Construction Law and Contents of a Collateral Warranty - Assignment Example

COLLATERAL WARRANTIES Name: Course: Instructor: Institution: City: Date: Collateral warranties Collateral warranties are contractual arrangements that are directly connected to another principal contract. Collateral warranty is mainly popular in the building industry. The principal contract in collateral warranty is a building contract with a consultant or sub-contractor. A collateral warranty is normally provided by an individual or company appointed under the principal contract, such as sub-contractor or consultant, a third party who is not a beneficiary under the main contracts (Steve, & Marc, 2014). According to Steve & Marc (2014), collateral warranties are also known as duty of care deeds because theyare normally executed as deeds. Collateral warranties are normally executed as deeds since no consideration is required for the contract to be valid.In collateral warranties, only the parties to a contract can sue to enforce the rights and obligations under the contact(Dishaine, & Lloyd, 2012). According to John (2012), collateral warranties are normally given in Public Private Partnerships. However they are also given by key sub-contractors. Contents of a collateral warranty 1) Principal covenant The principle of covenant requires the warrantor to fulfill its obligations under the agreed contract and without prejudice to the covenant, that it will perform all the designs in accordance to skills and necessary care (John, 2013). 2) Assignment Benefits of a collateral warranty can be assigned without restrictions, the same way as any other contractual benefit. However warrantors may ask for limits on the number of permitted assignment of collateral warranties in order to limit the number of the third parties they might be liable to. According to Lesley (2014), assignment involves the transfer of an interest from one party to another. In assignment however, the burden or the obligations in the warranty contract cannot be transferred. Assignment in construction contracts In a building contract, the employer may assign its rights to have the construction done, and its rights to sue the contractor in the event that the constructed building is not fully completed or is defective. However he cannot assign its obligations to pay for the works done. Also in a building contract, the contractor may assign its rights to payment of the contract value, but not the obligation to do the construction according to building contract or the obligations to meet genuine claims for example failure to complete the construction or defects in the construction done (Furmston, & Michael (2007) According to Mark (2012), after assignment of the rights, the assignee is entitled to the benefits of the contract and to make any proceedings against the other contracting party to enable him enforce his rights.However the assignor will still owe obligations to the other contracting party, and will be liable to perform any part of the contract that still needs to be fulfilled because the burden of the contract cannot be transferred to another party as was in Liberty Mercian v Cuddy. In assignment, the assignee takes over the performance of the contract with effect from assignment and the assignor will be indemnified against any breach by the assignee. The assignor will however still be liable for any previous liabilities incurred before the current assignment. Assignment in construction contracts helps in looking at whether collateral warranties given to parties with no direct interest in the construction contract can be assigned. Fund providers may require the project owner to assign the contractual rights against the contractor and the team task for designing, as security to the funder, benefit of performance bonds and guarantees of a company as was in Royal Bank of Scotland v Halcrow. The owner of the construction project may assign these rights to the purchaser either during or after the completion of the project. Provisions of contractual assignments Various courts have confirmed that any clause which provides that a party to a construction contract may not assign the benefits of that particular contract without other party’s consent is legally effective and must extend to all rights and benefits that arise under the contract. These include also the rights to any remedies (Anthony, 2011). According to Turner &Chris (2007), qualifications on the right to assign also comprise; A restriction on assignment without the consent of the other party, whether or not such a consent is not to be delayed or withheld; one of the parties may assign or only some specified rights may be assigned and limiting the number of assignments as always with collateral warranties (John, 2012) The legal and equitable assignment The Law of Property Act provides the ability to legally assign a debt, where the debtor or trustee or any other interested party gets a written notification. By complying with the formalities in the Act, the assignment becomes legal. However failure to comply with the provisions of the Act, the assignment takes effect as an equitable assignment, for example; an oral assignment, an assignment by the way of charge, an agreement to assign, an assignment of which notice has not been given to the debtor and an assignment of only part of the chosen action (Furmston, & Michael, 2007). According to Akenhed (2014), in an equitable assignment, the assignor cannot enforce the assigned property in its own name. However an assignor can only enforce if he includes the assignee in the action. This