Sign it or else: TCC assistance in obtaining executed collateral warranties

In a decision last week the TCC has given further consideration to the circumstances in which it will order a party to obtain collateral warranties which it has agreed to provide under a construction contract. The decision suggests that the court will go to great lengths to enforce collateral warranty obligations, even where the defendant has already exercised its best endeavours or where the company to give the warranty is insolvent or dissolved.

The court’s decision is the last in a series in litigation between Liberty Mercian and Cuddy Civil Engineering. A decision was given in the litigation last year (about which see our previous law-now here where the TCC found that that:

• An obligation on a third party to provide a collateral warranty under a contract survives termination of that contract, meaning the obligation remains even if the contract is terminated.
• An order to provide a collateral warranty will usually not be made if it is impossible for such an order to be performed, rendering any order useless.

The court did not at time of the earlier decision have sufficient evidence to decide whether performance of the order would be impossible and it therefore ordered Cuddy, the contractor, to use its best endeavours to obtain the warranties it had promised to Liberty Mercian, the employer. The warranties were to come from a civil engineering sub-contractor appointed by Cuddy called Quantum. Despite the earlier court order, Cuddy’s attempts to obtain the warranties were unsuccessful. Quantum was in liquidation at the time and its liquidator had used a range of argument to refuse execution of the warranties. A short while later, the liquidation concluded and Quantum was dissolved.

The matter was brought back before the court and, despite the above circumstances, Liberty Mercian applied for an order requiring Cuddy to obtain the warranties from Quantum. Such an order would require Cuddy to apply to have Quantum restored to the Companies Register and for Cuddy to then commence its own court proceedings to compel Quantum’s liquidator to execute the required warranties. Cuddy argued that it had already carried out its best endeavours to obtain the warranties and that it should not be put to such lengths in circumstances where the benefit to Liberty Mercian of warranties from an insolvent company was unclear.

The court accepted Liberty Mercian’s submission and ordered Cuddy to obtain the promised warranties from Quantum. Central to the court’s reasoning was the prospect that Quantum may have had professional indemnity insurance which would respond to claims under the collateral warranties. The court described the position in relation to the insurance policy as “far from clear” but was nevertheless prepared to make the order in the absence of any clear evidence as to the absence of insurance or other matters which showed that an order to obtain the collateral warranties would serve no useful purpose.

The court’s decision will be welcomed by employers who can now have faith that obligations to provide collateral warranties will be robustly enforced by the TCC. Contractor’s would be well advised to ensure that collateral warranty obligations are complied with at the outset of a project to avoid the prospect of being forced to pursue more reluctant consultants or sub-contractors (or their liquidator’s) at a later date.

Click here for reference to Liberty Mercian Ltd v Cuddy Civil Engineering Ltd & Anor [2014] EWHC 3584 (TCC) (30 October 2014)