Scribd
Upload
143 views

Collateral Warranties For Building Design and Construction

Collateral warranties create direct contractual relationships between parties not in the original contract, such as architects and building occupants. They arose due to courts ruling defects could only be recovered contractually. Standard forms exist but are often customized. Completing many for a large project can be difficult, though third party rights acts can help. A 2013 case ruled collateral warranties qualify as construction contracts, applying construction regulations unexpectedly. This may slow negotiations as contractors resist more warranties.

Uploaded by

Karthiktrichy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
143 views

Collateral Warranties For Building Design and Construction

Collateral warranties create direct contractual relationships between parties not in the original contract, such as architects and building occupants. They arose due to courts ruling defects could only be recovered contractually. Standard forms exist but are often customized. Completing many for a large project can be difficult, though third party rights acts can help. A 2013 case ruled collateral warranties qualify as construction contracts, applying construction regulations unexpectedly. This may slow negotiations as contractors resist more warranties.

Uploaded by

Karthiktrichy
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 3

6/6/2016 Collateral 

warranties for building design and construction ­ Designing Buildings Wiki

Collateral warranties for building design and
construction

For a detailed legal definition of collateral warranties see: Definition of collateral warranty.

Collateral warranties are agreements which are associated with another 'primary' contract. They provide for a duty of
care to be extended by one of the contracting parties to a third party who is not party to the original contract.

They came into being as a result of the courts deciding that defects in buildings were not recoverable in tort, as they
were an economic loss which was only recoverable through a contractual relationship. Collateral warranties therefore
create direct contractual relationships between parties that would not otherwise exist.

A typical example would be where an architect of a new office development owes a duty of careto an occupier of the
development in so far as any subsequent defects which may arise are concerned. Privity of contract rules would
prevent any liability arising between the architect and occupier without the existence of a collateral warranty.

There may also be a contractual requirement for parties to obtain further warranties, for example there may be an
obligation for the main contractor to obtain collateral warranties from sub­contractors.

Collateral warranties may include 'step­in' rights allowing the beneficiary to step­into the role of the client. This can be
important, for example to banks providing funding for a project, enabling them to ensure that the project is completed
if the client becomes insolvent.

There are a number of standard forms of collateral warranty (such as Joint Contracts Tribunal(JCT) collateral
warranties), however there can be some dispute about their specific terms, withclients often claiming that industry
standard warranties favour contractors and designers. There can also be difficulties with onerous terms
that designers or contractors are unable to agree to as their insurers will not provide cover. As a consequence
many collateral warranties are bespoke.

One of the disadvantages of collateral warranties is the difficulty in actually completing them. On large projects with
many consultants and sub­contractors and multiple occupants, there can be a great number of warranties. The
Contracts (Rights of Third Parties) Act can offer a way around this difficulty by allowing the primary contracts to
confer benefits upon third parties even though they are not a party to that contract.

See also: Practical considerations of collateral warranties.

Contents
[hide]
1 Parkwood Leisure Limited v Laing
2 Find out more
2.1 Related articles on Designing Buildings Wiki
2.2 External references

http://www.designingbuildings.co.uk/wiki/Collateral_warranties_for_building_design_and_construction 1/3
6/6/2016 Collateral warranties for building design and construction ­ Designing Buildings Wiki

Parkwood Leisure Limited v Laing

In the case of Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited in 2013, the judge found that
Parkwood’s collateral warranty was a construction contract as the definitions were widely construed and The Housing
Grants, Construction and Regeneration Act applies to all contracts related to the carrying out of construction
operations.

The court’s decision is an unexpected one for practitioners who assumed the Act did not apply to warranties.

Collateral warranties will now be subject to greater scrutiny in the light of this case. We may now see a resistance
among contractors and consultants to grant warranties and a desire to perhaps restrict the number and scope of
warranties so that their application is limited to be retrospective only. That inevitably means further complications for
the negotiation and drafting of warranties resulting in protracted and costly negotiations.

The decision also raises speculation as to the application of the Act’s Scheme for Construction Contracts and
payment provisions to warranties considered to be construction contracts.

The upshot of this could now see the rise of third party rights as circumventing the issues arising from this case.
Could this spell the end of the widespread use of warranties which may finally be falling out of favour?

Find out more

Related articles on Designing Buildings Wiki
Appointing consultants.
Caveat emptor (buyer beware).
Consultant switch.
Construction contract.
D&F Estates Limited and Others v Church Commissioners for England and others.
Defects.
Definition of collateral warranty.
Design and build.
Design liability.
Designers.
Guarantees.
Housing Grants, Construction and Regeneration Act.
Insurance.
Murphy v Brentwood District Council.
Novation.
Parkwood Leisure Limited v Laing.
Parent company guarantee.
Performance bond.
Practical considerations of collateral warranties.
Professional indemnity insurance.
Reliance letter.
Scheme for Construction Contracts.
Squibb Group Ltd v London Pleasure Gardens Ltd & Anor 2013.
Step­in rights.
Sub contractors.
http://www.designingbuildings.co.uk/wiki/Collateral_warranties_for_building_design_and_construction 2/3
6/6/2016 Collateral warranties for building design and construction ­ Designing Buildings Wiki

The Contracts (Rights of Third Parties) Act.

External references
The Contracts (Rights of Third Parties) Act .

http://www.designingbuildings.co.uk/wiki/Collateral_warranties_for_building_design_and_construction 3/3

You might also like