is to help protect the debtor from any proceedings that may arise in the future which might be brought by the assignor or any other assignee from enforcing the action without notice of the earlier assignment. Assignment of security Assignment can be used to take security, if the assignment is by way of charge and the assignor retains the right to sue for any loss it suffers by breach of other party to the contract, and an assignment by way of legal mortgage, that is, if there is an outright assignment together with an entitlement to re-assignment back once the secured obligation has been adequately performed (Hughes, & Martins, 2000). Assignment Restrictions According to Mulcahy & Linda (2008), an assignment of a contract may not necessarily transfer the benefits of an arbitration agreement provided in the contract; Regulation of certain rights for example, the assignment of an organization or company shares or the copyright. Some personal contracts for example, a contract for the employment of a personal servant or for the benefit of a motor insurance company cannot be assigned. Rights in the statutes for example, a liquidator’s powers to do wrongful trading proceedings against a director cannot be assigned. Where the assignee has no insurable interest on the subject matter of the transaction, the contract cannot be assigned. 3) Step-in-rights Step-in-rights are normally given to beneficiaries who have an interest in the project before the completion, for example, those who have provided funds for the construction of a building. Step-in-rights, gives the beneficiary the right to take place of the employer under the existing contract, to ensure the project continues, where the employer gets into difficulties that might threaten or delay the project, for example, financial constraints. The beneficiary will be responsible for the past and future unpaid funds of the contract(Lesley, 2014). The provisions of step-in-rights often tend to postpone the exercise of the warrantors’ rights to terminate to terminate the underlying contract. This helps to give time to those who have funded a project to respond to any issue and be able to exercise the step-in-rights. 4) Limitation or exclusion of liability According to Griffith & Godwell (1997), various clauses are included in the exclusion of liability, for example; i) Equivalent rights of defense clause In this clause the warrantor tries to ensure that it has all the same rights of defense against claims under the collateral warranty as it happens under the underlying contract. ii) No greater liability clause In this clause the warrantor seeks to ensure that it takes on no greater risk as a result of providing a collateral warranty than it is under the main contract (John, 2013). iii) Economic and consequential loss Economic and consequential loss limitations are resisted by those meant to benefit from collateral warranty contract, and to be appropriate they will depend on project specifications (Akenhed, 2014). iv) Net contribution clause In a net contribution clause if for example two warrantors are each liable to a beneficiary for the same inappropriate work or defective work, the beneficiary could seek to recover all of its damages from the first warrantor, irrespective of the joint liability of both the warrantors in relation to the relevant defects (Mark, 2012). The warrantor one could recover a share of those damages he settled from warrantor two. 5) Copyright and information use Third parties that intend to acquire rights and interests in the construction projects will require the right to use the information on design generated by the project (Lesley, 2014). It is important to include some clauses to allow for the right which can restrict the use of the design documents to purposes related with the underlying construction project Example of a case on a construction contract Parkwood Leisure Ltd v Laing O’ROURKE Wales and West Ltd (2013) The case (Akenhead, 2014) In this case, the court was required to state whether a collateral warranty was a construction contract in accordance to section 104 of the Housing Grants, construction and Regeneration Act 1996. Such an issue had never been previously taken in consideration by the courts despite the Act having in force for over fifteen years. The collateral warranty in consideration was given by Laing O’Rourke to Parkwood, the tenants of Cardiff International Pool that concerned Laing O’Rourke’s construction of that facility. At the time the warranty was given the project was nearly completion, but it had not yet been certified. Therefore there was some work to be done and remedying of any post PC defects which could take place during the tenant’s occupancy of the site. Akenhead ruled that whether a given contract was a construction contract had to be determined in accordance to the terms of the contract itself, and in relation to ordinary principles of contractual interpretation. A contract can be a construction contract even if it is retrospective in effect. Where one party to a contract for example in this case, agrees to carry out and complete construction project, it will usually and maybe invariably be an agreement for carrying out of construction activities. Akenhead J found out that this particular collateral warranty was to be treated as a construction contract in accordance to Section 104. He took into consideration words applied and used in the collateral warranty to arrive at his decision. Third Party Act 1999 under Collateral Warranty This Act is used to protect third party rights. The third party act of 1999 was