A PROFESSIONAL’S CERTIFICATE IS NOT A RECTIFICATION WARRANTY
Confusion leads to unfortunate results
Confusion sometimes arises between reliance documents and construction warranties, and the two are not the same.
Examples of reliance documentation are letters of reliance, collateral warranties and certificates issued by the professional, such as a CML certificate. Examples of construction warranties are those issued by NHBC, and intended to deal with hidden defects which are discovered after completion. Confusion in this area can lead to unfortunate results as the arrangements operate in very different ways from the perspective of a purchaser.
Construction Warranty – typically provides the beneficiary with a number of years of protection from latent defects to the structure which are discovered after completion. They are intended to put right problems covered immediately and as such the focus is rectification, rather creating a legal right to sue another party. Construction warranties such as the NHBC warranties are ofcourse, often purchased by the contractor and provided to the future owner.
Reliance Documentation – conceptually letters of reliance, collateral warranties and certificates are all part of the same “family” of rights. In essence, they are a “mini” contract issued between two parties who do not otherwise have a contractual link, and which are subsidiary to the appointment of the professional (something often forgotten by the drafters of bespoke collateral warranties!). They are intended to allow the beneficiary of the warranty to bring a legal claim against the issuer of the document in the event that the obligations expressed in the document have been breached.
This is perhaps clearer in the format of a collateral warranty, but letters of reliance and certificates are no different. The latter is no “safer” per se than a collateral warranty and it is the contents of the document which dictate the extent and duration of the liabilities being created. A well-drafted collateral warranty may be less onerous than a strictly drafted letter or certificate.
With claims under reliance documentation, a beneficiary must prove their claim and subject to the usual rules of English law. This means that they must prove a breach, prove their loss, and prove a causal link between the two.
The professional is free to defend such a claim, and therefore the time taken to resolve the issue may be months, or more often years. In the meantime, the claimant is under a duty to mitigate their loss. This often means undertaking and paying for works themselves to prevent further damage occurring and then reclaiming the costs from the issuer of the reliance document. In practice, as the works may be linked to more than one issue or constitute betterment, the issuer of the reliance document may only be legally responsible for part of the costs of the works.
It should also be noted that the practical value of a claim against a professional under reliance documentation is dependent on the assets available to pay the claim. Usually, the assets held by the professional alone will be insufficient to deal with an issue and therefore adequate professional indemnity (PI) insurance needs to be held by the professional.
PI insurance covers the professional, not the claimant, however, and therefore the focus of the insurance is as much about defending the professional than it is about paying a claim. The insurance is also subject to a market standard exclusion of onerous liability accepted in the contract. Consequently, if the terms of the reliance document are too onerous, a claim under that provision will not be backed by PI insurance. Any obligation which goes beyond reasonable skill and care may not be fully covered by the issuer’s PI insurance, and express guarantees or penalties will be excluded.
The experience of a purchaser with a hidden defect problem in bringing a claim under a construction warranty, as opposed to a collateral warranty or certificate will be very different, therefore. The former should deal with the problem swiftly and transfers the lengthy legal process of assessing responsibility for the defect and obtaining legal redress to the warranty issuer.
It is therefore seen that construction warranties and reliance documentation issued by a professional are very different things. Each has its place, and it is important that each is used appropriately, with a proper understanding of its limitations.
Certificates are often requested from the architect, but there are regular instances where they are requested from other professionals on a project, including consulting engineers (and sometimes where the architect has refused, realising that the certificate was being proposed inappropriately). If they are being requested as a cheaper (and arguably ineffective) alternative to a construction warranty, it will have implications for the whole project team. If claims against the certifiers do not produce immediate results, the purchaser will still be dissatisfied and will be looking for any avenue through which they can pursue their loss.
It is therefore in the whole project team’s interest to understand the issue and safeguard themselves by ensuring that appropriate arrangements are made.