collateral warranty

[Philipmcg]

hi a few months ago i started work . the main contractor asked me to sign a collateral warranty. i assumed this was something just to say you are standing over the work for 12-24 months. but the developer has just came to me and wants to pay me £1 for consideration. Can anyone enlighten me on this.

 

[Frank Wessely]

hi a few months ago i started work . the main contractor asked me to sign a collateral warranty. i assumed this was something just to say you are standing over the work for 12-24 months. but the developer has just came to me and wants to pay me £1 for consideration. Can anyone enlighten me on this.

Hi,

We will need much more detail to be able to comment.

Thanks.

 

[WaveJumper]

I do not know the answer to your question other than collateral warranties create a contractual link between various interested (third) parties within a project (development) and thus putting I thought ones self in the firing line regarding any likely future claims, hope you took advice on this before proceeding and if so would suggest speaking to them again.

Very specialised area and as mentioned above a lot more detail required.

 

[Philipmcg]

Hi,

We will need much more detail to be able to comment.

Thanks.

i never received a contract and the main contractor said he wasn't deducting retention, he asked me to sign this document, I thought it was just to say i was standing over the work for defects period. Main developer has said that its a contract design between developer and main contractor. He said its only valid if something we have designed in the house fails. We have designed nothing. We are electrical contractor and installed as asked.

 

[BubbaWY]

A collateral warranty provides additional comfort for the client/funder should the main contractor become insolvent.

The client/funder normally only has a direct contract with the main contractor. If the main contractor went under, then the client/funder has an issue in that the sub-contractors have no legal obligation to the project - either to complete any works, carry out any 12 month defect works or latent defects.

Also, if a sub-contractor has any design responsibilities, there would be no recourse if any design flaws became apparent.

If you dont have a formal sub-contractor contract, normally JCT Design & Build (if you have any design responsibility), then you shouldnt have signed a collateral warranty. As for them wanting to pay you £1, thats something Ive never come across.

How big is the project you are working on? What is the value of your works? You need to ask for a contract which will protect both you and your client.

 

[Frank the Insurance guy]

i never received a contract and the main contractor said he wasn't deducting retention, he asked me to sign this document, I thought it was just to say i was standing over the work for defects period. Main developer has said that its a contract design between developer and main contractor. He said its only valid if something we have designed in the house fails. We have designed nothing. We are electrical contractor and installed as asked.

"I thought it was just to say......." - A reminder to anyone to make sure you know what you are signing and if you do not, then ask someone who does.

As mentioned above a Collateral warranty creates a contractual link directly between you and a third party - usually you would only be liable to the party that contracted you to do the work, however by signing the collateral warranty you can now be sued directly by the other parties specified on the warranty!

the developer has just came to me and wants to pay me £1 for consideration.

As for them wanting to pay you £1, thats something Ive never come across.

@Philipmcg - Don't invoice or accept the £1 for consideration! I've come across this - it creates a contractual relationship between you and the developer, where there was previously none (I am assuming you have not invoiced or contracted directly with the developer!). Its sometimes used as a way of sidestepping a collateral warranty where another party (in this case the developer) wants to be able to sue you later on directly if something has gone wrong - so DON'T Do it! Unless of course they are holding up any payments to you, in which case you need to take some professional advice on pursuing what you are owed without the need to pay the £1.


Also - entering into collateral warranties may not be covered by your insurance policies, unless specifically agreed - as this creates an additional liability over and above that which would normally apply!

 

[Bob Morgan]

"I thought it was just to say......." - A reminder to anyone to make sure you know what you are signing and if you do not, then ask someone who does.

As mentioned above a Collateral warranty creates a contractual link directly between you and a third party - usually you would only be liable to the party that contracted you to do the work, however by signing the collateral warranty you can now be sued directly by the other parties specified on the warranty!





@Philipmcg - Don't invoice or accept the £1 for consideration! I've come across this - it creates a contractual relationship between you and the developer, where there was previously none (I am assuming you have not invoiced or contracted directly with the developer!). Its sometimes used as a way of sidestepping a collateral warranty where another party (in this case the developer) wants to be able to sue you later on directly if something has gone wrong - so DON'T Do it! Unless of course they are holding up any payments to you, in which case you need to take some professional advice on pursuing what you are owed without the need to pay the £1.


Also - entering into collateral warranties may not be covered by your insurance policies, unless specifically agreed - as this creates an additional liability over and above that which would normally apply!

Especially the last paragraph! If Collateral Warranties are even suggested, I have to inform my PI Insurer. The same applies to expressions such as '. . Warrant and Guarantee' in Client Agreements. In both instances, expect to be told "You're on your own!"

 

[WaveJumper]

Especially the last paragraph! If Collateral Warranties are even suggested, I have to inform my PI Insurer. The same applies to expressions such as '. . Warrant and Guarantee' in Client Agreements. In both instances, expect to be told "You're on your own!"

