‘If it ain’t broke, why fix it?’ asked Jeff Brown of collateral warranties. But third-party rights are now used by many big developers as they reduce paperwork, time and money
Jeff Brown asserts, based on a straw poll at a breakfast briefing, that third-party rights “don’t work” and we should stick with the existing provisions for collateral warranties. “If it ain’t broke, why fix it?” he asks (27 October).
Having watched the growth of collateral warranties and the administrative burden they impose, I find it hard to be so complacent. If a developer is required to deliver collateral warranties from its design team, main contractor and 20 design subcontractors, the paperchase can last months.
In addition, the legal costs of pursuing this could be as high as £20,000 on a multi-let building. There’s no doubt that collateral warranties add significant costs to a project – legal costs, of course, but also management time and effort debating the terms.
Contrast this with my recent experience of a building in the City. The tenant signed up for part of the building after completion, and since third-party rights had been included in the consultancy agreements and trade contracts, all we had to do was issue notices to the consultants and the trade contractors. They didn’t have to sign any documents, there were no arguments about unpaid accounts, no delays and no vast legal bills.
It’s surprising nobody at Mr Brown’s breakfast had come across third party rights on their projects. For purchasers and tenants, they’re now pretty universally accepted and recommended by the City of London Law Society, the British Property Federation and other bodies. Their use by the Joint Contracts Tribunal (JCT) was not innovative. The JCT picked up on a trend that had already started among the big developers, most of which now use third-party rights.
It’s surprising that nobody at Mr Brown’s breakfast had come across third-party rights on their projects
Mr Brown also suggests that the need to obtain warranties from consultants will be unaffected by the execution of a third-party rights’ schedule. Of course, consultants will also give third-party rights and not sign collateral warranties – how can Mr Brown suggest otherwise? The British Property Federation Consultancy Agreement and Construction Industry Council’s consultancy agreements both provide for third party rights.
He then launches into a tirade about the terms of the third-party rights in JCT forms. But this also occurs in the negotiation of the terms of collateral warranties. The use of third-party rights affects only the method of delivery of rights, not what rights are granted. We can debate endlessly about whether or not collateral warranties or third-party rights should include a net contribution clause, but castigating the JCT for including one in their drafting is unreasonable.
In addition, it is wrong to suggest that excluding liability for losses caused by delay is unacceptable. Liquidated damages under the building contract are payable to the employer, not also to purchasers and tenants. They may be payable to a funder after it has “stepped-in” but the drafting of third party rights allows for this. Perhaps Mr Brown needs to have a rethink on this issue?
Of course, if the building contract is not agreed, then the exercising of third-party rights’ will be delayed, as Mr Brown warns, but how many contractors are stupid enough to execute collateral warranties if there’s no underlying contract? And, if even they do, does he really think those collateral warranties are enforceable?
He concludes that warranties will be insisted on, for the foreseeable future at least. The fact that third party rights are used in most big City projects proves him wrong.
Ann Minogue is a partner at Linklaters