Are subcontractors ‘taking a Liberty’ by failing to return collateral warranties?

Please note: whilst this article is phrased as if advising contractors in relation to sub-contractors, it applies equally to sub-contractor and sub-subcontractors, and consultants and sub-consultants.

As we are all well aware, getting back executed collateral warranties can prove a rather trying exercise, to say the least.

A common solution to speeding this process is to include a provision in the contract stating that the return of the executed warranties will be condition precedent to payment. But, what happens if this provision or a similar provision to encourage the return of the warranties has not been included?

All too often contractors find themselves in a state of limbo between a subcontractor that has failed to return the warranties, and an employer and/or funder that is demanding the return of the warranties, and refusing to pay as a result.

But how far is a contractor expected to go to procure the warranties? Is it enough to show that reasonable attempts have been made or would the Court be willing to order a contractor to procure the warranties that they are contractually obliged to deliver?

In the case of Liberty Mercian Limited v Cuddy Civil Engineering Limited and others [2013] EWHC 2688 (TCC), a standard building contract was amended to contain provisions that the contractor (“Cuddy”) must provide collateral warranties from its subcontractors. The client (“Liberty”) claimed that Cuddy had failed to rectify defects, resulting in the termination of the contract, which Cuddy accepted as repudiatory breach. Liberty commenced proceedings against Cuddy which included a CPR Part 8 application seeking specific performance and requested that the Court used its discretion to force the contractor to provide the client with the collateral warranties as obliged by the contract.

Cuddy initially argued that due to conflicting contracting names (due to errors made when the contractual documents were drafted) the obligation to provide the warranties was not valid. This argument failed.

Cuddy then argued that they had attempted to get the warranties, but unfortunately the subcontractor had gone into liquidation and therefore it would no longer be possible to procure the warranties from the subcontractor. Interestingly, the Court did not consider the fact that the subcontractor was in liquidation a sufficient reason for Cuddy not to provide Liberty with the warranties. This was also the opinion in Oakapple Homes v DTR when the Court ordered an architect in liquidation to provide collateral warranties to tenants. To summarise briefly, the Court held that if there are reasons to suggest that the warranties may be backed by insurance they will still have some value if returned.

Recent case law certainly suggests that the Courts are willing to enforce provisions in the contract to provide warranties. In short, if you have a contractual obligation to provide collateral warranties there is very little you can do to get out of this obligation.

My simple advice to contractors would be:

• be upfront with the subcontractor at the outset - an early conversation about collateral warranties could prevent future problems
• include a condition precedent to payment or retention clause in your subcontracts allowing you to withhold money unless/until collateral warranties are provided. Payment or retention is a great motivation for Subcontractors to return collateral warranties swiftly

or, failing this:-

• include a clause with an obligation for the subcontractor to provide a warranty within a set time, stating that failing to meet this requirement will be deemed a material breach of the contract which will constitute grounds for termination

It goes without saying that contractors are going to struggle if their employer has failed to warn them from the outset about the requirement for collateral warranties. In turn the employer should check with any funder. Yet again this is an example of a situation where joined-up thinking (and dare I say a ‘collaborative’ approach) from the start will avoid potential problems in the future.

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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