Collateral contracts are supposed to protect those not party to a contractual set-up. They work, but they also introduce flint-hearted button counters into the equation

There have been a few problems with the curtain walling, cladding and roof on the head office of Scottish Widows Life Assurance in Port Hamilton, Edinburgh. The cladding leak ran up a bill for £6m and the roof another £2.1m. What the Scottish courts are testing is whether those devices, which are called “collateral contracts”, hold water. Let me tell you the tale.

Back in 1996, Edinburgh Construction Services agreed to develop a purpose-built office buildings for Scottish Widows, which would also be the key occupier. The developer entered into a construction management contract with Laing Management Scotland. The lead architect was BDP. Two of Laing’s key subcontractors were Harmon Facades, which handled the glazing systems, and Kershaw Mechanical Services, which designed and built the standing-seam roof.

The first snag is that Scottish Widows is not in contract with any of the construction folk, nor with the architect. Scottish Widows is a stranger to the contractual set-up. So if a defect pops up, how does the repair get paid for? The answer is by way of the collateral contracts. Harmon, Kershaw, BDP and Laing made a written promise to the occupier or owner that allows it to take over all the contractual promises made by those people in the original deal with the developer. Put another way, the subcontractors, architects, engineers and QSs are willing to go into the future blind as to who might phone them up one day and point to a building problem. Thing is, all these years later, Harmon is no more; ah, but the parent company in the US gave a guarantee about its work and it looks as though that guarantee is going to be dragged and dropped onto the collateral contract.

Credit: Simone Lia

The whole idea is to avoid a “black hole” whereby loss is suffered by a party but it can’t put its hand into the pocket of the culprit. But Scottish Widows’ pieces of paper has coaxed it to look at Harmon’s subcontract and at BDP’s architectural contract to winkle out the promises. Harmon promised Laing that it would designed the subcontract works and would properly install the curved curtain walling, the gasket glazed walling and the structural glazed walling, and that all of them would keep out the weather.

Well, says Scottish Widows: it didn’t. As to the architect, Scottish Widows says it was the “lead consultant” and responsible for the preparation of performance specifications and the carrying out technical checks on the design. And if that meant engaging a specialist cladding consultant to check up on Harmon, then so be it. As to Harmon’s actual work, it is said that BDP had an obligation to visit site regularly and test the curtain walling by pointing a hosepipe at the glass. None of this is yet proved of course but it does give you the idea behind collateral warranties. You might expect that similar things are said of the architect about Kershaw’s roof works. A storm ripped off eaves and gutters 10 years ago, and out came the collateral contract.

On the face of things, the construction and design folk have nothing extra to fret about concerning collateral warranties. After all, their liabilities are no more and no less than in their original contracts. So why worry? Well, it’s because a contract or subcontract in everyday commerce succeeds through the working relationships built up during performance. The contract and subcontract thrive on mutual trust, co-operation and, yes, give-and-take. So if there is a problem, it is the relationship that sorts it out. A leaky roof will be inconvenient but there will be co-operation in getting it repaired. Most events don’t result in claims for compensation if the parties are comfortable with each other.

But a collateral warranty throws strangers into the arena. There is no long-term working relationship, no warmth or need for compromise. The roof will be repaired but the bill for consequential loss will account for cost to the last penny. And that’s invariably what leads to court. In this Scottish Widows case, the supply chain is scrutinising every work in the collateral warranty for escape clauses. The court told them there is no escape. So the battle between strangers continues.