The two words most likely to raise a groan when discussing any construction project are surely “Collateral Warranty”: the document seemingly revered by funders and feared by contractors and consultants alike.
We have tried to de-mystify collateral warranties in a previous Brilliantly Simple Guide which focussed on the importance of “no greater liability” and “equivalent rights of defence” clauses. For warrantors, these clauses are of critical importance as they mean that the warranty’s effect does not widen the duty of care, it merely means that the duty is owed to additional parties. For both warrantors and beneficiaries such clauses are also of critical importance as they put further pressure on the underlying building contractor or professional appointment to do the job the parties intend it to do. At risk of stating the obvious, this means that when taking the benefit of a collateral warranty, it is not enough to review the terms of the collateral warranty: as soon as you spot a “no greater liability” or “equivalent rights of defence” it is vital that you take time to review the contract to which the warranty is collateral.
An example of such wording is:
10.1 Subject to clauses 10.2 and 10.3, the Consultant has no liability under this Deed which is greater or of longer duration than it would have had if the Beneficiary had been a party to the Appointment as joint employer.
10.2 Subject to clause 10.3 the Consultant shall be entitled in any action or proceedings brought by the Beneficiary under this Deed to rely on any limitation in the Appointment and to raise equivalent rights in defence of liability as it would have against the Employer under the Appointment.
10.3 No action or proceedings may be brought or commenced under this Deed at any time after the date being twelve years after the date of practical completion of the Works.
Rather than focussing on the breadth of the duty of care, this article looks at the length of time that liability under a collateral warranty lasts. This consideration has been prompted by a recent decision of the Inner House of the Court of Session in Scotland. Although not binding on the English and Welsh Courts, the Judgment in British Overseas Bank Nominees Limited and Others -v- Stewart Milne Group Limited had the potential to open up debate amongst lawyers south of the border and therefore create uncertainty for construction companies and funders.
Helpfully for contractors and consultants, the Inner House reached the same conclusion as had the TCC around a year earlier in the case of Swansea Stadium Management Company Ltd v City & County of Swansea & Anor: a collateral warranty effectively puts the beneficiary in the same position as the original client/employer and so the warranty does not create any longer period of liability.
This means therefore that even where a collateral warranty is executed as a Deed (a common requirement for banks and any legally advised purchasers), if the underlying building contract or professional appointment is only a “simple contract” then liability is highly unlikely to extend beyond 6 years after the date of practical completion of the works.
We regularly see documents relating to projects of no inconsiderable value where consultants have been appointed with no more formality than the acceptance of a fee proposal that in itself makes reference to “standard RIBA terms” or “an ICE appointment”. Whilst this may be enough to create a contract binding between the original parties, the absence of a single document recording the parties’ agreement and with the necessary formalities for execution as a Deed means that no matter how a future collateral warranty is executed, the presence of wording similar to that set out above by way of example is likely to kill any claim brought more than 6 years after practical completion.
If you are procuring construction works, whether you intend to occupy or sell the completed building, it is important to think about formal documentation from an early juncture. Funders, purchasers and tenants taking an FRI lease are all likely to want to have the benefit of collateral warranties. If properly advised, they are likely to seek such documents executed as deeds and with the underlying documents similarly executed. It is important to consider these requirements and have the relevant discussions with your construction team at tender stage to avoid any tensions during the project.
Finally, whilst again this may be stating the obvious, for the sake of good order I repeat our usual warning that everything depends on the wording of your documentation and that context is king.
These notes have been prepared for the purpose of an article only. They should not be regarded as a substitute for taking legal advice.