The Benefits Of Collateral Warranties In Commercial Developments

Author:Ms Linda Conway
Profession:Dillon Eustace

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...

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