mainly aimed at the construction industry, to help in doing away with collateral warranties on each construction project (John, 2013). According to this act, a person who is not a party to the contract may enforce the conditions of the contract if, the contract expressly implied that he may, or the contract provisions confers the benefits on him. However this act has not been adequately applied in the construction industry, due to the fear driven by the insurance industry that the act might give rise to an additional liability on the contracting parties and more claims against them by the third parties (Mark, 2012). According to Furmston, & Michael (2007), it creates an exception to the rule of privity of contract. It creates third party rights enabling a person not party to a contract to enforce a term of the underlying contract in his own rights. The act also considers the effect of third party rights on the contracting parties, which includes the ability to modify or terminate the contract Therefore collateral warranties still remain the common mechanism for giving third parties contractual rights of recovery in relation to construction projects. Advantages of Collateral Warranty Collateral warranty is a legal agreement that enables a third party with an interest in the completion of a particular project to pursue a legal claim against another party involved in that particular project. Warranties provide lenders with the actions to take in case the project is delayed or not well installed (Akenhed, 2014). Also lenders can negotiate step-in-rights in the collateral warranties, since these rights provides lenders with the rights to act on behalf of the developer and sue a sub-contractor and ensure the completion of a project and to recover lender’s money. Disadvantages of Collateral Warranty The main disadvantage for those providing collateral warranty is the potential for joint and several liability. According to Anthony (2011), it is a disadvantage since it is possible that a warrantor could bear all the costs of remedying the defect while in practice he might be only liable for the fault partially. Novation Novation involves transferring the burden and benefits of a contract to another party. Unlike assignment which only transfers benefits of a contract, novation transfers both the benefits and burdens of a contract (Mark, 2012). In novationthe original contract is always done away with and then replaced by a new one in which the third party takes up the rights and obligations which resemble those of one of the original parties to the underlying contract. Novation does not lead to the cancellation of the past rights and obligations of the original contract, however the parties can agree and novate the rights and the obligations of the contract (Mark, 2012). Novation can only take place with the consent of the original parties of the contract and the new parties. Consideration for the new contract must be provided for, unless the novation is fully documented in a deed which must be signed by all the three parties to the contract (Siddiqui, 1996). According to John (2013), novation is not unilateral contract mechanism, therefore it allows for negotiations for new terms and conditions to be enforced under the current construction project. According to Hughes, & Martin (200), however transferring both the rights and obligations to a third party proves to be a challenge for the completion of a project especially when the third party is not in a position to achieve the set goals or work with the scheduled time. Conclusion Third party Act 1999 under collateral warranties, assignment and novation are contracts that involve transfers of rights and obligations to third parties. In all, the duties and obligations of the parties to the contract are usually well stated. Therefore each party to the contract knows what they are liable to. In case of any breach of the terms specified in the contract, the party who has breached the contract will be held liable in accordance to the rules and regulations of the contract. However in various cases in different contracts, the use of collateral warranties has proven to be the most efficient method by which third parties can gain rights regarding obligations entered between clients and their professional team, contractor and any sub-contractor. Therefore collateral warranties still remain the common mechanism for giving third parties contractual rights of recovery in relation to construction project. References Anthony, L. (2011).Early termination by the client in the event of contractor’s non - performance. Duhaime, L. (2012).Restraint of Trade, Assignment, Novation & Frustration. Furmston, S.& Michael, S. (2007). Law of contract (15th ed.). Oxford University Press. Griffith, A. & Sidwell, A.C. (1997).Development of constructability concepts, principles and practices. Hughes, M. (2000). Contracts (Rights Of Third Parties) Act 1999. Butterworths Journal of International Banking and Financial Law. John, M.E. (2013).Implied terms in construction contracts. John, U. (2012).Construction Law. Justice Akenhad (2014) Through Ages: construction Law Lesley C. (2014) Building Information Modelling Mark E. (2012) Adjudication under the Construction Act 2009 Mulcahy & Linda (2008). Contract Law in Perspective (5th ed.) Siddiqui, A.W. (1996) NOVATION: and its comparison with common forms of building Procurement Steven W & Marc L (2014) Collateral Warranties available at, www.scl.org.uk Treitel, Guenter (2003). Law of Contract (11th ed.) Turner, Chris (2007). Unlocking Contract Law (2nd ed.) Read More