Enforcing the provision of executed collateral warranties

United Kingdom

Despite modern project management and procurement practices, obtaining executed collateral warranties from parties involved in construction projects remains notoriously difficult. Two recent cases in the TCC provide comfort that the court will be prepared to order the provision of such warranties in appropriate circumstances.

Collateral warranties form an important part of a project’s legal structure, providing rights of recourse to purchasers, tenants and funders as well as enhancing the employer’s own rights against sub-contractors and consultants. Traditionally, a number of mechanisms have been used to incentivise contractors, subcontractors and consultants (“warrantors”) to provide executed collateral warranties. Some examples include:

  • (for contractors) withholding access to the site (at the contractor’s risk) until executed collateral warranties are provided;
  • making executed collateral warranties a pre-condition to payment;
  • granting an irrevocable power of attorney enabling the party appointing the contractor/consultant, to execute the warranties in an agreed form on behalf of the contractor/consultant; and
  • getting blank warranties signed in advance and held in escrow until the warranty is also completed by the beneficiary at a later date.

Question marks exist over whether these methods constitute unenforceable penalties, are compliant with the Construction Act or fall foul of the formalities for the execution of documents. It is also debateable whether these methods provide any incentive to the warrantors once the works or services are complete or where the warrantor becomes insolvent.

When any of the above methods fail or are not utilised on a given project, the question remains: what is to be done if despite request, the warrantor fails to provide a collateral warranty which he is obliged to provide under his contract of engagement?

Two recent cases in the Technology and Construction Court are an interesting reminder that specific performance will usually be available in such circumstances. Specific performance is a legal remedy which may be ordered by the court to compel the warrantor to provide an executed warranty. Failure to comply with the order is a serious matter amounting to contempt of court and attracting penalties of imprisonment, the imposition of a fine and/or winding up in the case of companies.

Oakapple Homes (Glossop) Ltd v DTR (2009) Limited

In this case, the claimant property developer, Oakapple Homes, sought an order compelling DTR, an architect, whom Oakapple Homes had appointed and whose appointment had been novated to the contractor, Oakapple Construction Limited, to execute collateral warranties for the benefit of purchasers and tenants of the development. A majority of the development had been largely destroyed by a fire following completion of the works.

Both DTR’s appointment and the collateral warranty which DTR had provided to Oakapple Homes following novation, obliged DTR to procure warranties in favour of the purchasers and tenants.

The court’s judgment focused chiefly on whether the collateral warranties, if issued, would protect the purchasers and tenants against the losses suffered (about which see our previous law-now here. It is noteable however that the case appears to have been approached, both by the parties and the court, on the basis that an order for specific performance would be made if the warranties were found to apply.

Liberty Mercian Ltd v Cuddy Civil Engineering Ltd

In this case, the claimant, Liberty Mercian sought, amongst other things, an order for specific performance against its contractor to procure the execution of collateral warranties by a civil engineering firm appointed by the contractor. This case therefore presented a more complicated set of circumstances than in Oakapple where an order for specific performance was sought against a party who itself ought to have given a collateral warranty.

The contractor was obliged under the contract to provide collateral warranties within 28 days of Liberty Mercian’s request. It failed to provide them. It was held that that the contractor’s duty to provide the warranties arose because a demand had been made which gave rise to the contractor’s obligation to perform. Liberty Mercian’s rights arose from the contractual terms and as such they had causes of action which accrued from breach of the contract by the contractor in failing to provide the warranties in accordance with the Contract. Mr Justice Ramsey said:

“…where a party is in breach there are generally available both remedies in law in terms of payment of damages and remedies in equity such as specific performance”

To complicate matters, the contract in Liberty Mercian had been terminated and the contractor argued that termination brought to an end any right that Liberty Mercian might have had to specific performance. This was said to follow from the usual rule that the principal obligations under a contract are replaced with a right to damages only upon termination. This general rule was, however, held not to apply in the case of collateral warranties (and parent company guarantees). Mr Justice Ramsey held that such obligations were collateral or ancillary to the principal obligation to carry out construction work and therefore survived termination. Liberty Mercian therefore remained entitled, in principle, to an order for specific performance.

The precise order to be made by the court was held over for further submissions by the parties given the fact that the warranties were to be provided by a third party rather than the contractor itself. An order for specific performance is a discretionary remedy and the court will not usually make such an order where it is impossible for the order to be performed. The parties were therefore invited to make submissions as to the position of the civil engineering firm in question and the prospect for any order to be complied with.

Conclusion

Both cases demonstrate that parties are able to apply to court for specific performance as a remedy for non-delivery of an executed collateral warranty. This remains the case even after termination of a construction contract. Whether specific performance will be granted in any particular case can however depend on any special factors affecting the court’s discretion (one of which being whether it is impossible to perform the obligation).

For some parties, the costs and uncertainties of court proceedings will outweigh the benefit of applying for such orders. To those who are advocates of third party rights through the Contracts (Rights of Third Parties) Act 1999 as an alternative to warranties, this is another reason to choose third party rights over warranties. In practice, by listing the schedule of benefits specifically for a third party within the building contract, subcontract or appointment, a simple mechanism is included that permits the employer/contractor to serve a notice on the warrantors informing them of the identity of the beneficiary once known. This notice automatically confers the rights in the schedule on the named beneficiary, thereby removing the problem of having to deal with those warrantors who fail to provide executed warranties.

Reference: Oakapple Homes (Glossop) Ltd v DTR (2009) Limited (in liquidation) [2013] EWHC 2394 (TCC)
Liberty Mercian Ltd v Cuddy Civil Engineering Ltd [2013] EWHC 2688