Non-standard collateral warranties are set to re-emerge – and as their interpretation is so unpredictable, we'll no doubt soon be begging to see the back of them
The heyday of collateral warranties began in the late 1980s and unsurprisingly the courts are now encountering many claims arising under them. The oft-repeated assertion that collateral warranties are just "useless bits of paper" has certainly been rebutted. Many of these claims relate to wording that is "non standard" and, hence, their interpretation is unpredictable. Non-standard consultants' warranties may be about to emerge again, given the inability of the clients and consultants colleges on the JCT to agree a standard form.

In Northern & Shell plc vs John Laing Construction Limited, His Honour Judge Thornton QC had to interpret a collateral warranty given by Laing pursuant to a building contract entered into by Laing with the developer of a new office block, now known as Northern & Shell Tower. The last practical completion certificate was issued on 25 August 1989. On 16 January 1990, Laing entered into a collateral warranty in favour of the first long-leaseholder of the building. That warranty was assigned three times, ending up with Northern & Shell on 14 January 2002.

The deed of warranty was given after practical completion but it contained this clause (clause 5): "This deed shall come into effect on the day following the date of issue of the certificate of practical completion under the building contract."

Defects appeared in the cladding. Northern & Shell pursued Laing under the collateral warranty and the effect of clause 5 was critical since the claim form was (rather surprisingly) issued by Northern & Shell on the same date as the deed of assignment to it: 14 January 2002. If the limitation period ran from the date of issue of the certificate of completion, then Northern & Shell's claim was statute barred. If it ran from the date the deed was entered into, the claim form was just in time.

Judge Thornton had little difficulty in deciding in favour of Laing. Although clause 5 had obviously been drafted on the assumption that the collateral warranty would be entered into before the issue of the certificate of practical completion and had not been amended even though the collateral warranty was entered into afterwards, nevertheless the meaning was plain. The parties had agreed that the deed took effect retrospectively and that time began to run for limitation purposes on practical completion.

This situation would not arise under the MCWa forms published by the JCT. These provide that: "The contractor shall be entitled in any action or proceedings to rely on any term in the building contract and to raise the equivalent rights in defence of liability as it would have had against the employer under the building contract."

Why have we all been bothering having arguments about the enforceability of terms granting collateral warranties?

In other words, because Northern & Shell's claim would have been statute barred if it had been brought under the building contract, then it would also be barred under the collateral warranty.

And the argument would not arise if the Contracts (Rights of Third Parties) Act 1999 had been used to extend to Northern & Shell, the developer's rights under the building contract. Self-evidently, only equivalent rights can be extended unless the parties expressly agree otherwise.

Judge Thornton also remarked that a third party that is the intended recipient of a collateral warranty (under an obligation imposed on Laing in the building contract, by which Laing "further agrees to enter into warranties under seal in the form reasonably required by [the third party]") could enforce Laing's obligation itself seeking specific performance or damages. This entitlement arises under section 56 of the Law of Property Act 1925, which allows a third party to enforce a benefit it has been granted by a deed that relates to property rights.

So why have we all been bothering having arguments about the enforceability of terms granting collateral warranties? Why do we need powers of attorney? And who will be brave enough to advise clients to rely on section 56 in these circumstances?