Collateral warranties for building design and construction

[edit] What is a collateral warranty?

Collateral warranties are agreements that are associated with another 'primary' contract. They provide for a duty of care to be extended by one of the contracting parties to a third party who is not party to the original contract.

For a detailed legal definition of collateral warranties, see: Definition of collateral warranty.

[edit] Why are collateral warranties needed?

They came into being as a result of the courts deciding that defects in buildings were not recoverable in tort, as they were an economic loss which was only recoverable through a contractual relationship. Collateral warranties therefore create direct contractual relationships between parties that would not otherwise exist.

A typical example would be where an architect of a new office development owes a duty of care to an occupier of the development in so far as any subsequent defects which may arise are concerned. Privity of contract rules would prevent any liability arising between the architect and occupier without the existence of a collateral warranty.

[edit] What terms might a collateral warranty include?

There are a number of standard forms of collateral warranty (such as Joint Contracts Tribunal (JCT) collateral warranties), however there can be some dispute about their specific terms, with clients often claiming that industry standard warranties favour contractors and designers. There can also be difficulties with onerous terms that designers or contractors are unable to agree to as their insurers will not provide cover. As a consequence many collateral warranties are bespoke.

Collateral warranties may include 'step-in' rights allowing the beneficiary to step into the role of the client. This can be important, for example to banks providing funding for a project, enabling them to ensure that the project is completed if the client becomes insolvent.

There may also be a contractual requirement for parties to obtain further warranties, for example there may be an obligation for the main contractor to obtain parallel collateral warranties from sub-contractors.

One of the disadvantages of collateral warranties is the difficulty in actually completing them. On large projects with many consultants and sub-contractors and multiple occupants, there can be a great number of warranties. The Contracts (Rights of Third Parties) Act can offer a way around this difficulty by allowing the primary contracts to confer benefits upon third parties even though they are not a party to that contract.

See also: Practical considerations of collateral warranties.

[edit] Case law relating to collateral warranties

[edit] Parkwood Leisure Limited v Laing

In the case of Parkwood Leisure Limited v Laing O'Rourke Wales and West Limited in 2013, the judge found that Parkwood's collateral warranty qualified as a 'construction contract' as the definitions were widely construed and so The Housing Grants, Construction and Regeneration Act applied to it as it covers all contracts related to the carrying out of construction operations.

The Housing Grants, Construction and Regeneration Act 1996 (HGRA - also known as the Construction Act) is intended to ensure that payments are made promptly throughout the supply chain and that disputes are resolved swiftly. The Act applies to all contracts for 'construction operations' (including consultants' appointments). If construction contracts fail to comply with the Act, then the Scheme for Construction Contracts applies.

For more information see: Housing Grants, Construction and Regeneration Act.

At the time, the court's decision was an unexpected one for practitioners who assumed the Act did not apply to warranties.

For more information see: Parkwood Leisure Limited v Laing.

[edit] Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2024] UKSC 23

The approach taken in Parkwood was substantially revisited by the Supreme Court in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2024] UKSC 23, decided in July 2024. Overturning the Court of Appeal's 2022 decision in the same case, the Supreme Court held that the collateral warranty in question was not a 'construction contract' for the purposes of the Housing Grants, Construction and Regeneration Act 1996, and so the beneficiary had no automatic right to statutory adjudication under it.

Lord Hamblen, giving the leading judgment, held that a collateral warranty will only be a construction contract if it imposes obligations that are separate and distinct from those already owed under the underlying building contract. A warranty that simply repeats, or 'derivatively' promises, performance of obligations the contractor or consultant already owes to the employer - even where it is expressed in terms of continuing or future performance - will not usually qualify. On this basis, the Supreme Court indicated that most collateral warranties will not be construction contracts.

The decision means that parties can no longer assume that a collateral warranty carries the statutory right to adjudicate disputes quickly and relatively cheaply. Anyone drafting, negotiating or relying on a collateral warranty should therefore consider including express adjudication or other alternative dispute resolution provisions within the warranty itself, rather than assuming the protections of the Construction Act will apply by default.

[edit] Other cases

Other examples of cases related to collateral warranties include:

• D&F Estates Limited and Others v Church Commissioners for England and others.
• Murphy v Brentwood District Council.
• Squibb Group Ltd v London Pleasure Gardens Ltd & Anor 2013.

[edit] Related articles on Designing Buildings

• Appointing consultants.
• Construction contract.
• D&F Estates Limited and Others v Church Commissioners for England and others.
• Defects.
• Definition of collateral warranty.
• Design liability.
• Difference between collateral warranties and third party rights.
• Housing Grants, Construction and Regeneration Act.
• Murphy v Brentwood District Council.
• Novation.
• Parkwood Leisure Limited v Laing.
• Parent company guarantee.
• Performance bond.
• Practical considerations of collateral warranties.
• Scheme for Construction Contracts.
• Squibb Group Ltd v London Pleasure Gardens Ltd & Anor 2013.
• Step-in rights.
• Sub contractors.
• The Contracts (Rights of Third Parties) Act.
• Warranty.

[edit] External references

• The Contracts (Rights of Third Parties) Act.

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The supply chain is so long now it can be really difficult to get back to back warranties in place.