When a party is required to provide a collateral warranty in a particular form, but fails to do so, what is the legal result? Does the warranty take effect anyway, or will it only take effect once a "collateral warranty" document has been signed and provided?
The issue is important in at least two scenarios:
- Where a person (e.g. a purchaser, funder or tenant) who otherwise has no contractual rights against the contractor or consultant wishes to claim against the contractor or consultant.
- Where a person has contractual rights against the contractor or consultant, but those rights are unenforceable under the Limitation Act, yet enforceable under any warranty.
This latter scenario arose in a recent Australian case, which revolved around a claim for damages concerning a defective roof. Under the terms of the contract between the builder and the proprietor, the builder was to "provide to the proprietor a warranty on the whole roof ... for the period of fifteen years from the date of practical completion". Practical completion occurred in 1998. No warranty document was provided to the proprietor. The proprietor started court proceedings against the builder in 2006, i.e. after the 6 year limitation period had expired for an action for breach of contract or negligence, but within the 15 year warranty period...assuming such a warranty operated.
Was there a Warranty?
The question for the court was whether
- the roof warranty took effect upon practical completion
- the warranty would only take effect once a warranty document was provided by the builder
Resolving this issue came down to the semantics of the building contract. Although the court noted that a phrase such as "the proprietor warrants that" indicates that the warranty would operate from the commencement of the contract, there was other wording such as the builder "shall provide warranties" or "a warranty ... shall be given," suggesting that the warranties were to be given at a later date. The court concluded that the roof warranty did not take effect automatically, and that the parties only intended it to take effect once a warranty document was handed over to the proprietor. It was key to this reasoning that the contract required the builder "to provide" the roofing warranty. This language suggested that the warranty would be provided in the future, as a separate document.
In light of the above, careful consideration needs to be given to the wording in warranty clauses in construction contracts if the desired effect is for them to take effect without more (i.e. without a separate warranty document being provided). If (as in the Australian case) a collateral warranty only takes effect when the warranty document is provided, this means that contractors, consultants, and others who are required to provide warranties need to be requested to provide these documents and often chased-up for them. The effect of not having a warranty document can be dramatic, as in the Australian case where the proprietor was left unable to sue the builder.
It may often be simpler and easier for a construction contract or consultant's appointment to make use of the Contracts (Rights of Third Parties) Act 1999, so as to confer rights on funders, tenants, purchasers and the like without having to use separate warranty documents. When the Act is used, the only further document that is usually required is notification to the contractor or consultant of the identity of the beneficiary of the contractor's or consultant's warranty. However, it is still popular for collateral warranty documents to be used. So the headache of getting collateral warranties signed-up is not likely to go away any time soon.
This article was written for Law-Now, CMS Cameron McKenna's free online information service. To register for Law-Now, please go to www.law-now.com/law-now/mondaq
Law-Now information is for general purposes and guidance only. The information and opinions expressed in all Law-Now articles are not necessarily comprehensive and do not purport to give professional or legal advice. All Law-Now information relates to circumstances prevailing at the date of its original publication and may not have been updated to reflect subsequent developments.
The original publication date for this article was 16/12/2008.