Collateral Warranty© Daniel Atkinson 1999Warranties in GeneralA warranty is a term of a contract, the breach of which may give rise to a claim of damages but not the right to treat the contract as repudiated. It is therefore a less important term of the contract, or one which is collateral to the main purpose of the contact, the breach of which by one party does not entitle the other to treat his obligations as discharged. Collateral WarrantiesUndertakings may be given that are collateral to another contract, that is running side-by-side. They may be independent of the other contract because they cannot be fairly incorporated, or the rules of evidence hinder their incorporation, or because the main contract is defective in some way, or made by parties other than those by or to whom the undertaking is given. They are also referred to as "collateral contracts". As an example of a collateral warranty, an otherwise effective contractual exemption clause may prove worthless where an independent collateral warranty has been entered into. Relationship Between Sub-Contractor and Employer The employer may issue a promise to pay the sub-contractor (or to see that the sub-contractor is paid). Questions may arise to see whether the promise is;
If it is collateral to the contract it must be in writing, if it is a promise to pay it may be verbal. In Conrad v Kaplan 1 (1914) 18 DLR 37 (Can), a plaintiff sub-contractor was induced into restarting work after the main contractor failed when the employer orally promised he would get paid. The plaintiff sub-contractor could recover on the promise. It did not a guarantee the main contract even if this was an incidental effect. If an employer promises to pay the sub-contractor out of the money due to the main contractor it does not make the employer liable for the main contractor's debts; Dixon v Hatfield (1825) Bing 439. There may also arise liability on the part of an employer towards a sub-contractor if work is carried out before the main contract is has commenced and subsequently no main contractor is available to place an order with. Collateral ContractsA transaction between two parties may be of particular concern or affect to the performance of a third party. A collateral contract may be entered into between the third party and one of the original parties. This may be a useful device for avoiding privity of contract. Parliament has recognised the need to grant third party rights. The Contracts (Rights of Third Parties) Act 1999 gives a person who is not a party to a contract (a "third party") a right enforce a term of the contract if the contract expressly provides that he may, or the term purports to confer a benefit on him. It does not apply if on proper construction of the contract it appears that the parties did not intend the term to be enforceable by the third party. The Act therefore facilitates third party rights, but these rights may be specifically excluded or excluded by implication on construction of the contract. Courts may find a collateral contract where they make sense of the parties relationship and to do justice between them. An example of a collateral contract is found in Shanklin Pier Ltd v Detel Products Ltd 1 [1951] 2 KB 854. The plaintiff ordered their contractor to use paint supplied by the defendant. The defendant had represented to the plaintiff that the paint would last for seven years. The contract to supply the paint was between the defendant and the contractor. The paint proved defective and the plaintiff, although third parties to the supply contract, was held entitled to sue for breach of the promise as to durability. This was on the grounds that the transaction gave rise to an additional collateral contract between the plaintiff and the defendant where the consideration was the plaintiff's ordering the contractor to enter into the principal contract for the supply of the paint. In Greater London Council v Ryarsh Brick Co Ltd 1 [1985] 4 Con LR 85, in similar circumstances to Shanklin, Judge Newey QC accepted that even without express representations there may be a collateral contract containing implied terms as to fitness or suitability of the goods. Where there is no collateral contract found a plaintiff may still sue in negligence. However, a claim may be purely economic and this may well prove fatal in establishing a duty of care. Further, claims in contract by implied terms (for example implied by the Sale of Goods Act 1979) are normally strict, that is have no defence, but a claim in negligence will require proof of fault. Collateral Warranties Between Employer and SubContractorWhen a subcontractor enters into a domestic contract with a main contractor there is no contractual relationship between the employer and the subcontractor. The employer could only sue the subcontractor in tort and would have to prove that a duty of care was owed. A subcontractor would not owe a duty of care to an employer in tort in respect of pure economic loss, unless there was such a very close proximity of relationship between the parties and reliance by the employer on the subcontractor, such that the subcontractor was to be taken voluntarily to have assumed direct responsibility to the employer Muirhead-v-Industrial Tank Specialities Ltd (1985). Recent developments in the law have eroded an Employer’s ability to take legal action in the tort of negligence directly against a sub-contractor in respect of that Employer’s economic loss arising say from defective design and/or workmanship. The case of Murphy-v-Brentwood District Council (1990) HL 50 BLR 1 heard in July 1990, decided that normally, economic loss was non-recoverable unless there was some special relationship between the parties or where the economic loss was consequential upon actual physical harm to a person or some property other than the defective property itself. A collateral warranty between Employers and sub-contractors allows the Employer to sue the sub-contractor for any breach of the warranties’ conditions, which commonly include promises on the part of the sub-contractor to achieve a standard of design and workmanship as specified by the Employer. The terms of the warranty may impose whatever liabilities and responsibilities the Employer considers appropriate, so long as the sub-contractor, being aware of such terms, is willing to tender and enter into a sub-contract for the relevant work. It is important, but nevertheless is sometimes overlooked, to ensure that both the obligation to enter into the warranty and its full wording form part of the legal obligations set down by the terms of the contract between the main contractor and the sub-contractor or professional party. Warranties will also address the matter of deleterious materials, to ensure that such materials are not specified or used to employed in the works. Most collateral warranties include provisions for the benefit of the warranty to be assigned by the Employer to a third party, such as a purchaser or tenant. Indeed such third parties taking a legal interest in a building require such a warranty, so as to provide themselves with redress against a contractor or designer as a result of defects appearing within a period of time, commonly after 12 years from the completion of the original works. The following points should be carefully considered in the preparation of, or agreement to, warranties:
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