Critical Questions for Reviewing Collateral Warranties

Warranties, in construction, are unusual documents. The two parties (the companies who sign the warranty) rarely meet and have little communication with and no control over each other. A warranty is:

a contract entered into between a member of the project team (the warrantor) and a tenant, purchaser or funder (the beneficiary) which is collateral to – and depends upon the terms of – a contract already in existence between the warrantor and her employer

As a result of a warranty, the warrantor promises to the beneficiary to perform her existing obligations under her contract and allow the beneficiary to bring a claim if she doesn’t.

Q1: does the warranty accurately identify the underlying contract (and have you got a copy of that?)

Questions for Tenants, Funders or Purchasers

Typical questions for beneficiaries are:

  • Which members of the project team are providing warranties?
  • What forms of warranty are being offered and are they worth having?
  • Is your client on the list of categories of potential beneficiaries?
  • When will the warranties be provided?

I actually think these are secondary questions. The critical question is Q2: what are your objectives for this development?

The answer refines our understanding of their interests and any likely losses.  For example, if a funder is repaid in full at practical completion, its interest in the use, occupation and maintenance of the development is zero; if a tenant is not due to pay rent until 2 years after completion, its interests in the duties of the project team during the defects period is minimal.

Questions for the Project Team

What you really need to know is does it protect me from wider or longer liability, or from unscrupulous beneficiaries?

Extending Your Liability: A mere promise to carry out of the terms of the original contract (the bare minimum you need for a warranty) does not impose an extended duty of care or broader liability than that original contract, subcontract or appointment.

However, as most warranties contain stand-alone clauses such as those relating to copyright, indemnities, step-in, it is arguable that most warranties are a mix of promises direct to the beneficiary (ie primary liability) and promises to comply with the underlying contract (secondary liability).  Where the warranty reflects a secondary obligation, that liability depends on and is circumscribed by the contract to which it relates.

Q2: does the warranty include a clause expressly stating that the warrantor’s liability will be no greater or of longer duration than imposed by the underlying contract?

Q3: where your warranty contains clauses that are also in the underyling contract (eg copyright, insurance, duty of care and deleterious materials) are they exactly the same?

Q4: are any limits on your liability? Are they the same as those in the underlying contract or do they further limit your liability?

We offer a fixed fee report on collateral warranties, covering these issues and more, so you can ensure it does not extend your liability and so it suits your business needs.

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