Can You Avoid Collateral Warranties?

The definition of insanity, according to 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.

Alternatives

In my 20 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 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 warranties. [Integrated project insurance is the new flavour of the month to avoid warranties and create collaborative insurance]

Second, 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 warranties – specified third parties to rely on a schedule of rights and duties. 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 funder, tenant or purchaser 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 is by far the best route for bringing a claim.

2       To bring a claim under a project agreement

The tenant, funder or purchaser may be able to sue using 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).

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 less useful since court decisions in the 1980s which said the project team was not liable in tort for costs from defective buildings. So if there is no contract, there may be no claim. Despite that rule, there are some exceptions.

4       To bring a claim under a separate agreement

This involves agreeing a new contract between the funder, purchaser or tenant and the project team. It covers the two main mechanisms in use today: collateral warranties and third party rights notices.

What should you do?

You may not be able to avoid warranties completely, but you can consider if each warranty is really necessary or merely paper for paper’s sake!

[Updated November 2018]

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