Winward Fearon on Collateral Warranties

Transcription

1 Winward Fearon on Collateral Warranties

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3 Winward Fearon on Collateral Warranties SECOND EDITION David L Cornes BSc Eng), AKC, FICE, CEng, FCIArb Solicitor of the Supreme Court Partner, Winward Fearon Richard Winward LLB, FCIArb, F.Inst.CES Solicitor of the Supreme Court Partner, Winward Fearon

4 # David L. Cornes& Richard Winward 2002 Blackwell Science Ltd, a Blackwell Publishing Company Editorial Offices: Osney Mead, Oxford OX2 0EL, UK Tel: +44 0) Blackwell Science, Inc., 350 Main Street, Malden, MA , USA Tel: Iowa State Press, a Blackwell Publishing Company, 2121 State Avenue, Ames, Iowa , USA Tel: Blackwell Science Asia Pty, 54 University Street, Carlton, Victoria 3053, Australia Tel: +61 0) Blackwell Wissenschafts Verlag, KurfuÈ rstendamm 57, Berlin, Germany Tel: +49 0) The right of the Authors, to be identified as the Authors of this Work has been asserted in accordance with the Copyright, Designs and PatentsAct First Edition published 1990 by BSP Professional Books Second Edition published 2002 by Blackwell Science Ltd Library of Congress Cataloging-in-Publication Data isavailable ISBN A catalogue record for thistitle isavailable from the British Library Set in 10/12pt Palatino by DP Photosetting, Aylesbury, Bucks Printed and bound in Great Britain by MPG BooksLtd, Bodmin, Cornwall For further information on Blackwell Science, visit our web site: All rightsreserved. No part of thispublication may be reproduced, stored in a retrieval system, or transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, except as permitted by the UK Copyright, Designs and Patents Act 1988, without the prior permission of the publishers.

5 Contents Preface viii 1 Principles of Law 1 Definition of collateral warranty 1 A comparison of contract and tort 4 Essentials of a contract 5 Form of contract 20 Construing a contract 22 Implied terms27 Lettersof intent 28 2 The Rise of Collateral Warranties 31 Negligence to D&FEstates LimitedandOthers v. Church Commissioners for EnglandandOthers 36 Murphy v. BrentwoodDistrict Council to Contracts Rights of Third Parties) Act The background 47 Contracts Rightsof Third Parties) Act Aspects of the Act 56 Using the Act or not using the Act? 59 4 Assignment and Novation 64 Future purchasers and tenants 64 Assignment 64 Prior equities70 Restrictions on assignment 71 Novation 80 5 Reasonable Skill and Care and Fitness for Purpose 83 Reasonable skill and care 83 Fitness for purpose 88 Dwellings93

6 vi Contents 6 Damages and Limitation of Action 94 Damages94 Expectation interest and reliance expenditure 108 Mitigation and assessment 112 Assignment 117 Contribution and apportionment 125 Limitation of action Developers, Tenants, Purchasers and Funds 134 The position of a developer 134 The position of a tenant 137 The position of a purchaser 143 The position of the funding institution 145 Obligationsto enter into collateral warranties 147 JCT enabling clauses Insurance Implications 153 Principles of professional indemnity insurance 153 Disclosure of collateral warranties 155 Particular insurance problems 157 Other mattersof concern to insurers 161 Policy endorsements for collateral warranties 162 Problemson changing insurers Typical Terms 167 General considerations 167 Typical terms174 Contractorsand sub-contractors 199 Guaranteesof obligationsunder warranties Practical Considerations 201 Doesa warranty have to be given? 201 Commercial balance 203 Legal costs and consideration 203 Negotiating and insurance 204 Warrantiesmust be executed 204 The givers, receivers and contents of warranties 205 Standard formsof collateral warranty 207 Commentaries Other Solutions: Present and Future 228 Possible solutions ± the present 228 Possible solutions ± the future 234 Appendix 1 Housing Grants, Construction and Regeneration Act

