Collateral Warranties and Insolvency

[Wooodd]

Hello everyone, I'm new around here and sorry to join with a question (but I'm sure that's how most people do)

We as a company have undertaken works for a contractor who has since gone into administration, whilst most payments had been received there is still outstanding retention monies owed to us which we will not now receive.

The end user has contacted us with regards to a defect (its disputable whether this is an actual defect but that's a separate discussion) under the Collateral Warranty we entered into which has raised questions for us. If payment has not been received in full for a project, do we have to honor warranties? Would this be like paying for a TV on finance, stopping making the payments 1/2 way through, and then going back to the shop you owe money to if it goes faulty asking for another one?

We have written back to the end user relaying our belief that as payment was never received in full the warranty would not be applicable to which they responded as follows:

"Following ______________ becoming insolvent, the Authority terminated _______________'s employment pursuant to clause 8.5.1 of the Building Contract between itself and _______________.

Clause 7.9 of the contract between _______________ and (MY COMPANY) (the “Sub-Contract”) provides that the Sub-Contract automatically terminates on termination of the Building Contract.

This negates the Authority’s ability to step-in under clause 5 of the collateral warranty between (1) (MY COMPANY) (2) the Authority and (3) ______________ (“Warranty”) because the Sub-Contract that the Authority would be stepping into has terminated. In any event, clause 5.2 of the Warranty allows the Authority to choose whether to exercise its step-in rights in the event of contractor insolvency and the Authority has never agreed to step-in under the Warranty.

The termination of the Sub-Contract does not, however, impact (MY COMPANY) obligations to the Authority under the Warranty, in particular, the requirement to remedy defects. It is also not the case that _____________'s failure to pay (MY COMPANY) relieves it of the obligations it owes to the Authority under the Warranty."

Can this be the case? That even though payment has not been made in full we have to honor a warranty given? If they had exercised their right to "step-in" I would understand as this would in turn make them liable for the outstanding funds too as they would take on the obligations of ___________ (such as payments) as will as the rights afforded to them under the contract.

Does anyone have any experience with this or could anyone point me in the direction on any evidence either way as Google has proven to be less than fruitful.

 

[Frank the Insurance guy]

Hi @Wooodd ,

Sorry to hear you have been brought into the dispute by way of the collateral warranty.

Can I ask what the alleged defect is? If it relates to a design or professional service issue, this is something that your Professional Indemnity insurers will deal with on your behalf.

Does the alleged defect relate to the work you carried out?

 

[IanSuth]

Also (not that i have specific experience) is the text quoted from the contract you signed or the one they had with the now defunct company

If it was not mirrored/mentioned in the contract you signed then I don't see how it is enforceable on you

 

[Paul Kelly ICHYB]

One would assume that all agreements are with the main contractor and liability lies there - you reported to them, not the client!

 

[Frank the Insurance guy]

One would assume that all agreements are with the main contractor and liability lies there - you reported to them, not the client!

Unfortunately not @Paul Kelly ICHYB

A collateral warranty extends a sub-contractors/consultants liability to not just their employer (usually the main contractor), but also the end customer, and potentially future owner of a site/development.

As such the purpose of a collateral warranty is exactly what is happening here - the main contract has gone bust, but the local authority (who I assume are the beneficiary of the collateral warranty) can now sue the sub-contractor for any defects/issues that they caused.

This is very common in large construction projects.

Note - subcontractors who enter into a collateral warranty MUST notify their insurers if this is the case as most policies will not extend to provide liability cover to other parties (only to the directly contracted party). The insurance policy therefore needs to be spefically extended.

 

[Paul Kelly ICHYB]

You learn something every day!

 

[Wooodd]

Thanks all for the replies,

@Frank the Insurance guy. This defect is very minor. We install drainage and one pipe is at a slight fall. The fall isn't detrimental to the system in any way but it should be level. So this is a workmanship issue not design if anything.

@IanSuth The quoted text in the OP is from their letter to us not from an order.

We enter these Collateral Warranties daily and our insurers are well aware.

 

[IanSuth]

Thanks all for the replies,

@Frank the Insurance guy. This defect is very minor. We install drainage and one pipe is at a slight fall. The fall isn't detrimental to the system in any way but it should be level. So this is a workmanship issue not design if anything.

@IanSuth The quoted text in the OP is from their letter to us not from an order.

We enter these Collateral Warranties daily and our insurers are well aware.

If it is a simple workmanship issue, wouldn't it be cheaper to rectify than fight ?

Or as Frank has said if this is covered by your insurers use their legal advice line for a more definitive opinion

 

[Wooodd]

If it is a simple workmanship issue, wouldn't it be cheaper to rectify than fight ?

Or as Frank has said if this is covered by your insurers use their legal advice line for a more definitive opinion

Yes it definitely would, the works themselves are minor and this will most likely be our course of action.

It has raised internally where we stand though, more than anything for if this were to occur again on a larger scale. Forewarned is Forearmed and all that.

There could be an instance where the works are completed and before any payment is received the company go bust but these warranties get signed early in the process. If this were the case we cannot see how they would get free work and still be covered by a warranty as this would imply. Same logic, but ours is a minor scale this time round.

 

[Newchodge]

It looks as if you need a conditional warranty that can only be tirggered after full payment has been received. Perhaps your insurers may know if that is feasible?

 

[Frank the Insurance guy]

@Frank the Insurance guy. This defect is very minor. We install drainage and one pipe is at a slight fall. The fall isn't detrimental to the system in any way but it should be level. So this is a workmanship issue not design if anything.

The cost of correcting Defective workmanship isn't covered by Insurance, so you will have to fix it at your own cost.

It has raised internally where we stand though, more than anything for if this were to occur again on a larger scale. Forewarned is Forearmed and all that.

There could be an instance where the works are completed and before any payment is received the company go bust but these warranties get signed early in the process. If this were the case we cannot see how they would get free work and still be covered by a warranty as this would imply. Same logic, but ours is a minor scale this time round.

I suggest seeking legal advice before signing up to your next collateral warranty - you may be able to insert a specific clause to say the beneficiary must settle all outstanding payments before the warranty can be enforced. Not sure if this is possible, but would be interesting to know - please let us know if you do get advice.