Update on collateral warranties

Recent decisions from the Technology and Construction Court (TCC) as well as the Court of Appeal have looked at some common issues relating to collateral warranties.

“No loss” wording is effective

The TCC struck out a defence stating that the losses claimed were too remote and ordered summary judgment in Orchard Plaza Management Company Ltd v Balfour Beatty Regional Construction Ltd [2022] EWHC 1490 (TCC).The claim was based on a collateral warranty, originally issued to the developer’s funder, which it then assigned to the management company. The management company became aware of possible defects in the cladding which the contractor had designed and installed, but did not commission remedial work until it received an improvement notice from the local council. The contractor tried to defend the claim on the basis that the warranty had originally been issued to the funder and only the losses recoverable by the funder should be recoverable by the management company. The contractor argued that the “no loss” wording in the warranty meant that it wasn’t liable for the cost of the works instructed by the council on the basis that the funder wouldn’t have had to meet these costs and the “no loss” wording meant that the management company couldn’t recoup these costs.

However, the court took a common sense approach to the “no loss” wording and concluded that the management company’s claim was not too remote, and so was recoverable from the contractor. While the decision doesn’t change the law it is reassuring to have confirmation as to how “no loss” clauses should be approached.

Collateral warranty is a construction contract

Section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) defines a “construction contract” as “an agreement for the carrying out of construction operations“. This has been interpreted broadly, meaning that it includes not only traditional building contracts but also agreements that relate to construction operations.  The definition is important because various rules, including rules concerning adjudication, apply to construction contracts.

A case back in 2013 confirmed that a collateral warranty can be a construction contract for the purposes of section 104(1), and since then some collateral warranties have excluded the word ”warrants” with a view to avoid coming within the scope of the Construction Act.

However a recent decision of the Court of Appeal has confirmed that the words “warrants, acknowledges and undertakes” are not necessary for a warranty to be classified as a construction contract.

Following this decision, it is likely that in most cases a collateral warranty will be interpreted as a construction contract, meaning there is a right to adjudicate a dispute under it. Whilst this may be good news for beneficiaries as it confirms that they disputes under collateral warranties can be referred to adjudication, this could be regarded less favourably by contractors or consultants giving warranties because adjudication is cheaper and quicker than going to court so beneficiaries might be more inclined to take enforcement action going forwards.

If you have any questions arising from this article or about collateral warranties generally, please contact our Commercial and Technology team at [email protected] .