7 Contents vii Appendix 2 The Law Commission Report No. 242: Privity of Contract: Contractsfor the benefit of Third Parties 245 Appendix 3 Contracts Rightsof Third Parties) Act Appendix 4 Appendix 5 Appendix 6 Appendix 7 Appendix 8 CoWa/F: The BPF, ACE, RIAS, RIBA, RICS, Form of Agreement for Collateral Warranty for use where a warranty isto be given to a company providing finance for a proposed development Third Edition, 1992) 256 CoWa/P&T: The BPF, ACE, RIAS, RIBA, RICS, Form of Agreement for Collateral Warranty for use where a warranty isto be given to a purchaser or tenant of premises in a commercial and/or industrial development Second Edition, 1993) 263 MCWa/F: The JCT Standard Form of Agreement for Collateral Warranty for use where a warranty is to be given to a company providing finance funder) for the proposed building works by a contractor 2001 Edition) 269 MCWa/P&T: The JCT Standard Form of Agreement for Collateral Warranty for use where a warranty isto be given to a purchaser or tenant of building worksor part thereof by a main contractor 2001 Edition) 281 MCWa/F/Scot Funder): The Scottish Building Contract Committee Form of Agreement for Collateral Warranty for use where a warranty is to be given by the main contractor to a company providing finance funder) for proposed building workslet or to be let under certain SBCC main contract forms November 2001) 291 Appendix 9 MCWa/P&T/Scot Purchaser and Tenant): The Scottish Building Contract Committee Form of Agreement for Collateral Warranty for use where a warranty isto be given by the main contractor to a purchaser or tenant of the whole of part of the building s) comprising the works which have been practically completed under certain SBCC main contractsforms November 2001) 306 Table of Cases 320 Table of Statutes & Statutory Instruments 331 Index 334

8 Preface Since the first edition of this book, there have been some immensely important developmentsin the law relating to collateral warrantiesand the parties who make use of them. Those developments are in statute, case law and practice. Asto statute, in 1999 Parliament brought into being a radical new Act: The Contracts Rights of Third Parties) Act. It has created, for the first time in English law, the possibility, in certain circumstances, that parties who are not themselves parties to contracts can enforce those contracts for their own benefit. Prior to that Act, usually, only a party to a contract could sue and be sued on the contract. That ancient rule of privity of contract has, therefore, been very substantially and fundamentally amended. There are some lawyers who are now beginning to think that the rights created by this new Act may enable some collateral warranties to be avoided. These developmentsare so important that the whole of Chapter 3 isdevoted to it in this second edition, including a discussion about the possible practical uses of the Act on development projects. As to case law, the House of Lords have handed down some very important decisions in recent times, expanding and explaining the extent of `third party remedies' in the absence of or indeed the replacement of, the contractual solution and clarifying the principles relating to assessment of damages on assignment. These cases are Linden Gardens Trust v. Lenesta Sludge Disposals, St Martins Property Corporation v. Sir Robert McAlpine & Sons, AlfredMcAlpine Construction Ltdv. Panatown, Henderson v. Merrett Syndicates and White v. Jones. These cases deal with the concepts of recovery of third party loss and a modern statement of the elements of tortious duty: the assumption of responsibility. We have also considered cases such as the House of Lords decision in Investors Compensation Scheme Limited v. West Bromwich Building Society, which set out the current judicial thinking on the formation and interpretation of contract. Asto practice, people involved in collateral warrantieshave a much better understanding of the issues. Collateral warranties are being used, not just as contracts that are collateral to other contracts, but to create primary contractual obligations. An example of that approach is the now almost universally used right, created in collateral warranties, for the benefit of a funder of a project to `step-in' to the project as principal in the event of the developer being in default of the funding agreement. There is also now an increasing trend for the givers of warranties to have their obligationsunder the warrantiesguaranteed by their parent companies. Since the mid 1980s, the use of collateral warranties has been growing

