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A Brilliantly Simple Guide to ‘No Greater Liability’ and ‘Equal Rights of Defence’ clauses

A ‘No Greater Liability’ clause is a clause inserted in a collateral warranty which links the liability of a builder or professional under a collateral warranty to their liability under the original contract or professional appointment. Its intention is to replicate  any caps on the amount of money which can be recovered and/or set stricter time limits within which a claim can be made.

Whilst the terms of collateral warranties are reviewed as a matter of course by both parties, these reviews often do not pick up on the importance of this type of clause.

Collateral Warranty

By way of a brief reminder, a collateral warranty is a contract drawn up between two parties (for example, the tenant of a new building and a sub-contractor who worked on the building) which gives the parties legal rights which they would not have had otherwise. The two parties to a collateral warranty are the Warrantor (the party giving the warranty) and the ‘Beneficiary’ (the party who has the benefit of the warranty).

Under English and Welsh contract law, unless expressly provided or the contract purports to confer a benefit on a third party, only someone who is party to a contract can bring a claim under it (‘privity’). Privity means that, generally, third parties are unable to bring claims and to be granted rights under contracts.  (See my colleague Emilie Sclater’s article on Third Party Rights).

Privity can cause a problem if, for example, the lift were to break in a new office block owned by a Landlord (A) and rented by a Tenant (D). The block was built for A by a Contractor (B) using a specialist lift sub-contractor (C) (see diagram below). Under contract law, D would be unable to sue C for C’s poor workmanship as there is no contract between them. A collateral warranty bridges this gap, allowing D to bring a direct claim against C under certain conditions. In this example, C would be the Warrantor and D the Beneficiary.

‘No Greater Liability’ Clauses

Using the facts in the above example, here is a very brief ‘No Greater Liability’ clause (NGL clause):

“C shall have no greater liability and shall owe no greater duty to D under this Deed than it would have had if D had been named as Contractor in the Sub-Contract.”

The typical NGL Clause seeks to place a limit on the  Warrantor’s liability to be no greater than the liability they  would have had under the original contract (known as the ‘Underlying Contract’). This means that the warranty cannot be effectively reviewed without examining the Underlying Contract, as the liability under it may be less than it is in the warranty. For example, the Underlying Contract may specify a limit on C’s liability for lift repairs of £1m. This £1m cap would apply to C’s liability under the warranty, even if the warranty itself contains no specific limit or requires PI cover of a higher sum to be maintained by the Warrantor. If the repairs come to more than £1m D may be unable to recover the additional cost. 

‘Equivalent Rights of Defence’ Clauses

If an NGL clause is included, an ‘Equivalent Rights of Defence’ clause (ERD clause) often follows. An example of a simple ERD clause is below:

“The Contractor shall be entitled in any action or proceedings by the Beneficiary to rely on any limitation or term in the Sub-Contract and to raise the equivalent rights in defence of liability as it would have against the Contractor under the Sub-Contract.”

This clause seeks to do a similar job to an NGL clause, but using a slightly different mechanism. An NGL clause states that liability is limited to levels in the Underlying Contract, and therefore the Warrantor  cannot be liable beyond that level. An ERD clause states that the Warrantor may use any of the wording contained in the underlying document or any defence which would have arisen as against the original contracting party to defend a claim under the warranty.

A common issue stemming from use of an ERD clause comes from how documents are signed. If the Underlying Contract referred to in the collateral warranty is signed as a simple contract (and not a deed), then claims can only be made within 6 years of the relevant date (usually Practical Completion or the end of the defects liability period). The time allowed for bringing a claim under a collateral warranty signed as a deed, which would usually be 12 years, would be limited to 6 years if an ERD clause has been included in relation to an Underlying Contract signed as a simple contract.  Therefore, if a defect emerges after 6 years but before 12 years, the ERD clause allows the Warrantor to successfully defend the claim on the basis that it is out of time. This could deprive the Beneficiary of damages.

Many collateral warranties include drafting extending liability to 12 years, but these should be checked individually  to ensure that any ERD clause does not override such extension  due to the  limitation period of the Underlying Contract.

Another clause (not covered in this article) which can limit liability is a ’Net Contribution’ clause. Such clauses seek to limit the portion of damages payable to a percentage of the whole loss based on the level of the professional’s involvement and responsibility as compared with that of any other appointed professionals. For more information on these please see my colleague Katie Pickering’s article.

 

These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.

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