?
A warranty in law is a legally binding promise or undertaking – and that is exactly what the contractor gives under a collateral warranty.
The essence of a collateral warranty is that the contractor warrants (that is promises) to the beneficiary that he has performed his obligations under the building contract in accordance with its terms, nothing more nothing less.
The contractor is not, however, providing guarantees or indemnities to the beneficiary in respect of non-performance as some warranties seek to impose.
Should the contractor seek to limit his liability?
Yes – the contractor may wish to limit his liability to losses for which he is liable to the employer under the building contract because the beneficiary might suffer types of losses that the employer would not suffer. For example, if structural defects are discovered and the tenant has to move to other premises while remedial works are carried out, the tenant might otherwise claim under the warranty:
• the cost of alternative accommodation;
• moving costs;
• loss of profits caused by the disruption to his business; and/or
• the cost of his management having to deal with the defects and to organize the move.
A common limiting provision is that the contractor’s liability under the warranty is to be no greater than his liability to the employer under the building contract. This should mean that the contractor’s liability under the above example is limited to the cost of repairing the defects.
Another way of limiting liability is simply to impose a monetary cap on what can be recovered under the warranty, whether overall or for individual claims.
What about excluding liability for delay?
It is generally accepted that the contractor should only be liable to the employer for delay to the project and should not be liable for the consequences of any such delay suffered by a beneficiary. It is therefore common practice for collateral warranties to expressly exclude delay liability, for example as under the British Property Federation and the JCT2005 standard forms of warranty.
What about “step in” rights for a funder?
It is common practice for the project funder under the funding agreement to have the right to “step into the employer’s shoes” in the event of, for example:
• the employer becoming insolvent
• the funder terminating the funding agreement; or
• the contractor threatening to terminate the building contract or to suspend performance.
In such a situation the fund will require an obligation in the warranty for the contractor to comply with the funder’s instructions under the building contract (instead of those of the employer).
Contractors will usually wish to have the following provisions included in the “step in” provisions of the warranty:
• the right of “step in” not to be exercisable until all sums that have fallen due under the building contract have been paid to the contractor; and
• the contractor to be released from all liabilities owed to the employer.
It is not however usual for any other type of beneficiary (such as tenants or purchasers) to enjoy “step in” rights.
What other types of provisions are usual in collateral warranties?
In respect of any design the contractor carries out:
• the granting of a copyright licence to the beneficiary; and
• the obligation to maintain professional indemnity insurance.
What other provisions might the contractor seek to have included?
The same limitation period for the beneficiary to commence legal proceedings against the contractor as the employer has under the building contract.
An acceptable provision as far as the contractor is concerned as to the number of times that the benefit of the warranty can be assigned by the original beneficiary.
Please note: These key points are only intended to give general guidance and are no substitute for specific legal advice on any given situation.