Having negotiated collateral warranties with all sorts of contractors, professionals and others for more than 15 years, I am concerned by the waste of time and effort involved in negotiating. This often arises from lack of understanding.
Background
Collateral warranties are designed to create contractual rights where otherwise only common law duties of care would exist. Such duties of care are not regarded as satisfactory by those who would have to enforce them because there are limits on the damages that can be recovered if they are breached, and there are problems with enforceability.
Originally, that was the only purpose of collateral warranties, but they now include insurance and copyright provisions and often what are called “step-in” rights. These will all be dealt with in later articles in this series.
Warranties were originally resisted by those asked to give them (or rather, by their insurers) because it was thought that they extended the liability that would otherwise exist. However, they are now generally accepted, although negotiations over their content can be ferocious. They have become acceptable because they now include clauses making it clear that the contractor has no greater liability to the beneficiary than it has to its client and has the same defences to a claim by the beneficiary. Some warranties go further and include express limits on liability and “net contribution” clauses.
For reasons that are not clear, warranties are in general only sought from those who have a design responsibility, but there is no logical reason why a contractor with no design responsibility should not give a warranty in respect of matters such as workmanship and co-ordination. This is, in fact, becoming more common. The exception to all of this is the QS who has always been required to give warranties.
Parties
Having negotiated collateral warranties for more than 15 years, I am concerned by the waste of time and effort involved in negotiating, often arising from lack of understanding
The parties will be the contractor (or consultant or subcontractors) and the beneficiary — usually a bank, a purchaser or tenant of the development or, in certain cases, the developer. If the warranty contains step-in rights, the contractor’s client will have to be a party because the step-in rights overrule the client’s contractual rights.
Words to the effect “which expression shall include its successors in title and assigns” may appear after the name of one or more of the parties. If they appear after the name of the beneficiary, they may mean that the warranty can be assigned again and again. If the words do not appear after the contractor’s name, the warranty may not be enforceable if the contractor gets taken over.
It is not necessary to be concerned about the descriptions given to parties. If a subcontractor is referred to as “the Contractor” throughout the warranty, this does not mean it is liable as if it was the main contractor. The warranty only requires the giver to perform the obligations it actually has, whatever they are.
Recitals
These appear after the names of the parties and will usually be headed “Recitals” or “Introduction” or, in old fashioned documents, begin with the word “Whereas”. These paragraphs set the scene so that anyone reading the document can understand the background. They should briefly describe the nature of the project, the roles of the parties and why the warranty is being entered into. However, they do not impose obligations on either party.
The next article will look at the core of the collateral warranty – the provisions containing the contractor’s undertakings to the beneficiaries.
Postscript
Neil White is head of the construction and engineering group at Taylor Joynson Garrett.
