In the development of property – whether rural or agricultural land, residential development, or for renewable energy generation – contracts for design and construction contain much scope for negotiation. Given the scale of the works involved and the estimated life-span of the completed development, there may also be several third parties who run the risk of sustaining loss in the event the works prove faulty or defects arise.
How are the third parties' interests protected?
The answer is collateral warranties – contracts granted by the contractor or consultant, in favour of parties who are not signatories to the underlying contract.
We have recently completed several deals across a variety of key business areas where the existence and wording of collateral warranties has proved critical. With specialists in both property and construction, we have been able to provide up-to-date knowledge and expertise to maximise the benefit and value of collateral warranties for our clients.
Who may need a collateral warranty?
There are several common categories:
i) a funder providing finance for the development;
ii) a landowner who has formed a"special purpose vehicle" to carry out the development;
iii) a party looking to buy a completed development;
iv) a tenant taking occupancy of a completed development.
Each of these parties may stand to incur financial loss if the works are faulty, but would not have a contractual right to sue the original contractor or designer without the collateral warranty being in place.
Under Scots Law, warranties need not require the beneficiary to make reciprocal obligations to the contractor or consultant; warranties can be seen as promises rather than part of a bargain comprising both"give" and"take".
Recent years have been good to collateral warranties – several high-profile cases involving developments of significant size have reached court, with judges confirming that collateral warranties have an"essential purpose", namely:
"... in the event that work is defectively carried out, the person who ultimately performs the necessary remedial work will have a right of action against those who are responsible provided that it is the beneficiary of collateral warranties granted by those persons". (Scottish Widows Services Limited v Harmon Facades Limited and another, 2010)
In the property development context, the circumstances in which collateral warranties are beneficial are many and varied. A funder will often require warranties in its favour as a"condition precedent" of granting funding for works to be carried out. In a renewables context, a landowner should require warranties in respect of a new hydro, onshore wind, photo-voltaic, or biomass development on their land, as they may be saddled with clean-up or remedial costs if the development malfunctions. For storage facilities on agricultural properties, purchasers will look to have warranties in their favour in respect of newly-constructed units, to protect their own position once they take ownership.
Warranties themselves come in many different shapes and sizes. Industry bodies produce"standard forms", often containing limitations and exclusions from liability, seeking to protect the consultant or contractor in question. Professional indemnity insurers also seek to negotiate forms of warranty, again with a view to restricting their own exposure in the event of claims. Warranties themselves are ripe for negotiation.
The one key point is the protection mechanism created by having collateral warranties in your favour. Having a collateral warranty in your favour entitles you to require the contractor or consultant to attend your site to investigate defects which arise. Warranties need not inevitably end up in court proceedings; having granted a collateral warranty, a consultant or contractor is obliged to respond to a claim, and to investigate what remedial works are required. The claim may be disputed, but the claim will be answered in some form. Without collateral warranties, third parties are hard-pressed to make claims"stick" without resorting to court proceedings, thereby incurring significant additional expenditure.
With strong backing from the courts, and widespread use in the development sector, collateral warranties should be an integral part of all installation or construction contracts.
Are you confident you have your warranties in place?