COLLATERAL WARRANTIES A collateral warranty is a form of contract which runs alongside, and is usually supplemental to, another contract

in order to deal with the issue of the privity of contract (between two parties). It is "collateral" to the primary contract. The primary contract is usually a building contract or a sub-contract or a consultant's appointment. Usually a collateral warranty creates a contractual relationship between two parties where none would otherwise exist. It takes the form of a contract between the party to the underlying contract who is providing services or carrying out work and a third party who has an interest in the proper performance of that contract and, just like any contract, it must be signed by the Parties, most commonly as a deed (valid for 12 years). The person giving the collateral warranty commonly called the warrantor and the person to whom it is given the beneficiary . Typical Scenarios where collateral warranties may exist: Between a sub-contractor and employer Between the contractor and funding agency, or purchase/ tenant of finished property. Between the architect (or other design team consultant/member) and funding agency, or purchaser/ tenant of finished property. Between the architect and Employer when the architect (or other design team consultant/member) is novated to the contractor in Design and Build contracts. Between the architect and Employer if the architect is appointed directly by the contractor in a Design & Build contract.

As an architect, collateral warranties increase risk, and should be avoided or limited if possible. A common way of doing this is by limiting them to the first purchaser, tenant or funder. There is also often a limit in the collateral warranty extension on the number of assignments two is the most common figure. An Architects Professional Indemnity (P.I) Insurer must always be informed about any warranties proposed and asked whether they are prepared to cover the additional risk, also, most professional indemnity policies exclude liability under collateral warranties which is longer (or wider) than the initial architects appointment. Standard forms of collateral warranty to be given by consultants to funders and purchasers/tenants on traditionally procured projects have been published by both the CIC (in 2003) and BPF (2005). Key Standard Clauses of a CIC Collateral Warranty (CIC/ConsWa/P &T): Clause 1: The Warranty: The Consultant warrants to the Purchaser/Tenant that it has exercised [and will continue to exercise] reasonable skill care and diligence in the performance of its services to the Client under the Appointment. Clause 2(a): The Exclusion of Economic and Consequential Loss: the consultant shall be liable for the reasonable costs of repair, renewal and/or reinstatement of any part or parts of the Development to the extent that the Purchaser/Tenant incurs such costs and/or the Purchaser/the Tenant is or becomes liable either directly or by way of financial contribution for such costs. The Consultant shall not be liable for other losses incurred by the Purchaser/the Tenant. If this limitation on the basic warranty did not appear, then the architect would be liable to the purchaser/tenant for the damages for breach of contract assessed in accordance with the normal rules The British Property Federation argues that the drafting of Standard Collateral Warranties should anticipate the inevitable requirements of certain purchasers and tenants and should reflect various alternative provisions in relation to losses other than the cost of repair. According to the BPF, for clients who wish to extend the consultants responsibility to cover economic and consequential loss and can persuade the consultants to provide adequate insurance cover should delete the last sentence and replace it with: The consultant shall in addition be liable for other losses incurred by the purchaser/tenant provided that such additional liability to the firm shall not exceed x in respect of each breach of the firms warranty Clause 2(b): The Contribution Clause:

Without prejudice to any other exclusion or limitation of liability, damages, loss, expense or costs the Consultants liability for such costs of the repair, renewal and/or reinstatement in question shall be further limited to that proportion thereof as it would be just and equitable to require the Consultant to pay having regard to the extent of the Consultants responsibility... The effect of Clause 2(b) is to try to ensure that, if there is a latent defect in the building and the purchaser/the tenant wishes to sue, his recovery against, say, the architect is assessed on the assumption that the architect is only liable for his share of the contribution to the loss even if the purchaser/the tenant is unable to recover from the contractor who may have also contributed to the loss either because the contractor has not given a collateral warranty at all or, having done so, is insolvent and so cannot meet his share.

Clause 2(c): Defences of Liability The Consultant shall be entitled in any action or proceedings by the Purchaser/the Tenant to rely on any limitation or exclusion in the Appointment and to raise the equivalent rights in defence of liability as it would have had against the Client under the Appointment. To ensure that if, for example, the consultancy agreement contains a limitation on the architects liability for negligence, that limitation is also imported into the collateral warranty.

Clause 2(d): Independent Enquiry The obligations of the Consultant under or pursuant to this Agreement shall not be released or diminished by the appointment of any person by the Purchaser/the Tenant to carry out any independent enquiry into any relevant matter. For example if a surveyor is employed by the purchaser/tenant. Clause 6: Copyright Obliges the architect to give the purchaser/tenant as wide-ranging licence to copy and use the documents for any purpose related to the premises The licence extends to the copying and use of documents for an extension, but not a right to reproduce the design for an extension

Clause 7: Professional Indemnity Insurance The architect should check that his PII corresponds to the obligation in the collateral warranty, but the obligation is largely academic because: 1. The obligation is too uncertain to be enforceable since it is qualified with the proviso: provided always that such insurance is available at commercially reasonable rates, and 2. There is no effective sanction for a breach by the architect of his obligation to maintain PII 3. Most PII policies contain a specific endorsement about collateral warranties stipulating the number which may be given and the terms which are insured

Clause 8: Assignment Blanks are included so that the agreement can prohibit assignment altogether or the number of assignments can be restricted (CIC recommends 2) N.B - An assignment does not create new rights, it extinguishes the assignors rights and, from the date of assignment, give the assignee the rights which the assignor would otherwise have had. It does not mean that the limitation period starts again.

Clause 10: Limitation No action or proceedings for any breach of this Agreement shall be commenced against the Consultant after the expiry of years from the date of practical completion under the building contract. Usually six years for agreements under hand and twelve years if executed as a deed.

Alternatives to Collateral Warranties: Third Party Rights: enabled by the Contracts (Rights of Third Parties) Act, 1999

Assignation: The employer/client could assign the benefit of the construction contracts, however this can only provide a benefit to one party and might not be appropriate where the employer/client has ongoing defects and retention obligations. Latent defects policy: This is an insurance policy that will respond to certain latent defects in buildings.