Complex Construction Agreements - Essay Example

Collateral warranties The general legal principle involved in the formulation of collateral contracts is that while the contractor and client enter into the main agreement, a subsidiary agreement is also formulated between the client and sub-contractor. The connecting link is the agreement between the contractor and the sub contractor. The definitions of terms that commonly arise in construction contract is provided in the Appendix. In the case of complex construction agreements, it may be noted that there are several parties involved in the contract. i.e, the main contractor, the client and various several sub contractors such as plumbing services, electrical services, building materials, foundation work, among others. Spelling out the rights and responsibilities of the various parties thus becomes very difficult, because the main contract may exist between the client and the contractor, but may not take into account the rights of the other third parties. It may not also adequately represent the rights of the client if there is a violation by the third parties in question. On this basis, the major reasons for collateral warranties are spelt out below and detailed further: (a) It allows third parties such as sub-contractors to compensation on a quantum meruit basis despite the absence of a contract (b) It enables the establishment of a liability in tort within the scope of a construction contract (c) It addresses the deficiencies arising out of privity of contract Collateral contracts are required in construction contracts, where subcontractors perform services for the main contractor rather than the customers themselves and their rights need incorporation into construction agreements. Collateral contracts in effect, establish a connection between parties such as the client and the subcontractors who would not otherwise enter into a direct contractual relationship. When a contractor expresses an intent to utilize the services of a particular subcontractor, who commences work on this basis, it will be entitled to take legal action if the contractor fails to fulfil any of the implied terms, even if no formal contract exists. In the case of British Steel Corporation v Cleveland Bridge and Engineering Co Ltd (1984)1, the Court held that there was no true agreement between the parties, but the claimants were entitled to recover certain payments due to them on a quantum meruit basis2 and the defendants’ counter claims were not entertained. Collateral warranties are required to counteract the difficulty associated with establishing a liability in tort when a construction contract is in place; as stated by Lord Scarman, “Their Lordships do not believe there is anything to the advantage of the law in searching for a liability in tort where the parties are in a contractual relationship.”3 The extent to which the Courts could apply duty of care and the tort of negligence would be circumscribed within the contractual terms and the limitations imposed by the express and implied terms of the contract.4 The case of Holt v Payne Skillington (1995)5 established a different principle, i.e, the scope of duty in tort could be wider than the limitations imposed by contractual terms. On an overall basis however, legal precedent does not support liability in tort for negligence; when collateral warranties are signed by both the parties6, they function in a similar manner to contract in imposing obligations. The case of Donaghue v Stevenson7 established the principle that damages in contract would only cover economic losses8, while damages in tort would apply only in the case of personal injury. Collateral warranties help to establish the extent to which the respective parties would be liable for damages and also protects the employer in the event the building turns out to be defective due to the substandard work of the contractor or sub contractors. Since a defective building involves purely economic losses, it would not fall within the parameters of tortious liability which requires personal in jury. In such an instance, the collateral warranty functions as the legal document that allows a client to recover damages for substandard work or for delays in completion and allows parties to sue in the courts to enforce their rights and claim damages. While the extent of recovery is limited by the kind of indemnity insurance carried by the parties, collateral warranties help to ensure that such recovery under tort falls within the parameters of contractual obligations. The purpose of the Contracts (Rights of Third Parties) 1999 was formulated to offset the limitations of the doctrine of privity in contract. It clearly sets out the circumstances when a third party has a right to enforce the contract and also contains many other provisions specifically geared towards protecting the interests of third parties. According to Section 2 of the Act, the parties to a contract cannot rescind or vary a contract in such a way that it affects a third party’s rights, without first obtaining the consent of the third party, subject to certain requirements for obtaining consent, as set out in Section 2. Variation clauses which are introduced may affect the work but not necessarily the contract. Since the requirement for consent must be associated with a variation in contract for third party right to grant consent being taken into account, they may not necessarily apply in the case of construction contracts9. The Third Parties Act does not adequately address the needs in construction contracts because there may be several instances where the contractor may choose to change a particular sub contractor and engage a new one, who may not be represented in the contract. Since the Third Parties Act sets out the names of the original parties concerned and is limited in this aspect, it may not allow for variations and changes that may be made during the course of construction. This is why construction contracts are supplemented with collateral warranties. ....................................................................1144 words Bibliography Chappell, David, 2006. “Construction Contracts Questions and Answers”, Taylor and Francis. Cases cited: Barclays Bank plc v Fairclough Buildings Limited (1994, 3 WLR 1057). British Steel Corporation v Cleveland Bridge and Engineering Co Ltd (1984), 1 All ER 504 D & F Estates v Church Commissioners for England (1988) 2 All ER 992 Darlington BC v Wiltshier Northern Ltd (1995), 3 All ER 895. Donoghue v Stevenson [1932] AC 562 Greater Nottingham Co-operative Society v Cementation Piling & Foundation Ltd (1988), 2 All ER 971 Henderson v Merrett Syndicates Ltd (1995), 2 AC 145 Lancashire and Cheshire Association of Baptist Churches Inc v Howard & Seddon Partnership (A Firm) (1993), 3 All ER 567, Murphy v Brentwood DC (1990), 2 All ER 908 Tai Hing Cotton Mill v Liu Chong Hing Bank (1986), 1 AC 80 Tweddle v Atkinson (1861), 1 B&S 393 Appendix Collateral warranty: A collateral warranty in a construction contract is an agreement which exists side by side with the main construction contract and is related to that main contract. Sub-contractor: A contractor providing specific building services to the main contractor rather than the client Privity of contract: The legal principle stating that parties who are not direct signatories to a contract will not have any rights or recoveries under the contract. Read More