Architect's Collateral Warranties

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[edit] The obligation to provide collateral warranties

There is no legal duty on anyone to agree the terms of or to enter into a collateral warranty in favour of a third party. If collateral warranties are required, the employer is well advised to ensure that there is a binding obligation imposed by the terms of the consultancy agreement with the architect to grant collateral warranties.

The client may want collateral warranties in favour of:

• Funders.
• Future purchasers.
• Tenants.
• Freeholders, borough councils or other third parties who may suffer a loss if the project is negligently designed or constructed.

But architects should not accept open-ended provisions which raise the prospect of their being required to enter into collateral warranties with, say, 60 tenants.

[edit] Enforceability of obligation

Will courts order the architect to enter into the collateral warranty, or will they suggest that damages for breach of the contractual obligation undertaken by the architect is adequate remedy for the client?

The latter is most widely held, and for this reason, powers of attorney are frequently inserted into tailor-made consultancy agreements in addition to the basic obligation to provide the collateral warranty, which authorises the client to execute the collateral warranty on behalf of the architect if the architect in breach of contract, fails to execute it himself.

[edit] The terms of collateral warranties: CoWa/P&T (purchaser and tenant) [which edition?]

Clause 1: The Warranty

• Consultants generally warrant that they will exercise reasonable skill and care in the performance of their duties.
• Consultants do no guarantee results.
• The warranty relates to the duties under the consultancy agreement.

Clause 1(a): The Exclusion of Economic and Consequential Loss

‘The firm shall be liable for the reasonable costs of repair, renewal and/or reinstatement of any part or parts of the development to the extent that:

• The purchaser/tenant incurs such costs and/or
• The purchaser/tenant is, or becomes liable either directly or by way of financial contribution for such cost.

The firm shall not be liable for other losses incurred by the purchaser/tenant’

• If this limitation on the basic warranty did not appear, then the architect would be liable to the purchaser/tenant for the damages for breach of contract assessed in accordance with the normal rules.
• According to the BPF, for clients who wish to extend the consultant’s responsibility to cover economic and consequential loss and can persuade the consultants to provide adequate insurance cover should delete the last sentence and replace it with: ‘The firm shall in addition be liable for other losses incurred by the purchaser/tenant provided that such additional liability to the firm shall not exceed £x in respect of each breach of the firm’s warranty’

Clause 1(b):’The Contribution Clause’

• To ensure that if there is a latent defect in the building and the purchaser/tenant wants to sue, his recovery against the architect is assessed on the assumption that the architect is only liable for his ‘share’ or the contribution to the loss.
• Even if the purchaser/tenant is unable to recover from the contractor who may have also contributed to the loss either because the contractor has not given a collateral warranty or because the contractor is insolvent.

Clause 1(c): ‘Defences of Liability’

• To ensure that if, for example, the consultancy agreement contains a limitation on the architect’s liability for negligence, that limitation is also imported into the collateral warranty.

Clause 1(d): ‘Independent Enquiry’

• To prevent a contribution claim by the architect arising from the involvement of an independent surveyor to carry out any independent enquiry by the purchaser/tenant in the development

Clause 5: ‘Copyright’

• Obliges the architect to give the purchaser/tenant a wide-ranging licence to copy and use the documents for any purpose related to the premises.
• The licence extends to the copying and use of documents for an extension, but not a right to reproduce the design for an extension.

Clause 6: ‘Professional Indemnity Insurance’

• The architect should check that their PII corresponds to the obligation in the collateral warranty, but the obligation is largely academic because:

1. The obligation is too uncertain to be enforceable since it is qualified with the proviso: ‘provided always that such insurance is available at commercially reasonable rates’, and
2. There is no effective sanction for a breach by the architect of their obligation to maintain PII

• Most PII policies contain a specific endorsement about collateral warranties stipulating the number which may be given and the terms which are insured.

Clause 7: ‘Assignment’

• Blanks are included so that the agreement can prohibit assignment altogether or the number of assignments can be restricted.
• Two or three assignments are usually permitted.
• An assignment does not create new rights.
• It extinguishes the assignor’s rights and, from the date of assignment and gives the assignee the rights which the assignor would otherwise have had.
• It does not mean that the limitation period starts again.

Clause 9: ‘Limitation’

• ‘No action or proceedings for any breach of this agreement shall be commenced against the firm after the expiry of x years from the date of practical completion’
• Usually six years for agreements under hand and twelve years if executed as a deed (under seal)

[edit] CoWa/F (funder) [which edition?]

• Confers on the funders ‘step-in’ rights entitling the funder to ‘take over’ the appointment and to receive prior notice of termination of the appointment.
• Clause 5 entitles the funder to serve notice on the architect upon termination of the finance agreement.
• Clause 6 requires the architect to give notice to the funder before terminating the appointment for breach by the developer.
• Clause 7 requires the funder to accept liability for fees payable to the architect.

[edit] Find out more

[edit] Related articles on Designing Buildings Wiki

• Appointment.
• Collateral warranties.
• Defects.
• Definition of collateral warranty.
• Performance bond.
• Practical considerations of collateral warranties.
• Professional indemnity insurance.
• Reliance letter.
• Step-in rights.
• The Contracts (Rights of Third Parties) Act.