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Collateral warranties and third party agreements

18 September 2015
Collateral warranties and third party agreements have been part of the landscape in appointment documentation for many years but some mystique and uncertainty still surrounds them, particularly when they are requested as an after-thought by the Client who had adopted a fairly relaxed attitude towards contract terms until prompted by (say) a fussier fund or purchaser. A reminder of a few basic tenets may assist in making practitioners a little more comfortable.

A version of this article also appears in the current edition of Architects Journal

A warranty is not an unqualified guarantee that everything about the Project is in order; it is confirmation from the warrantor to the recipient third party, that it has performed its services in accordance with the appointment. It follows that an Architect should not agree a form of warranty until its  Appointment has been finalised, otherwise it will not know what confirmation it is passing on to the third party(ies).

A golden rule of warranties is that they must not extend the liability of the warrantor (whether in time or nature) beyond that which exists under the Appointment. Insurers provide protection for the Architect’s legal liabilities and it is the Appointment that defines what those legal liabilities are. Insurers could argue that any elements in the warranty that go beyond this defined legal liability are also beyond the protection of the policy. If, therefore, the Appointment document was a simple contract under hand with a limitation period of six years for bringing claims, the Architect should not agree a deed of warranty with a liability period of twelve years. It is a good idea to have what is now a standard clause in warranties to the effect that the warrantor shall have no greater liability under the warranty than exists under the Appointment  and can rely on all the Appointment’s limitations on liability.

The number of warranties to be provided should be kept to a sensible number. This will vary from project to project but an Architect will not want to acknowledge a contractual obligation to every person who may have an interest in the Project. It is common, for example, to exclude individual domestic tenants from entitlement (and some policies of insurance exclude protection for warranties given to such tenants), and generally it is recommended to require a party to have a minimum size or nature of interest before becoming entitled.

Assignment of the warranties should also be restricted where possible (and again some insurance policies exclude claims which are brought under warranties that have been assigned more than a given number of times). To a degree this is somewhat superstitious because a first assignee may be particularly ferocious and a later assignee may be a lot more benign, but generally the more distant one gets from the original project and the more people one rubs up against contractually, the more likely it is to encounter trouble.

Another recommended restriction is a net contributions clause, which provides that where a loss has been jointly caused, the  Architect will only be responsible for that proportion of the loss which it would be fair for it to bear, based on its responsibility and on the understanding that every other responsible party has paid their fair share. This is intended to guard against the risk of some of the other responsible parties not being around anymore and the Architect being held liable for the whole loss.

Assuming that the warranty reflects the principles outlined above, the Architect need not be concerned about extending its liability to these recipients. Arguably, if the Architect’s Appointment is a simple contract and does not exclude the operation of the Contracts (Rights of Third Parties) Act, the warranty recipients may be entitled to claim under the contract anyway as parties within the reasonable contemplation of the Appointment signatories. Where, though, an Architect has never signed a warranty before or where it is asked to do so as a concession to its Client, despite there being no contractual obligation in the Appointment, Architects should raise the matter with Insurers to see whether they have any specific requirements or objections. As warranties are so common, there ought not to be objections, but it is prudent to have on record the fact that the question was raised with PI Insurers.

For further information on this article, please  contact Mark Klimt.

Further Reading