The Benefits Of Collateral Warranties In Commercial Developments

Author:Ms Linda Conway
Profession:Dillon Eustace
 
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  1. Introduction

    A collateral warranty, in the context of a commercial

    development, stands alongside a principal agreement, usually a

    contract and/or a letter of appointment. The need for

    collateral warranties arose because, in general, the party that

    commissions a building and has it erected is not the party that

    carries the burden if there is a defect in the building. Prior

    to 1989, as illustrated by D & F Estates Limited v

    Church Commissioners for England (1989 1 AC 177), third

    parties presumed that they had the protection of the general

    law of tort if there was a defect in a building. D & F

    Estates Limited established that third parties could not

    claim pure economic loss. This case also established that the

    cost of remedying a defective building fell into the category

    of pure economic loss and therefore such costs could not be

    recovered.

  2. Benefits and Burdens of Collateral Warranties

    A collateral warranty, where a third party is named

    specifically as a beneficiary, is designed to create a

    contractual route for the pursuit of claims by third parties.

    It is seen as a commercial necessity where a client intends to

    sell or let the complete building and where the construction is

    being financed by a lending institution. They are usually

    provided by a contractor, architect, civil and structural

    engineer, and mechanical and electrical engineer.

    The aspect of collateral warranties that most concern the

    professionals providing them is the issue of joint and several

    liability. Potentially, a warrantor could be responsible for

    the entire cost of remedying the defect when it is only

    partially at fault. In addition, consequential and business

    losses that may result from losses are incalculable and

    difficult, if not impossible, to insure. A funder who has

    negotiated step-in rights to complete a development will also

    be interested in collateral warranties.

  3. Effectiveness of Collateral Warranties

    There is no absolute guarantee that a beneficiary under

    collateral warranty will be able to recover the costs it incurs

    in relation to an inherent defect from a warrantor. The

    beneficiary must prove negligence and hope that the warrantor

    remains solvent and has adequate levels of professional

    liability insurance in place. For the tenant, in particular, it

    is preferable for the landlord to accept liability for inherent

    defects throughout the term of the lease. Although the landlord

    would be unlikely to agree to this, a compromise should be

    reached.

    A collateral...

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