A warranty is, in essence, an undertaking by the party giving the warranty (the warrantor) that the work performed by the warrantor is of a particular standard and quality, and/or that the warrantor will rectify any work that is defective. Warranties may be contained in a term in a contract or may arise out of a written document whereby the warrantor provides a warranty to a third party. An example is a written warranty addressed by a specialist subcontractor (whose only contractual relation is to the main contractor) to the owner/employer of a building project. This written warranty gives the owner/employer the right to look directly to the specialist subcontractor for the rectification of defective works. A simultaneous but independent written warranty could also be given by the main contractor to the owner/employer, whereby the owner/employer has the right to look directly to the main contractor for the rectification of defective works in the event that the specialist subcontractor is no longer able to fulfil its warranty to rectify the works.
An indemnity, on the other hand, is an assurance by one party (the indemnifier) that the indemnifier will compensate the party to whom the indemnity is given (the indemnified) for loss and damage arising out of defective works. Like warranties, indemnities may also appear as a term in a contract, or may arise out of a written document whereby the indemnifier provides an indemnity to a third party. Like warranties, a simultaneous but independent indemnity could also be given by the main contractor to the owner/employer.
The difference between warranties and indemnities were the focus of a recent case decided by the Singapore Court of Appeal, which teaches the importance of drafting warranty and indemnity forms properly.
In Management Corporation Stata Title Plan No 1933 v Liang Huat Aluminium Ltd [2001] 3 SLR 253 the plaintiff owners of a condominium development (MCST) collectively sued a specialist subcontractor for damages for defective works as assignees of a deed entitled "Indemnity for Aluminium and Glazing Works".
By the time of the trial, the main contractor was insolvent and the MCST decided to proceed only against the subcontractor. At that time, the defective works had yet to be remedied by the MCST, and the MCST sought damages for essentially prospective loss and damage. The trial judge found that the subcontractor's works were in fact defective, but that the terms of the deed were an indemnity in the sense that unless and until monetary loss and damage was incurred by the MCST, no claim could be made against the subcontractors. The trial judge therefore dismissed the MCST's claim.
The MCST appealed to the Court of Appeal.
The main issue was whether the deed was a warranty or an indemnity and, if it was an indemnity, whether monetary loss and damage had to be actually incurred before a claim could be made against the subcontractors.
Two judges of the Court of Appeal found in favour of the MCST, ruling that the deed was not only an indemnity but a warranty as well. Insofar as the deed was an indemnity, the two judges ruled that actual monetary loss and damage need not be incurred in order for a claim to be made by the person indemnified. The other judge of the Court of Appeal, who was in the minority, ruled that the deed was an indemnity only, and that as MCST had not incurred any monetary loss and damage, it was not entitled to make a claim against the subcontractors.
Although the Court of Appeal's decision was not unanimous, both the majority judgment and the minority judgment referred to the modern approach of the courts in interpreting written contracts and deeds. Through this approach, the court seeks to interpret the document from an involved perspective. The question that the court asks is not what the document means to the court so much as what the document would mean to a person having full knowledge of the surrounding circumstances (except pre-contractual negotiations) at the time of the contract.
However, although the same approach was employed by both the majority judges and the minority judge, different conclusions were reached. This underscores the importance of drafting warranties, indemnities and all other contractual documents in a manner that accurately and clearly sets out the intentions of the parties.
For further information on this topic please contact Lawrence Teh at Rodyk & Davidson by telephone (+65 225 2626) or by fax (+65 225 1838) or by email ([email protected]).