Now thats good advice

 

[Bob Morgan]

Now thats good advice

Just as an aside, another 'Dodge' is to insist that 'Payment Requests' are made which are in-line with the Payment Schedule. The 'Agreement' will give Chapter and Verse on how this is to be done, using THEIR STANDARD FORM! - They will NOT entertain any other request!

HOWEVER, try explaining that one to the Clerk at a County Court, when you are pursuing a debt! - You will be told that ". . . Aha! - You never sent them an Invoice!" Irrespective of 'The Agreement' Invoices are always sent by Recorded Delivery!

Such 'Agreements/Contracts' used to be the domain of Bechtel, Halliburton and USA Inc., etc., but are becoming more common in the UK. In addition to the 'Referrals' I have already mentioned (Collateral Warranties and expressions such as 'Warrant and Guarantee'), any Agreements or Contracts that are proposed by a Client that are NOT based on Standard Forms (RIBA, JCT, and FIDIC etc.) MUST be referred to the PI Insurer!

 

[Michael Gerard]

First and foremost, always ensure that any agreement for building works is in writing, and do not commence any works until the agreement has been signed or at least clearly agreed.

It is quite common to see a construction project requiring designers and specialist contractors to provide collateral warranties. The reason for their use is that if a building turns out to be defective, the person with an interest in the defective building will find it very difficult to successfully pursue a third party (i.e. a specialist sub-contractor that has been directly employed by the main contractor), who is responsible for the defect if they do not have a contractual relationship with them. This is because, someone who is not a party to a contract can only bring an action in the tort of negligence, but recovery of the financial losses (i.e. pure economic loss) are limited, unlike that in an action for damages arising from under a contract.

As the name suggests therefore, the purpose of a collateral warranty is to create a direct contractual relationship that is collateral to the main contract: the £1 consideration is a nominal fee that ensures the contract is valid – in the absence of any consideration, there would be no valid contract, consideration being an essential ingredient to create a legally binding contract.

If the main contractor did not inform you from the outset that your company would need to provide a collateral warranty, then you are under no obligation to provide one: from your brief, it would appear that you are under no obligation to provide a collateral warranty and my advice would therefore be, do not provide one.

If you agree to provide one, you will incur costs for a solicitor to review the terms and conditions (it is imperative you instruct a solicitor in order to understand what you are signing up for and to advise you), and you will also increase your risks as to be responsible for any defects and faults with your work – even if the main contractor ceases trading, you have a contract with the developer and [most probably] with other [unknown] companies should the collateral warranty be assigned.

The main contractor may have a term in its contract with the developer to execute collateral warranties with certain professions and / or trades, but has overlooked this obligation when engaging you – however, this is not your problem.

Further, I also note from your brief that you have no design liability – even if you were under an obligation to execute a collateral warranty, if this obligation only extended to design, then there is no requirement to execute a collateral warranty.

If the main contractor withholds payment because of your failure or refusal to provide a collateral warranty, you have the HGC&R Act 1996 to fall back, which includes right of suspension and adjudication.

 

[The Resolver]

You have started to work on the project before any mention was made as to you signing a collateral warranty, If there is no term in your contract with the contractor to say that you must provide a collateral warranty to the conractor's client then you have no legal obligation to provide one. The contractor may well have been required to provide such in his contract with the developer. I imagine that if you had been so asked , you would have been well advised to increase your fee to cover the additional risk (if only to pay for a solicitor to advise on the terms eg to ensure you only warrant your work not that of the contractor).

,You cannot be required to provide the CW and the contractor cannot terminate your contract with them. You are, therefore, in a strong posiiotn as to negotiations. However consider whether you can gain something out of complying with the request. The £1 is clealrly an insufficient payment as consideration for the risk you are taking on. £1,000?

 

[Gyumri]

The £1 is clealrly an insufficient payment as consideration for the risk you are taking on. £1,000?

The consideration of £1 is quite sufficient. In the old days it used to be a peppercorn. The risk being assumed by the OP has no bearing on the value of the consideration paid for the warranty.

 

[kulture]

The consideration of £1 is quite sufficient. In the old days it used to be a peppercorn. The risk being assumed by the OP has no bearing on the value of the consideration paid for the warranty.

You have misunderstood the £1 is sufficient to establish a consideration, BUT not sufficient reward to take on the risk.

 

[The Resolver]

£1, peppercorn, a copy of last year's Beano annual, it matters not - it all amounts to taking on risk for no reward (apologies to Beano fans) and,as the OP already has the contract to do the work, it would be foolish to do so. The only deal he could negotiate with his client is to take on the warranty in return, if not money, for more work than already cntracted to do. Asa Kulture says, its set as £1 to ensure there is some consideraton to make it binding.

 

[Gyumri]

You have misunderstood the £1 is sufficient to establish a consideration, BUT not sufficient reward to take on the risk.

That must be the understatement of the year!