One definition of insanity (attributed to, but never said by, Albert Einstein) is ‘doing the same thing over and over again and expecting different results.‘
This is how it feels to work with collateral warranties. If you don’t know what a collateral warranty is then head to what is a warranty.
Alternatives to collateral warranties
In my 25+ years as a construction contracts lawyer, there were several ‘false dawns’ covering new approaches and alternative strategies. Each (it was hoped) would never-ending paperwork trail involved with agreeing and signing collateral warranties.
First, there was the introduction of decennial or latent defects insurance. However, because of the cost and monitoring involved, this insurance was often limited to larger projects. And even where it has been adopted, for instance on the Channel Islands, it has not replaced the use of collateral warranties. [Integrated project insurance is the new flavour of the month to avoid warranties and create collaborative insurance]
Next, there was the Contracts (Rights of Third Parties) Act 1999. When the Act became law, firms were falling over themselves to publish articles on how the Act meant we would no longer have to draft, amend, prepare, negotiate, execute and store collateral warranties in triplicate. But, because of concerns about its impact in practice, the Act was routinely contracted out of.
This Act slowly began to be adopted on a limited and precise basis, beginning with the JCT Major Project Form in 2003 and NEC3 in 2005. Essentially – a bit like collateral warranties – third party rights schedules allowed specified stakeholders to enforce a limited series of contractual obligations from the warrantor’s underlying agreement. Although this process has simplified the execution route, it has done little to avoid the need for drafting and negotiation of those terms.
Other options
What options does a stakeholder (funder, tenant or purchaser) have to bring a claim if the project is not constructed as intended? There are four choices:
1 To bring a claim under its agreement with the developer
A robust agreement with the developer/landlord/seller is by far the best route for bringing a claim.
2 To bring a claim under a project agreement
The stakeholder may be able to sue for breach of agreements between the developer and members of the project team. However, it’s not the easy option as it requires an exception to a legal rule (privity of contract) or an assignment of those agreements.
3 To bring a claim in tort
Even if you haven’t heard of the law of tort, you will have heard of it’s most common example: negligence. This option is not often relied on as a series of court decisions in the 1980s said the project team was not liable in tort for the costs of repairing defective buildings. So if there is no contract, there may be no claim. There are some exceptions, which are beyond the scope of this post.
4 To bring a claim under a separate agreement
This involves agreeing a new contract between the stakeholder and each member of the project team and is reflected in the two main mechanisms in use today: collateral warranties and third party rights notices.
What should you do?
Consider whether you need any collateral warranties or can rely on other claims (as above). If you do decide to adopt collateral warranties, consider who you need them from and their format. It is often quicker and easier to agree a short warranty (CoWa/F SCWa/F and equivalents), or a 500-word version, than the many pages of bespoke agreements.
If you are asked to agree a warranty and need help understanding whether it safeguards your business, grab a copy of my book or ask for a fixed price warranty report.
For the insider’s guide to warranties, grab How to Write Simple and Effective Collateral Warranties in Just 500 Words, available from Amazon in paperback and kindle.
[Updated November 2018 and November 2023]
