The provision of collateral warranties1
under the JCT SBC/Q 2016, allows for parties under contract to confer rights on
third parties who are not otherwise in the contract. A collateral warranty is a
contractual means of extending to another party (tenant or subsequent owner),
the obligations owed by parties under the contract. In other words, it
represents a standing invitation to sue in contract because, the law of tort2
no longer provides an appropriate remedy3
for construction defects. Without a collateral warranty, a party who
subsequently acquires an interest in a development, has little or no protection
in law, if it subsequently emerges that one of the parties involved in the
project 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 be
routed under the provision of collateral warranties within the contract.
The rationale for collateral warranties (in English
law) 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 benefit
from it, or be subject to its obligations. So, if there is no collateral
warranty between the Employer and a sub-Contractor who is in breach of the
sub-contract, the Employer will be unable to sue the sub-contractor for breach
of contract. His only recourse would be to make a claim against the main
Contractor with whom he would have a contractual relationship. The value and
significance of a collateral warranty given to an occupational tenant is
subject to the typical ‘full repairing and insuring’ (FRI) clause in a
commercial occupational lease. It will require the tenant to carry out
maintenance and repairs, and in most cases this obligation extends all the way
to rebuilding the let property, irrespective of cost (say, destruction by fire).
this regard, the Contracts (Rights of Third Parties) Act 19995
was designed to set out circumstances in which privity of contract could be
overridden and allow parties to agree that a third party could be the
beneficiary of rights under that contract. Yet another ground of claim is under
it reflects a situation with three parties, one of whom has breached a contractual
obligation to a second party, resulting in loss to a third party. It is based
on the concept of ‘drittschadensliquidation’,
where the creditor might claim in contract for the loss of a third party, to
whom the creditor’s loss had been transferred.
In the project, RP has made timely appointments of the
Contractor and Designer as required under the law, this will allow the parties
perform their obligations under the contract. AT and BDB are required to plan,
manage and coordinate the planning/design works and construction works
Claims under Issue No.1
During construction work, a truck loaded with
expensive electrical equipment falls into a sinkhole which opens up in the car
park underneath. No loss to life is reported but the cargo is destroyed. An
investigation confirms that the sinkhole was caused by sub-standard civil works
of CC. The truck belongs to one of the tenant’s subsidiary company which runs
logistics. If, during the running of a construction project, the works do not
comply with the contract requirements, the Employer will wish to know what
remedies, 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 when
a building collapsed after the builder (who acted in a reasonable manner) had
supported it in accordance with the recognized practice at that time. In
another case, P & M Kaye v Hosier and
Dickinson8, it was argued that a Contractor who produces
defective work during the course of the contract is not in breach9
of contract until he hands over the defective work because, until then, it is
open to him to rectify his works10. If
the sinkhole was due to defective construction works by CC, RP can only raise a
claim against BDB11
(there is no contractual relationship between RP and CC) for the direct cost12
towards 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 the
sub-contract agreement will be liable to pay BDB all costs arising out of this
claim. However, under the terms of collateral warranty agreement, CC is
directly liable to the tenant (who will have to raise a claim against CC in
litigation, arbitration or adjudication) for the cost towards damaged
electrical equipment and any recoverable costs on the truck involved in the
1 Collateral warranty is known as a duty of
care agreement which is supplemental to the contract. Collateral warranties
fill 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 of
delict or tort (because there is no duty of care).
2 The law of tort is
essentially about the liability (legal responsibility) that the law imposes on
a person to pay compensation to another who has suffered injury or damage to
his property as a result of the wrongful act of that person. In Scotland it is
known as ‘tort’. The equivalent breach of law in Scotland is known as ‘tort’.
3 At the core of the law
of tort or delict is the idea of reparation for harm caused and losses
suffered. Where a wrongful act by a person results in harm or damage to
another, it is reasonable to assume that the person who caused the harm should
bear the losses.
4 Cavalier v. Pope 1906 AC 428, Bottomley v.
Bannister 1932 1 KB 458, Governors of the Peabody Donation Fund v. Sir
Lindsay Parkinson & Co. Ltd. 1984 3 All ER 529, Muirhead v. Industrial
Tank Specialties Ltd. 1985 3 All ER 705, D & F Estates v. Church Commissioners
of England 1988 2 All ER 992, Murphy v. Brentwood DC 1990 2 All ER 908 and
Department of the Environment v. Bates 1990 2 All ER 943, the cases listed refer to orthodox position
of the law for builder’s liability in negligence under the law of tort.
5 Act 1999 applies in
England and Wales.
6 Albazero 1977 A.C. 774 and Alfred McAlpine v
Panatown 2001 1 AC 518.
7 (1964) (SLT)
8 (1972) 1 WLR 146
9 The basic principle is that awards of damages for breach of
contract are intended to put the innocent party in the position they would have
been in had the contract been properly performed,
10 It is based on the concept of ‘temporary disconformity’.
11 Surrey Heath Borough Council
v. Lovell Construction Ltd. and Another (1988) B.L.R 25
12 The Contractor is given a ‘reasonable
time’ after receipt of the schedule or instructions to make good the specified
defects, 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 Surrey
Heath 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 related
14 If the rectification
works will result in slippage to overall completion of the Works, it will
constitute a Contractor delay event.