9 Preface ix in the United Kingdom and that growth rapidly accelerated after the House of Lords decision in D. & F. Estates Ltd& Others v. The Church Commissioners for England& Others in 1989 and Murphy v. Brentwood District Council in Those cases have had the effect of substantially removing the prospects of tenants and purchasers bringing successful actions in tort and in the absence of contract) in respect of the consequences of defective design and construction on projects. One of the side effects of the enormous growth in the use of collateral warrantieshasbeen the attempt by each of the partiesinvolved to try to have their own interests dominate in the negotiation process. Inevitably, this has produced a plethora of non-standard forms of warranty, some as short as one page and some occasionally reaching 40 pages or more. Those vested interests have made the production of widely acceptable standard forms of warranty very burdensome for those who have tried. At the time of writing the first edition of this book, there was only one standard form in England and Wales, CoWa/F. That form took three yearsto agree. The eleven yearsbetween the first and second editionsof this book have witnessed the publication by representative bodies of the construction industry of new standard form warranties for different procurement routes, the latest being the forms published in the autumn of 2001 by the JCT for main contractors and subcontractors. A detailed commentary on these forms is set out in Chapter 10. There is one particular issue, which we have not addressed in this book, namely incorporating a power of attorney into a contract to enable the employer to execute a collateral warranty himself where the other party fails to do so. Commercial issues aside, the legality and effect of such powers is a thorny issue, and, rather than attempt to rehearse the arguments here, we felt that our readers would be better served consulting specialist literature on the subject, in particular, Aldridge, Powers of Attorney 8th edn, 1991). Our purpose in writing this second edition, as it was with the first edition, hasbeen to try to explain the law relating to collateral warranties, the developments in the law of privity of contract and the issues that arise in drafting and considering collateral warranties and third party rights, so as to demystify the subject and to clear away some myths. We hope that we have succeeded. Whilst we have sought to explain the law and the issues as we see them, a book is no substitute for good legal advice in the area of collateral warrantiesand third party rights. We are grateful to Lucy Welsh and Kay Oliver who have done much of the typing for this second edition, and to all those who encouraged us to embark on thissecond edition. In particular, we thank Julia Burden, our commissioning editor from Blackwell Publishing, who has been inordinately patient with usduring the lengthy preparation of thisbook. We are also grateful to Emma Le Breton for her input to the research and to Tom Wrzesien, Chloe Shanely and Nicholas Lane of Winward Fearon who also did research. Thanks are also due to our partner, Michael Harlow of Winward Fearon, for hisinput on landlord and tenant law;

10 x Preface Brandon Nolan of McGrigors, Solicitors, Edinburgh, for his assistance on some aspects of the law of Scotland; Bob Ferguson of AON Limited, insurance brokers, for his input on some of the insurance aspects of collateral warranties; Paul Miller of Morgan Cole for permission to make use of hisletter dated 3 December 2001 in relation to Rockwool Limited and their mineral wool product; and Charmian Martin of The Wren Insurance Association Limited for some input on that mutual insurance company's approach to collateral warranties. Notwithstanding all that input, the views expressed in the book are our views. We are pleased to acknowledge the kind permission of the following, who own the copyright, to reproduce their publications: The British Property Federation, The Association of Consulting Engineers, The Royal Incorporation of Architects in Scotland, The Royal Institute of British Architectsand the Royal Institution of Chartered Surveyorsto reproduce the Formsof Agreement for Collateral Warranty CoWa/F and CoWa/ P&T); the Joint ContractsTribunal to reproduce Standard Formsof Agreement for Collateral Warranty MCWa/F and MCWa/P&T); the Scottish Building Contract Committee to reproduce Standard Forms of Agreement for a Collateral Warranty by a main contractor MCWa/F/ Scot Funder) and MCWa/P&T/Scot Purchaser and Tenant)); and Butterworth & Co Publishers) Limited who kindly gave permission to reproduce some extracts from Volume 22 of The Encyclopaedia of Forms and Precedents, Landlord and Tenant: Business Tenancies, which sets out some examples of typical repairing covenants in leases. We have tried to state the law in England and Wales as at 1 January We have derived considerable assistance from the cases from Scotland and Northern Ireland that are referred to in the book; we anticipate that readersfrom Scotland and Northern Ireland, where the practice in relation to collateral warrantiesisvery similar to England and Wales, will find the text very useful. Winward Fearon David L. Cornes 35 Bow Street Richard Winward London WC2E 7AU February 2002