Collateral warranties reach the key construction project players that other contracts do not. They give purchasers, tenants and funds, and others with an interest in the project, a contractual relationship with those involved in the design and construction, where otherwise there is none. The rights given reflect the rights of the employer under the building contract and the appointments of the consultants and avoid the "black hole" of no remedy faced by a tenant, purchaser or fund or other party with a defective property but no contract with the party responsible.
A Scottish case has highlighted the purpose and nature of collateral warranty rights and their potential limits. The court noted that contract wording must be considered in such a way as to give effect to the contract's primary objectives rather than giving undue influence to minor provisions or niceties of wording. The fundamental purpose of the collateral warranty in question was to place the beneficiary and the contractor in an equivalent position to the original developer and the contractor, not to extend the obligations of the contractor to the beneficiary of the warranty beyond those in favour of the original developer. Details of the wording used should not obscure that basic objective.
It said the notion of equivalence is central. The warranty's purpose is not to provide purchasers, tenants and security holders with rights greater than those of the original employer; that would make no commercial sense. Equivalence accordingly requires not merely that the beneficiary of the warranty should have the same rights of action as the original employer; it also requires that those rights should be subject to the same qualifications, limitations and defences as were available, in this case, to the contractor in respect of the original building contract.
Because of the importance of time-bar provisions to contractors and designers, the court considered that a collateral warranty should normally be subject to the same time bar as applied to the original building contract, i.e. a time bar that takes effect on the same date although it was, of course, possible for the parties to a collateral warranty to agree on a different time bar. Which meant that the collateral warranty was intended to give the contractor the same defences against a beneficiary as it would have against the employer and, therefore, the same limitation period.
British Overseas Bank Nominees Ltd v Stewart Milne Group Ltd at: https://www.scotcourts.gov.uk/ docs/default-source/cos-general-docs/pdf-docsfor-opinions/2019csih47.pdf?sfvrsn=0
