Is it possible for a party to provide a collateral warranty without realising it, asks Francis Ho

francis ho bw 2017

Whatever your thoughts on them, there is no hiding from collateral warranties. On a large project there can be dozens of them, leaving construction team members in no doubt that they are responsible for a third party’s losses should they breach the terms of the underlying contracts with the developer or main contractor.

For some, it may come as a surprise that the High Court recently confirmed that a collateral warranty may exist without there being a formal instrument or the parties even realising it has come into existence. And while the case of New York Laser Clinic vs Naturastudios did not concern a construction matter, its narrative of broken promises and falsehoods is timely.

NYLC could not claim for breach of contract since it had not purchased the devices. To cover the considerable outlay, it had arranged hire purchase agreements 

The claimant, New York Laser Clinic (NYLC), was in the business of removing unwanted body hair from its clients using lasers. This process works by firing beams at melanin, a pigment found in hair. That it turn absorbs heat and carries it deep into the base of the hair follicle, removing the hair and making it unlikely to resprout. Unfortunately, melanin is also found in the epidermis and care must be taken to avoid burning skin. The darker the skin type, the more melanin there will be. A clinician can reduce the power but does so at the expense of the treatment’s effectiveness. The alternative is to adopt more advanced laser technology.

That was the choice the claimant made in 2015. At the time, it owned 13 Mini GentleLase lasers from Candela. These were in very good working order but could not safely remove hair permanently for those with the darkest skin tones. That, however, was not a limitation for Candela’s pricey Nd:YAG laser.

As it weighed up a purchase, the claimant came into contact with the defendant. Naturastudios was the UK distributor of Forma-TK’s Magma Diode Lasers. The Magma machines were a substantially cheaper option than the Candelas and, according to the defendant, superior in almost every material way.

The defendant’s bombastic claims about the lasers constituted a warranty, with breach occurring when the machines proved unfit for purpose

Like the Nd:YAG lasers, they could treat all skin types. It was claimed they were substantially faster, too, requiring only a third of the time to treat full legs. Unlike the Candela, the devices could safely be used on clients with a tan and did not require expensive cryogen gas. Furthermore, the procedure was painless and it was impossible to burn clients.

Unsurprisingly, the claimant plumped for the Magma lasers only to face a severe episode of buyer’s remorse. Not long after a disappointing soft launch of its new machines, it commenced legal proceedings. It subsequently received permission to amend its claim form to sue for breach of collateral warranty.

NYLC could not claim for breach of contract since it had not purchased the Magma devices. To cover the considerable outlay, it had arranged hire purchase agreements with three finance houses. These, in turn, acquired the lasers from the defendant for the claimant.

While NYLC did not have an agreement with Naturastudios, the Honourable Mr Justice Cavanagh deemed that a collateral warranty had nonetheless come into existence. As he explained, this could arise from a “promise or assertion, with contractual force, which leads to a contract being entered into. If the warranty that is relied upon turns out to be false, the person to whom it is made may have cause of action against the promisor for breach of contract. It is not necessary that the warranty was made fraudulently, or even negligently.”

The defendant’s bombastic claims regarding the Magma lasers were enough to constitute a warranty, with breach occurring when the machines proved unfit for purpose. NYLC had suffered losses by having to compensate unhappy clients and cede profits it would have obtained had the lasers been suited to the purpose for which they had been acquired.

The claimant’s reliance on Naturastudio’s inaccurate statements induced it to facilitate the finance houses buying the lasers. This amounted to NYLC’s consideration for the collateral warranty (as did the fact that it had actually covered the deposit itself).

Applying the lessons of this case to the construction industry, it may be rarer for a scheme to be driven as overtly by a third party, such as NYLC, while the purchasing entities (here the finance houses) serve as little more than that person’s vassals. Typically, experienced participants will make sure that an appropriate network of collateral warranties is laid down to deliver the required duties of care. Nonetheless, the judgment is a helpful reminder that even if they fail to do so, there will still be occasions where if you promise the moon, you might just be required to make good on it.

Francis Ho is a partner at Penningtons Manches Cooper