The Benefits Of Collateral Warranties In Commercial Developments
-
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.
-
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.
-
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...
To continue reading
Request your trial