NEWS / Affiliate / Special Performance - Provision of collateral warranties

Affiliate

04 DEC 2017

SPECIAL PERFORMANCE - PROVISION OF COLLATERAL WARRANTIES

What happens if the warranty is requested before the contents agreed?

It is not uncommon for work to begin on projects with the contract package for the project un-agreed.

Part and parcel of this are that the contents of a collateral warranty required from the professional are not agreed either.

The client will typically include a collateral warranty in less than ideal terms, often driven by requirements of other parties such as funders.

The final form of such a warranty will often be different after negotiation between the parties, and after the professional has (hopefully) removed elements not insured by professional indemnity insurance, and protected its own rights in areas such as its copyright.

But what happens if the collateral warranty is requested before the contents are agreed? Is the professional required to give the warranty in the form attached to the contract?

The chilling answer appears to be yes, based on the 2016 case of Kier Construction Limited v WM Saunders Partnership LLP.

This was a project to provide a new leisure centre in Scotland. The appointment contained an obligation to provide a collateral warranty to the Employer when requested, in the form attached to the appointment. The warranty attached was not fully complete and had for example blanks within the professional indemnity insurance obligation and net contribution clause.

The warranty was not requested until some 6 years later, after practical completion, and after problems on the project had arisen, including litigation for defects in the project against the main contractor. WM Saunders refused to provide the warranty, citing amongst other things the incompleteness of the warranty and its outstanding fees.

Kier applied to the courts for “specific implement”, which is the Scottish equivalent of the English law “specific performance” ie WM Saunders had to sign the warranty and hand it over.

The court granted this to Kier. The court’s decision was based on the unequivocal obligation within the appointment to provide the warranty and was also swayed by the fact that Kier would have been in breach of its own contractual obligations if the warranty was not given. The outstanding fees were considered to be a separate issue.

Whilst this was a Scottish law decision and therefore not binding on the English courts, there is nothing which is out of step of English contractual law, and therefore the decision is likely to be persuasive.

In particular, the judge was clear that the obligation within the appointment was an obligation to provide the warranty, not an obligation to “agree to agree” the warranty. This was not unusual - the provision of warranty obligations within appointments generally take the form of obligations to provide, not agree a warranty. As such and unless they were changed, it is difficult to see that the outcome would be any different in an English law case.

Overall the Kier Construction decision underlines the importance of agreeing on all of the contents of the contract package before it is signed.

The case provided an uncomfortable reminder of this risk management point, and that a firm could be legally obliged to sign an onerous collateral warranty, which in turn created liabilities which were not covered by the firm’s insurance.

In a catastrophe scenario, therefore, the firm could be legally required to sign a document which would put it out of business.

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James  Burgoyne

James Burgoyne

Director - Claims & Technical

Jim joined Brunel in 2009 and heads up the Technical and Claims Department. As well as representing Brunel on the ACE PII panel, he writes occasional pieces for us on insurance, risk and associated topics.

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