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Institution of Civil Engineers

ICE Legal Note


Collateral Warranties

1 Introduction
1.1 Members of the Institution of Civil Engineers will be involved in all aspects of the
requesting, considering and giving of warranties. While the Institution does not express
any view on the desirability or otherwise of giving warranties, the Institution is concerned
that, if additional duties or burdens are taken on through the vehicle of warranties, such
duties or burdens should be reasonable. Moreover, the process should be properly
regulated, properly understood, and should not expose either individuals, firms or
companies to unexpected or inappropriate risks.

1.2 The term “Collateral Warranties” refers to documents given or intended to be given by
engineers or others, acting individually or for or through partnerships or companies for
the purpose of creating legal relationships. These are additional to the principal contract
for the work concerned. The warranties may be in the form of contracts, which will
therefore need to comply with the formalities of a contract (including consideration or
execution as a Deed); or they may be in the form of acknowledgements of other legal
duties, that is in tort (under English law) or delict (under Scots law).

1.3 Note the strong recommendation in section 5 that specialist advice be obtained on
collateral warranties.

2 Purpose of Collateral Warranties


2.1 The purpose of collateral warranties is to create legal relationships, particularly duties,
which would not otherwise exist. A collateral warranty may also clarify a relationship
which might otherwise exist only by implication of law. Collateral warranties are
necessary because English law does not generally permit a third party to enforce rights
arising out of a contract to which it is not a party. However, an employer can now, with
the agreement of the engineer, use the Contracts (Rights of Third Parties) Act 1999 to
give third parties direct enforceable rights without the need for a warranty. The contract
can explicitly define those terms which are intended to be enforceable by third parties. In
time, this legislation may replace collateral warranties, but will not do so until parties to
construction contracts have confidence that it meets all the needs currently fulfilled by the
warranty. Until then, collateral warranties remain important.

2.2 The persons to whom, or for whose benefit, warranties are given may be other parties to
the construction project, or they may be third parties, such as a funding agency (whose
identity is known) or future tenants or purchasers, whose identity may be unknown at the
time the warranty is given. The latter use introduces the problem of assessing the risks
of making legal undertakings to unknown parties. In some cases they may also change
the nature and scope of existing valid legal relationships. By way of example, an

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employer may require a separate warranty from a contractor in respect of particular


technology used by the contractor. The warranty is in addition to the construction contract
between the employer and the contractor. This will extend and/or alter the existing
contractual relationship.

2.3 Another common example of a warranty is that given by a Sub-Contractor to the


Employer, typically covering design work. Such documents have been in existence for
many years in building contracts (JCT standard forms). Widespread use of warranties,
however, developed when in the late 1980s the House of Lords severely reduced the
scope of claims available in tort. Some typical examples are described in Appendix A.

2.4 There are other names for a collateral warranty, such as a duty of care agreement. Note,
however, that a duty of care letter to the third party may not constitute a contractual
relationship (for example, where there is no consideration) but may, in some
circumstances, be acceptable as an acknowledgement of a duty of care in tort.

3 Providing a warranty
3.1 Engineers who are asked to give warranties should consider carefully whether they
should do so, with particular consideration as to whether their professional indemnity
insurance will cover their liabilities under the warranty. The following considerations are
of particular relevance:

• What work or activities are covered by the warranty? Is this more extensive than the
work actually being undertaken by the engineer? For example, a requirement for
satisfactory materials and workmanship in a construction contract may be
transformed to a warranty that all materials shall be and shall remain of satisfactory
quality and fit for the purpose for which they are required.

• Does the warranty contain inappropriate lists of “deleterious materials”? Extensive


lists of deleterious materials may be resisted on the basis that most of these are only
deleterious if used improperly. Improper use would be a breach of the warrantor’s
explicit duty to employ reasonable care and skill so a separate clause is unnecessary.

• Is the duty proposed to be undertaken wider than that existing in the absence of the
warranty? Where the engineer’s primary duty is to use skill and care (which is usually
the case) the warranty may contain an undertaking that the work will be reasonably fit
for its purpose or that the Works will be “properly” designed or that the Works will
“meet the requirements of the Employer in all respects”.

• What is the effect of the warranty on limitation periods (the time within which any legal
action must be begun)? Engineers may find that giving a warranty extends the time
for which they remain liable even beyond that in the original agreement with the
employer. Engineers should consider requiring inclusion in the warranty of an
express statement on the limitation period to remove any uncertainty as to the period
of liability.

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• Does the warranty extend the legal obligations beyond the normal bounds set by
legal precedent e.g. to liability for economic loss?

• Does the warranty require a transfer of the engineer’s intellectual property rights,
which may restrict future use by the engineer? The warranty should be limited to the
grant of a licence in respect of the engineer’s rights and exclude liability for misuse.

• Which person or persons will acquire rights under the warranty? The primary
purpose of warranties is usually to create benefits in favour of persons not otherwise
able to bring claims against the engineer. The engineer should also check to whom
the benefit of the warranty may be transferred. Insurers may require limitations on
assignment of warranties by the persons receiving them, typically imposing a
maximum of two assignments.

• Do the requirements to maintain insurance take into consideration restrictions within


the policy for contamination and pollution based claims?

• Does the warranty require a commitment to maintain insurance which is not


sustainable? A warrantor should avoid absolute obligations to maintain cover which
depends upon such insurance being available in the market at commercially
acceptable rates.

