Collateral warranties

Over the years the courts have started to show a readiness to award damages for the negligence of designers and/or contractors, even if the claimant did not have a direct contract with the contractor, i.e. was not in privity of contract, thus expanding the area of negligence claims beyond the original employer. However, in the late 1980s the courts took a more stringent position, finding that it was not possible to recover damages for negligence in relation to defects in buildings as such damages were economic losses, which are not recoverable in tort. The two key decisions in this regard were the House of Lords’ decisions in D&F Estates v Church Commissioners1 and Murphy v Brentwood District Council.2 After these two cases it was clear that owners and those occupying buildings, such as tenants, needed a contractual method to claim damages against the designers and/or the contractors. Such claims had to be based in a breach of contract and, as they had no privity of contract with either the designer or contractor, such claims would fail. This problem extended not just to subsequent owners and occupiers but also to those providing the funds, other purchasers, and those who had any other interest in the building or project. The development of collateral warranties created the contractual relationship needed.

In some cases collateral warranties also seek to restrict liability by the addition of what are known as “net contribution clauses”. In the Scottish case of Glasgow Airport Limited v Messrs Kirkman & Bradford,3 Glasgow brought a claim against Kirkman, the structural engineers, after it had entered into a lease agreement for a unit at Glasgow airport, under which Glasgow undertook to carry out “landlord’s works” in terms of a building contract for the premises. It then entered into a building contract with main contractors for design work in relation to the floor slab. The main contractor then engaged Kirkman with liability limited to £2 million. Later, after the tenants had problems with a defective floor slab, Glasgow commenced proceedings to recover the £2 million as damages for breach of a collateral warranty. It was claimed that Kirkman failed to exercise reasonable skill and care in its work, which was denied, and in return Kirkman claimed that any liability to Glasgow under the collateral warranty was limited to costs and did not extend to damages that Glasgow was required to pay to third parties. Kirkman took the position that the collateral warranty should be construed by reference to its own terms and that the reference to “liability for costs” was confined to any sums which Glasgow was required to pay in respect of repair or reinstatement of the floor slab and did not extend to consequential losses. Needless to say Glasgow took the position that Kirkman’s liability under the warranty was unrestricted and that it was entitled to recover all losses arising from its breach.

The court took the position that it made commercial sense for the words “liability for costs” to describe Kirkman’s “whole liability” under the warranty. The question of construction was to be resolved by considering the express terms of the “sub-consultant’s liability for costs” in relation to the general warranty as to reasonable care and skill. The court found nothing that would suggest an intention to restrict Kirkman’s liability from that which would otherwise flow from the terms of the agreement, especially since there was no express provision that its liability was limited to costs. Accordingly, the warranty entitled Glasgow to recover all losses directly caused by Kirkman’s breach, subject to the rules of remoteness.4 Accordingly, the collateral warranty meant that Kirkman’s liability for costs was given the wider meaning, which had been Glasgow’s contention in the first place and also included consequential losses arising from Kirkman’s breach.

Thus, in Glasgow, without collateral warranties Glasgow Airport would not have been able to recover either its own or its tenant’s losses directly from Kirkman. Here too it should be noted that liability was found not to have been limited to direct costs as liability was limited by a clause contained in the main contract, which was capped at a maximum of £2 million.

One recent case of note is Swansea Stadium Management Company Ltd v Swansea City and County Council,5 in which Mrs Justice O’Farrell granted summary judgment and struck out part of the tenant’s claim against a contractor, Interserve Construction Limited, under a collateral warranty, finding that it had no real prospect of success as it was statute-barred under the Limitation Act 1980. In so doing, she applied established principles, but her judgment is of interest in that she confirmed, in line with previous authorities, that the relevant collateral warranty had retrospective effect. This is notable because collateral warranties are often entered into after the building contract; an alternative finding would mean that such warranties were unable to achieve the purpose for which they were created.

Collateral warranty provisions

Typically, most collateral warranties contain some sort of promise to be responsible for the obligations of the one giving the warranty under the primary contract along with a “no greater liability” clause. In effect this limits the warrantor’s liability to an amount not greater than the amount of liability which could have arisen under the primary contract. Other provisions usually include language requiring the party to maintain insurance and supply further warranties if necessary, a listing of any prohibited materials and a clause allowing the assignment of the warranty. If a lender is involved it is also common to find provisions which allow the funder to take over the role of the employer in the event of any difficulty and, in effect, to act as the employer would under the primary contract. Further, in collateral warranties dealing with tenants, there are also provisions dealing with limitations of liability (or exclusions), net contribution clauses and prohibitions on recovering consequential losses and liability caps, for example.

It should be noted that where the main contractor has any design responsibility, collateral warranties are generally required from the main contractor as well as from anyone involved with the design of the works. The problem is that the designers are, perhaps, able to insure their own negligent design but not able to prevent negligent work from being constructed, thus there is an argument against obtaining collateral warranties from those who have had no design responsibility like subcontractors.6

In Safeway Stores Limited v Interserve Project Services Limited (formerly known as Tilbury Douglas Construction Limited)7

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