Collateral Warranties in Construction

Within the UK, the "privity of contract" doctrine prevents an outside party to a contract from enforcing any contract terms. The parties named within a contract may enforce the contract's terms and/or seek damages from any other parties named in the contract for the failure to perform under the contract.
 
Within Construction or Works Project contracts, the employer can enforce the contract terms with any party named or obligated by the Construction or Works Project contract, such as structural engineers, architects, or other professional organisations.
 
However, many other parties may have a vested interest in the Construction or Works Project as it progresses and after its completion, such as financial institutes for lending purposes, the buyers of the property(ies) or those to whom the property will be leased.
 
These interests may exist for some time after the completion of a Construction or Works Project, especially in the areas of end-of-project snagging or defects that arise in the property after a period.
 
Third parties, such as buyers or the lessees of a property, will want to preserve their right to seek damages in the event of their incurring a loss due to defects occurring in the property from professional consultants or contractors who were involved in the Construction or Works Project, where the professional consultants or contractors were negligent in their performance in constructing the property or undertaking the Works.

A limiting factor of buyers or lessees of a property in their ability to seek damages from professional consultants or contractors would be that they were not a party to the Construction or Works Project contract. The buyers or lessees of a property may have limited rights to undertake a tort claim if there is a reasonable chance of proving a negligence claim caused by professional consultants or contractors.
 
However, there are legal limitations as to what defines a "pure economic loss" to the extent that buyers or lessees of a property within construction claims for injury might be successful, subject to satisfying the requirements for a tort claim.
 
The cost of rectifying the issue that caused the injury would not be covered by a claim under tort. It is in the area of being able to claim for the costs of repairs to a property that buyers or lessees of property have an interest in if such a repair was caused by the professional negligence of the professional consultants or contractors during a Construction or Works Project.
 
As the buyers or lessees of a property were not parties to the original Construction or Works Project contract, it would be unlikely that they could bring a claim for the cost of repairs under the original Construction or Works Project contract.
 
A collateral warranty is a separate and distinct contract granting rights to third parties to claim or sue for damages where professional consultants or contractors have been found negligent in their performance. The warranty sits with but is usually much shorter in content than the Construction or Works Project contract. However, it (the collateral warranty) will be governed by the terms of the Construction or Works Project contract.
 
The collateral warranty provides a contractual link to the professional consultants or contractors engaged in the Construction or Works Project contract that enables buyers or lessees of a property to claim damages against the professional consultants or contractors in cases of negligence, amongst others.
 
Within the collateral warranty, the professional consultants or contractors will warrant to vested third parties that they have performed their obligations and duties in accordance with the Construction or Works Project contract.
 
If there is a breach of the Construction or Works Project contract by a professional consultant or contractor, it would generally follow that a collateral warranty breach has occurred. A collateral warranty effectively promises that professional consultants or contractors will comply with the terms and obligations of a Construction or Works Project contract.
 
“Pure economic loss” claims limitations for claims made under tort do not apply to claims made under a collateral warranty. Therefore, injury claims and claims for correcting building defects can be made where collateral warranties are catered for under the Construction or Works Project contract.
 
However, it would need to state expressly within the Construction or Works Project contract that professional consultants or contractors must provide third-party collateral warranties, which may be provided during or after the Construction or Works Project completion.
 
Collateral warranty terms and conditions exist within most Construction standard forms of contract, such as the Joint Contracts Tribunal (JCT), the Institution of Civil Engineers (ICE) and the Royal Institute of British Architects (RIBA), amongst others. However, it is common for major contractors to use their own generic forms of collateral warranty.

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