Good as their words

The first article in this series looked at the background to collateral warranties, the parties and the recitals (25 February). Now for the most important part: the warranty itself. As before, references to the contractor apply equally to professional advisers and subcontractors.

The warranty nearly always begins with the words “The contractor warrants that …”, followed by one or more subclauses setting out different obligations. The most common of these are that the contractor has performed and will perform its obligations under the building contract or appointment and that in the performance of its obligation to design the works, the contractor exercise reasonable skill and care.

Neither of these should cause any problem, provided the contractor’s obligations are clearly defined in the contract. However, there is an increasing tendency for those advising building contractors and consultants to try to exclude the first part of this warranty. This is usually not acceptable to banks or subsequent purchasers.

The effect of these is simply to repeat for the beneficiary the obligations that the contractor has to its client.

Supplementary warranties

Supplementary warranties are often added, although, if the contract is properly drafted, these are unnecessary because the principal warranties should cover the supplementary issues.

The supplementary warranties that most often appear are that the contractor has exercised reasonable skill and care in the selection of goods and materials; that the works designed by the contractor will satisfy any performance specification contained in the building contract or appointment; that the works will be of sound manufacture and workmanship and (for design-and-build contracts) will satisfy the employer’s requirements.

•  Supplementary warranties must not increase a contractor’s liability under the original contract
•  The warranty must stay within the obligations needed to secure insurance

If entering into a collateral warranty, it is important to check that these clauses do not increase liability beyond the obligations under the original contract. If they do, they may not be insured under the contractor’s professional indemnity insurance.

Qualification

The warranties entered into are often qualified by a number of provisions. It is common to see a provision that the contractor shall have no greater liability to the beneficiary, nor a liability of longer duration, than the contractor would have had if the beneficiary had been named as the employer or client in the building contract or appointment. The purpose of this is to ensure that the warranty does not extend the underlying obligations, so that the obligations in the warranty will be insured.

PI insurance

There is one vital issue relating to PII that affects the warranty clauses. Many smaller contractors and most professional consultants have very limited assets and, in the absence of satisfactory insurance, would be unable to meet any significant claim under a warranty. It is, then, in the interests of both parties that the terms of the warranty fall within the risks usually covered by a PI policy.

The contractor does not wish to be faced with claims that it cannot meet, and the beneficiary wishes to have a source of money so that any claims it has will be paid. Although it is not usually possible for those advising a beneficiary to obtain details of any exclusions in the contractor’s policy, there are two that are common to all: obligations in warranties that exceed those taken on by the contractor in the building contract or appointment, and obligations that amount to an “express guarantee”.