The original intent of warranties was to allow claims to be made directly against contractors, subcontractors and professionals involved in developments by others interested in the development who were not in contract with them. For example, the bank funding a development could sue the contractor if the developer became insolvent.
Although this is still a principal purpose of collateral warranties, rights to enable third parties to continue and complete developments have become increasingly apparent. These "step-in" rights have always been a feature of collateral warranties but they are becoming more sophisticated and allow the beneficiary of the warranty greater freedom to step in.
Copyright clauses have also always appeared but are becoming more extensive to include rights over electronic data and provisions requiring the warrantor to obtain copyright licences. I have even seen a few warranties that entitle the beneficiaries to have direct access to the warrantor's staff for the purpose of briefing any new professionals and to the warrantor's files so that the beneficiary has full information on the development. There is no reason for these provisions not to be included, as long as the warrantor is remunerated for the help that it provides.
Although originally collateral warranties were provided by designers only, it is now widely accepted that some parties who only carry out construction work should give warranties as well. There is no logical reason why workmanship warranties should not be provided. For a developer, purchaser or bank, the lack of warranties obtained from subcontractors responsible for important structures and elements of plant and equipment means that they have incomplete protection against insolvency. The difference between these warranties and design warranties is that workmanship warranties do not include any insurance provisions as it is not usually possible to insure against defects in workmanship.
Collateral warranties may now give beneficiaries rights such as access to warrantor’s staff More are given by subcontractors But they still involve long, costly negotiations …
By refusing or restricting cover for collateral warranties, professional indemnity insurers can dictate, to a significant extent, their terms. This influence has seen the warrantor's position improve materially over the years. Net contribution clauses (restricting liability of the warrantor to what is reasonable for it to bear) are now common. Even where the principle is conceded, there are still debates about the detailed terms.
Limitations on liability to tenants are also common and usually restrict liability to the cost of making good defects. However, there is a move to extend the limit to include the cost of obtaining alternative premises if the original premises cannot be occupied until the defect is repaired – which seems reasonable.
Limits on liability in other circumstances have not gained ground, apart from in PFI and project finance arrangements, and in very large developments where the potential liability for the warrantor is so huge that nobody would accept the job unless it was restricted.
Neil White is head of the construction and engineering group at Taylor Joynson Garrett.