Consultants’ appointments and collateral warranties: who needs them?

10-MINUTE TOPIC Barry Goodall and Tom Booth set out the benefits of having professional appointments and collateral warranties. At various stages, virtually every construction project has consultants involved in it, whether architects, structural engineers, project managers or a multitude of others. These are all professionals who hold themselves out as being skilled in their areas, and who in return for using that skill, expect to be paid whatever fee is agreed. Having clarity in contractual documentation relating to their appointments, as well as other project documentation such as collateral warranties, can help to define and protect your interests when engaging on any construction project. Nothing surprising there then. Consultants’ appointments – it’ll be fine, won’t it? So, what’s the problem? In itself, there is usually no problem in terms of what a particular consultant’s area of expertise might be in general terms, but what is often (and perhaps surprisingly often) a problem is understanding what terms a consultant might have been employed on and, indeed, what it is that they are actually being expected to do, how they are supposed to do it and when. Why is that? Well, in a surprising number of projects, there is no agreed appointment with the consultant that clearly sets out the terms on which they are appointed and what they are supposed to do. Even when there is an agreed appointment, these specifics are still often unclear. It is also the case that appointments might well be put in place through an exchange of e-mails or correspondence, but that communication can be far from clear. What does that lead to? Uncertainty, and where there is uncertainty then there is often confusion, which in turn becomes ripe ground for problems and disputes – and no-one wants that. It may also lead to either the consultant or their employer not getting what they expected in terms of the services themselves or, from the consultant’s viewpoint, payment or an unexpected obligation or liability. So, not only is it important for the consultant’s employer to be clear on what it is getting, and for the consultant to know what it is expected to do and be liable for, but in many cases funders, and later purchasers, will expect those terms to be clear and robust. This is particularly the case in respect of the required duty of care and the extent of the services required, with collateral warranties or assignments of the appointment often being an important part of the contractual framework of a project and development. If there is a lack of clarity or an absence of any appointment, then it is not difficult to see that this may have a real and detrimental impact on a development’s value and risk profile. So, if an appointment is unclear, then it makes sense to address it upfront and spend some time at the outset getting the terms clear, and considering key provisions such as: setting a standard of duty of care or, if required, a requirement to achieve a given performance specification; maintaining professional indemnity insurance (at an agreed level and terms of coverage) for 12 years from practical completion (or the termination of the appointment if earlier); being assignable by the employer, without consent of the consultant, or on an agreed number of occasions without consent; providing collateral warranties in favour of the funder, purchaser, tenant and any other interested party; not to use or authorise the use of any deleterious materials; to allow the appointment to be novated (where appropriate); to grant an irrevocable, royalty free, non-exclusive licence to use the intellectual property rights in the documents that have been or will be created by or on behalf of the consultant that includes an ability to grant sub-licences; to agree monetary caps, which consultants often request; net contribution clauses; being executed as a deed, which then gives a longer limitation period; and to get the schedule of services right and complete. The value of clarity cannot be underestimated for those involved in a project, and for the project as a whole, so it is worth spending the time and effort to remove the uncertainty as best you can by getting a clear appointment in place. Collateral warranties: just extra paperwork? On many developments, a significant amount of effort is put into parties giving or obtaining collateral warranties from consultants, contractors and subcontractors, and it can often become a real paperchase. So why are they so important to the extent that in many cases contractors are required to provide them as a precondition for payment or they will have money deducted from them if they are not provided? The reason is simple in reality. They are needed in order to put direct contractual relationships in place where there otherwise would not be one. Simple examples of this would be a collateral warranty directly between an employer and subcontractor (and therefore skipping around the main contractor), or between a funder or tenant and a main contractor where no other direct contractual relationship might exist. Understanding why it is important to have a direct contractual relationship is easy. The main, and perhaps obvious, reason is that without a direct contractual relationship, it is not possible for one party to bring a contractual claim against the other. Simple. There may be limited circumstances where a tortious claim might be brought, but they are more difficult to bring, less clear and losses (and types of losses) are often more difficult to claim. However, there are far fewer of these problems if there is a clear contract or warranty in place, ie the beneficiary of a collateral warranty will have a direct contractual claim against the party giving the warranty and can bring claims against the warrantor for their losses arising out of a breach. What is it collateral to? The position is that a collateral warranty is collateral to, and will usual piggy back on, another agreement, for example, a consultant’s appointment. In essence, the party giving the warranty (such as an architect), as well as often warranting the required standard of care, will warrant to the beneficiary that they have complied with the terms of their appointment with, for example, the employer or a subcontractor might warrant to the employer or funder that it has complied with the terms of the relevant subcontract. If a breach of that underlying appointment or contract has occurred, then the beneficiary of the collateral warranty can bring a claim against the warrantor and claim losses incurred (subject to the warranty’s terms). The importance of collateral warranties differs for each party. To the warrantor, they widen the parties that can bring claims against them; to the beneficiary, they give important direct rights which can be used and claims brought where there would otherwise be none, which can be invaluable to a project if, for example, a main contractor becomes insolvent and the ability to recover from that party is not possible. There are other ways in which direct rights can be obtained without collateral warranties, such as where direct rights of action are granted in favour of beneficiaries using what are known as third-party rights under the Contracts (Rights of Third Parties) Act 1999. While collateral warranties are separate documents and agreements, third-party rights achieve the same effect, giving beneficiaries a direct right of action against the warrantor, but those rights are embedded in the primary contract and granted by way of a simple notice. This method is often preferred on larger schemes where there are a significant number of beneficiaries or where the third party’s interest in the project is remote but still needs protecting. Even so, while the use of third-party rights is becoming more common, having that actual agreement in their hand, in the form of a collateral warranty, does still seem to be the preferred route for many. Of course, the terms of any collateral warranty are important, as with any other agreement. In many ways collateral warranties can be quite innocent in their looks, but if the underlying contract or appointment is onerous, then so will be the possible liabilities under the collateral warranty. In short, any party giving a collateral warranty needs to take care in agreeing its terms, whether by limitations and exclusions, “no greater liability clauses”, restrictions on assignment and the like. Any party wanting a warranty needs to make sure they clearly understand what they are getting and those providing them must be clear what they actually giving. Clarity is everything. Barry Goodall is a partner and head of construction and Tom Booth is a solicitor in the construction team at Brabners LLP Photo © Shutterstock