• Are warranties also being signed by the other parties involved in the project? What is
the financial strength of the other parties and is their liability limited? The potential
warrantor needs to assess whether the others are likely to remain in business and
financially sound, because it could become the sole remaining warrantor responsible
for the total liabilities. The risk can be reduced by insertion of a “net contributions”
clause under which all warrantors are deemed to have paid their fair share whether or
not this actually occurs. If this is unobtainable, then the potential warrantor should at
least avoid taking greater liability than co-warrantors. For example, it should not take
responsibility for consequential losses if the others are only covering the cost of
remediation.

3.2 Note that the Construction Industry Council has issued standard forms of collateral
warranty – see their website at www.cic.org.uk.

4 Contracts (Rights of Third Parties) Act 1999


4.1 Where warranties are to be used, the principal contract should specifically exclude rights
under the Contracts (Rights of Third Parties) Act 1999. Collateral warranties should be
viewed as an alternative to statutory rights rather than as a supplement to such rights.

4.2 The warrantor must understand that its undertakings in the warranty will become its
liabilities in the event that there are problems with the work it has done. Moreover, the

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existence of the warranty may increase the likelihood of actions being brought against it
and even if they are unsuccessful, the warrantor’s defence costs may be at risk.

4.3 Examples of some of the cruder arguments that have been used in pursuit of warranties
are given in Appendix B together with suggested responses.

5 Legal and insurance advice and liability


5.1 Because of the complex nature of these considerations, it is important that specialist
legal and insurance advice is obtained wherever there is doubt about the effect of a
warranty, so that the full extent of the proposed obligations may be understood. There
may be an exception where the warranty is in an unaltered form previously approved by
a professional body. Even here, however, care should be taken to ensure that insurance
cover will not be prejudiced by taking on the new obligations. Some insurers themselves
issue approved forms of warranty.

5.2 The liability assumed by an engineer under a collateral warranty is potentially large,
comparable to that under the original contract with the employer, and engineers should
be wary of signing warranties other than in the name of a limited company. Partnerships
should be aware that a warranty signed by one partner will usually create a liability
binding against all the partners.

5.3 It is very likely that the proposal to give warranties will involve the engineer in expense in
respect of:

• seeking appropriate advice;

• carrying out additional work and/or activities;

• paying for wider insurance cover;

• paying for insurance cover over a longer period.

It is therefore usually appropriate for the engineer to ask for a realistic fee as a condition
of giving a warranty.

A fee would constitute “consideration” and has the additional advantage under English
law of enabling the warranty to be under signature rather than under seal. This would
mean that the limitation period for claims implied by law is 6 years rather than 12 years.
These limitation periods implied by law will be overriden by an express limitation period
included in the warranty.

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Published for the Institution of Civil Engineers by

Thomas Telford Services Ltd, I Heron Quay, London

E144JD

Collateral Warranties

First published 1991

© Institution of Civil Engineers 2001

The information, suggestions and/or advice contained in this publication are intended for use as a general statement
and guide only. Neither the Institution nor any committee of the Institution can accept any liability for any loss or
damage which may be suffered by any person as a result of the use in any way of the information contained herein
and any person using such information or drafting contracts, specifications or other documents based thereon must in
all cases take appropriate professional advice on the matters referred to in this publication and are themselves solely
responsible for ensuring that any wording taken from this document is consistent with and appropriate to the
remainder of their material.

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Appendix A
Typical examples of collateral warranties are:

• A consulting engineer, in addition to signing a contract with an Employer for the design and
supervision of a project (the principal contract), might be asked to provide a warranty to one
or more third parties such as a funding agency (known) or the future tenants or purchasers
(probably unknown) of the Employer’s new asset when it is completed under the project.

• A consulting engineer, in addition to signing a contract (the principal contract) with a


Contractor for design work in the Contractor’s design and construct contract with an
Employer, might be required to provide a warranty to the Employer or other third parties.

• A consulting engineer, originally engaged by the employer, then has its terms of engagement
novated to the contractor, to create a design and construct relationship between the
employer and the contractor. The employer will probably still want a collateral warranty from
the consultant.

• A works contractor, in addition to signing a contract with a Management Contractor for


construction work (the principal contract) might, under the terms of the Management
Contractor’s contract with an Employer, be required to provide a warranty to the Employer or
other third parties.

• A nominated sub-contractor, in addition to signing a contract with a main Contractor for the
design, supply and installation of specialist work (the principal contract), is often required to
provide a warranty for the design element of its contract to the Employer who is in contract
with the Contractor.

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Appendix B
Resistance to the provision of a warranty may encounter pressure in the form of various
arguments some of which are set out below with a suggested line of resistance:

• Everyone else is signing them:


This may be true, but should not override the engineers’ judgment as to whether in the
particular circumstances the risk of providing a warranty outweighs the benefit of the fee
being offered by the client. The client may pursue alternative solutions, such as
commissioning a review of the design or a survey of the building, or by procuring latent
defects insurance cover.

• If you are confident in your work, you should not hesitate to provide such a warranty:
The loss which may be claimed by a third party may be far greater than loss which could be
suffered by the original client. This constitutes an increase in risk which the warrantor would
need to factor into the fee.

• This warranty is in the same terms as the normal obligations:


The wording of the warranty can be misinterpreted. Legal opinion should be sought and
obtained. However, there is no guarantee that a judge or arbitrator would agree with those
opinions.

• This warranty only reflects the current state of the law:


The warranty only reflects current market practices. It is, however, fixed in form once signed,
so would preclude any possible benefit accruing to the warrantor from favourable changes in
the law which may occur in the future.

• You are insured in any case:


The insurer must be informed and must give its approval of the warranty. It is to be borne in
mind that the insurers may not accept the terms of the warranty and that generally insurers
do not cover liability assumed under an agreement which would not have existed in the
absence of that agreement. In any case, the availability and the cost of insurance may
change and may be totally different in the future.

9 July 2001

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