The provision of collateral warranties1under the JCT SBC/Q 2016, allows for parties under contract to confer rights onthird parties who are not otherwise in the contract. A collateral warranty is acontractual means of extending to another party (tenant or subsequent owner),the obligations owed by parties under the contract. In other words, itrepresents a standing invitation to sue in contract because, the law of tort2no longer provides an appropriate remedy3for construction defects.
Without a collateral warranty, a party whosubsequently acquires an interest in a development, has little or no protectionin law, if it subsequently emerges that one of the parties involved in theproject has been negligent or has acted in breach of contract. In summary, the loss from defects to the building,if discovered before it causes injury is not recoverable under tort4,there is no transmissible warranty on quality of building and claims have to berouted under the provision of collateral warranties within the contract. The rationale for collateral warranties (in Englishlaw) arises from the consequences of the doctrine of ‘privity of contract’,whereby only a person who is party to a contract may sue or take any benefitfrom it, or be subject to its obligations. So, if there is no collateralwarranty between the Employer and a sub-Contractor who is in breach of thesub-contract, the Employer will be unable to sue the sub-contractor for breachof contract.
His only recourse would be to make a claim against the mainContractor with whom he would have a contractual relationship. The value andsignificance of a collateral warranty given to an occupational tenant issubject to the typical ‘full repairing and insuring’ (FRI) clause in acommercial occupational lease. It will require the tenant to carry outmaintenance and repairs, and in most cases this obligation extends all the wayto rebuilding the let property, irrespective of cost (say, destruction by fire). Inthis regard, the Contracts (Rights of Third Parties) Act 19995was designed to set out circumstances in which privity of contract could beoverridden and allow parties to agree that a third party could be thebeneficiary of rights under that contract. Yet another ground of claim is undertransferred loss6,it reflects a situation with three parties, one of whom has breached a contractualobligation to a second party, resulting in loss to a third party. It is basedon the concept of ‘drittschadensliquidation’,where the creditor might claim in contract for the loss of a third party, towhom the creditor’s loss had been transferred. 1.
ApplicationIn the project, RP has made timely appointments of theContractor and Designer as required under the law, this will allow the partiesperform their obligations under the contract. AT and BDB are required to plan,manage and coordinate the planning/design works and construction worksrespectively. Claims under Issue No.1 During construction work, a truck loaded withexpensive electrical equipment falls into a sinkhole which opens up in the carpark underneath. No loss to life is reported but the cargo is destroyed. Aninvestigation confirms that the sinkhole was caused by sub-standard civil worksof CC. The truck belongs to one of the tenant’s subsidiary company which runslogistics.
If, during the running of a construction project, the works do notcomply with the contract requirements, the Employer will wish to know whatremedies, if any, are available against the Contractor. In the case of Morrison’s Associated Companies Ltd. v.James Rome & Sons Ltd7, the builder was not found liable in negligence whena building collapsed after the builder (who acted in a reasonable manner) hadsupported it in accordance with the recognized practice at that time.
Inanother case, P & M Kaye v Hosier andDickinson8, it was argued that a Contractor who producesdefective work during the course of the contract is not in breach9of contract until he hands over the defective work because, until then, it isopen to him to rectify his works10. Ifthe sinkhole was due to defective construction works by CC, RP can only raise aclaim against BDB11(there is no contractual relationship between RP and CC) for the direct cost12towards reinstatement of the defective works13,damage to associated works and any liquidated damages14(if overall works are delayed) as stipulated in the contract. CC under thesub-contract agreement will be liable to pay BDB all costs arising out of thisclaim.
However, under the terms of collateral warranty agreement, CC isdirectly liable to the tenant (who will have to raise a claim against CC inlitigation, arbitration or adjudication) for the cost towards damagedelectrical equipment and any recoverable costs on the truck involved in theaccident. 1 Collateral warranty is known as a duty ofcare agreement which is supplemental to the contract. Collateral warrantiesfill what Lord Drummond Young termed as a ‘black hole’, where a party might’sustains a loss’ but has no claim under contract – and none under the law ofdelict or tort (because there is no duty of care).2 The law of tort isessentially about the liability (legal responsibility) that the law imposes ona person to pay compensation to another who has suffered injury or damage tohis property as a result of the wrongful act of that person. In Scotland it isknown as ‘tort’. The equivalent breach of law in Scotland is known as ‘tort’.3 At the core of the lawof tort or delict is the idea of reparation for harm caused and lossessuffered.
Where a wrongful act by a person results in harm or damage toanother, it is reasonable to assume that the person who caused the harm shouldbear the losses.4 Cavalier v. Pope 1906 AC 428, Bottomley v.Bannister 1932 1 KB 458, Governors of the Peabody Donation Fund v. SirLindsay Parkinson & Co.
Ltd. 1984 3 All ER 529, Muirhead v. IndustrialTank Specialties Ltd. 1985 3 All ER 705, D & F Estates v.
Church Commissionersof England 1988 2 All ER 992, Murphy v. Brentwood DC 1990 2 All ER 908 andDepartment of the Environment v. Bates 1990 2 All ER 943, the cases listed refer to orthodox positionof the law for builder’s liability in negligence under the law of tort.5 Act 1999 applies inEngland and Wales.
6 Albazero 1977 A.C. 774 and Alfred McAlpine vPanatown 2001 1 AC 518.7 (1964) (SLT)8 (1972) 1 WLR 1469 The basic principle is that awards of damages for breach ofcontract are intended to put the innocent party in the position they would havebeen in had the contract been properly performed,10 It is based on the concept of ‘temporary disconformity’.11 Surrey Heath Borough Councilv.
Lovell Construction Ltd. and Another (1988) B.L.
R 2512 The Contractor is given a ‘reasonabletime’ after receipt of the schedule or instructions to make good the specifieddefects, etc. It must be done at no cost to the Employer unless the architect /contract administrator, with the consent of the Employer, otherwise instructs.13 In SurreyHeath Borough Council v. Lovell Construction Ltd. and Another (1988) B.
L.R 25,it was held that the Employer was entitled to recover in contract for all relatedlosses. 14 If the rectificationworks will result in slippage to overall completion of the Works, it willconstitute a Contractor delay event.