Collateral warranties can be notoriously difficult to procure, even when an underlying contract states that they must be provided. This difficulty can be increased where the works or services are complete or there is a dispute relating to the project. A recent case in the Scottish Court of Session suggests that the court will take a robust approach in ordering the provision of executed collateral warranties.

Introduction

Collateral warranties are widely used in construction and engineering projects to create a contractual relationship between parties which would not otherwise exist. Their purpose is to impose contractual duties and obligations on the grantor in favour of a third party (such as an employer, purchaser, funder or tenant) who may suffer loss should a construction or design defect arise. 

Traditionally, there are a variety of methods by which parties try to incentivise or enforce the provision of warranties. These include: 

  • making executed collateral warranties a pre-condition to payment;
  • getting blank warranties signed in advance and held in escrow until the warranty is also completed by the beneficiary at a later date;
  • (for contractors) withholding access to the site (at the contractor’s risk) until executed collateral warranties are provided; and
  • granting an irrevocable power of attorney enabling the party appointing the contractor/consultant, to execute the warranties in an agreed form on behalf of the contractor/consultant.

What happens if, despite or in the absence of these methods, the grantor still fails to deliver a collateral warranty? A claim for breach of contract will ordinarily be insufficient, as such a claim can only be brought by the grantor’s counter-party who may not have suffered a significant loss due to the non-provision of the warranty. Recent cases have, however, shown a willingness of the court to enforce the provision of warranties by mandatory orders, known as specific implement in Scotland and specific performance in England. A decision earlier this year from the Scottish Court of Session suggests that the court will take a robust approach in dealing with objections to the making of such orders.

Kier Construction v WM Saunders Partnership

Kier sought specific implement for the provision of a collateral warranty from WMSP, its architectural, civil engineering and structural engineering consultant. Under the terms of its construction contract, Kier undertook to procure collateral warranties from each of its design consultants and sub-contractors. This was reflected in Kier’s contract with WMSP (the “Appointment”), which required WMSP to provide a signed collateral warranty within 14 days of a request by Kier. A form of warranty was appended to the Appointment and contained blanks for (i) the “relevant parties” to be considered for the purpose of a net contribution clause and (ii) for the amount of professional indemnity insurance to be maintained by WMSP. The blank in relation to “relevant parties” was to be filled in with a “full designation of consultants/building contractor who are sharing in the net contribution clause”.

The project, a new leisure centre in Dumfries, was completed in May 2008. However, Kier did not request a collateral warranty from WMSP until early 2015 by which point the parties were engaged in separate litigation with the employer in respect of defects at the leisure centre. Kier used the form of warranty attached to the Appointment, completing the blanks, and forwarded this to WMSP for execution. After ignoring this and further requests, WMSP advised Kier that there were outstanding fees due to be paid by Kier adding that, if payment was received, the draft collateral warranty would be duly executed and returned. However, WMSP ignored follow up correspondence from Kier, even returning a cheque in respect of payment of the outstanding fees. Accordingly, Kier raised proceedings for specific implement.

An armada of arguments

WMSP put forward what Lord Woolman described as “an armada” of arguments to resist an order. The court ultimately found that WMSP had agreed to the draft warranty proposed by Kier in return for payment of its outstanding fees. However, the court also dismissed WMSP’s argument as to the enforceability of its warranty obligations under the Appointment as follows:

  1. Agreement to agree. WMSP submitted that its Appointment envisaged further negotiations to agree the blanks in the form of warranty. The court disagreed, finding that the use of the words “shall” and“default” in the Appointment made it clear that WMSP had an obligation to provide the warranty. The “relevant persons” blank could be filled in by reference to the consultants and sub-contractors engaged by Kier for the project. The insurance blank was to be completed by “inserting the figure agreed by the parties in respect of the professional indemnity cover”. It is unclear from the judgement whether such a figure had been agreed (WMSP’s argument suggests it had not) or how the blank was to be filled in if it hadn’t.
  2. Mutuality. WMSP argued that Kier could not enforce the obligation because it had itself breached the Appointment by preventing WMSP from carrying out the Architect’s Services in accordance with the Appointment, potentially exposing WMSP to a claim by the employer. Further, Kier had failed to make full payment of WMSP’s fees. The court found that the obligation to provide the warranty was a stand-alone requirement and that the duties relied upon by WMSP were not a true counterpart. WMSP could claim against Kier in relation to such matters and, as against the employer, could argue that any breach was caused by Kier.
  3. Impossibility. WMSP contended that it was impossible for it to represent, as it was required to do by the form of warranty, that the Works had been carried out and concluded to the standard covered by the design because Kier did not carry out the Works to the specified standard nor did it call for certain inspections. The Court dismissed this on the same basis as the mutuality argument.
  4. Contractual provisions as sole remedy. Finally, WMSP argued that Kier’s sole remedy for WMSP’s default was its contractual right to suspend fee payments under the Appointment. Lord Woolman disagreed, noting that the Appointment expressly preserved Kier’s common law rights and that “very clear language” would be required for a party to waive its right to specific implement.

Conclusions and implications

The decision adds to the small number of recent cases providing welcome guidance on the effectiveness and enforceability of collateral warranty obligations, which had previously been lacking despite the popular use of them in construction projects. It suggests that the courts are likely to take a robust approach to ordering specific performance where circumstances require - even when a project is long complete and parties are already engaged in litigation. The making of such orders is discretionary, however, and will be subject to any individual facts of a given case which may affect the court’s discretion. Parties ought to bear in mind this uncertainty alongside the costs of court proceedings when considering how best to enforce the provision of collateral warranties. 

Where signed collateral warranties are unable to be obtained at the outset of a project or through the contractual devices mentioned at the start of this Law-Now, an alternative option for enforcement is to use the third party rights legislation. This is often seen as being more practical and efficient than the use of collateral warranties and can be arranged at the same time as the building contract, permitting the employer or contractor to identify beneficiaries at a later date once known. One important difference between the two, however, is that the use of third party rights will not give rise to a “construction contract” under the Housing Grants, Construction and Regeneration Act 1996 (as per Hurley Palmer Flatt Ltd v Barclays Bank plc), making it more difficult to provide for a right of adjudication without detailed drafting.

References: 

Kier Construction Limited v WM Saunders Partnership LLP [2016] CSOH 17;

Hurley Palmer Flatt Ltd v Barclays Bank plc [2014] EWHC 3042 (TCC).