Collateral warranties – doing a good deed


Collateral warranties – deed, what deed?

Collateral warranties are often signed as part of the commercial reality of getting the deal done. How many of us actually consider the possibility of not being able to enforce them at a later date? Not getting the basics right can prove very costly indeed.

By way of reminder, the whole point is that a collateral warranty should ensure that the grantor:

·        takes proper skill, care and diligence in design;

·        uses materials of merchandisable quality;

·        carries out and complete the works in a proper workmanlike manner; and

·        complies with an express fitness for purpose obligation.

Whilst the contents are drafted with care, construction litigators still see many warranties that are not executed properly, which has dire consequences. Lack of proper execution means that you cannot rely upon the document as a deed and benefit from the extended limitation period of 12 years to bring an action. To put it bluntly, your rights under the warranty will have been extinguished after 6 years (the normal time under simple contract) and to argue otherwise would be a futile exercise.

In some cases, you will not be able to make out a contract at all leaving you with no redress whatsoever. Of course it depends how the job has been procured but privity of contract will prevent you from enforcing the building contract against a third party and the rights of third parties clause will undoubtedly have been struck out. You are going to face an uphill struggle with defective warranties whichever side you find yourself on. It is therefore worthwhile getting the basics right in order to minimise costly and unnecessary disputes from arising in the first place.

The deed and its pitfalls

The fact is that problems can occur. In such circumstances, tt is important to know how deeds work so that you can assist your lawyers with collating corroborative evidence if you do have some irregularity in the document.

In brief, the terms of the warranty must be reduced in writing. Any representations during negotiation not in writing are only persuasive as contemporaneous evidence of the intentions of the parties.

Moreover, the document must make it clear on its face that it is intended to be a deed. The intention must be expressed by the person making it or, as the case may be, by the parties to it. It is often argued that the beneficiary must also execute the document. Do not be fooled – this  is completely unfounded in English and Welsh law.

The deed needs to be signed by either two directors or one director and the company secretary or one director with a witness.

A warranty will be defective as a deed if signed by only one director and not attested as such by a witness. Adopting the old engineering adage, “if it ain’t broke, don’t fix it”, you should continue to execute documents as you have always done unless there is good reason not to, in which case, seek advice.

Your problems are confounded if there is more than one formal defect to the deed. In such circumstances, you cannot argue estoppel to prevent the other party from relying upon the defect to deny that a deed was ever entered into. Expect a stern rebuke from the Technology and Construction Court and a costs order against you if you attempt to do so.

The issue of legal delivery of the document, which should not be confused with physical delivery, is another fertile area for argument. Let’s clear this one up now – legal delivery is an act done which evidences an intention to be bound. Dating the document is often the most common way of doing this but clear evidence to the contrary will rebut any supposed intention.

The lack of contract

If you cannot evidence the making of a valid deed, a warranty may still exist as a simple contract or be evidence that a contract was formed between the parties. This brings with it another headache as there is no automatic presumption that a defective deed exists as a contract. The evidential problem is this – if the document was drafted as a deed, it may not require consideration in its terms, which is a crucial element of making out a contract.  The worse case scenario is that you may not even be able to evidence the formation of an agreement.

If that happens, you need to rely on tort in which case you will need solid contemporaneous evidence of a breach of professional duty of skill and care. Your records 6-12 years on may not be in good order and you may have already disposed of the files. Even if you do have records, the exercise of going through them will be expensive either in lawyers’ fees or management time or both. In any case, tortuous damages are only given on an indemnity basis which limits the losses you may be able to recover.

Safeguarding your interests

You can take some basic steps to safeguard your interests. Make sure you execute the document in the right places. Expect repeat calls from your lawyers until you do. Keep copies of the executed warranty and do not assume that other parties will produce them if you are faced with a problem.

If you want the benefit of the warranties, then ensure you can evidence of your entitlement. In short, the collateral warranty is a humble but highly significant document which deserves due care and attention.

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