Collateral Warranties: Do They Work?


The recent Court judgement in Scottish Widows Services Ltd v Harmon/CRM Facades Ltd & Ors and Scottish Widows Services Ltd v Kershaw Mechanical Services Ltd & Ors has highlighted the effectiveness of properly drafted Collateral Warranties.

Why are Collateral Warranties used?

They are used to give third parties who do not otherwise have a contractual relationship a right to sue a party when loss occurs.

Why is this judgement important?

It is important because it addresses a number of issues on which there has been little previous judicial authority. It provides the following guidance:

Collateral Warranties must be interpreted having regard to the parties' commercial intentions, namely to allow the party who suffers a loss to have a right of action against any contractor or consultant who has provided defective work.
A physical defect in a building is itself the primary loss resulting from defective performance by contractors or consultants.
A physical defect will, however, have economic consequences which may fall on a number of parties, the main one being the cost of repair.
The liability for repair is also a loss, and a party incurring such a loss can recover the loss through the contractual link created by a Collateral Warranty. The true measure of the loss is the cost of repairs.
It is not necessary for the party making the claim to have an obligation to carry out the repairs, for example under a lease or sublease - what is necessary is that repairs have been carried out at the expense of the beneficiary of the Collateral Warranty, or their assignee, to give rise to the claim.
For joint and several liability to be established, the critical issue is whether the breach of contract contributed to a single loss sustained by the Claimant. It is immaterial that each party sued had a separate contract.
The Judge refers to net contribution clauses in a way which suggests the Courts will give effect to them.
A consultant might have a liability to a beneficiary (or to its original client), for failing to appoint a specialist sub-consultant, when it did not have the in-house expertise to fulfill a function required of it under its professional appointment.