REUTERS | John Kolesidis

Ask the team: the building contractor has been replaced, do I need new sub-contractor and professional consultant collateral warranties?

The answer to our subscriber’s question depends on the precise circumstances. This blog post considers the situation on a commercial property development, where works are ongoing and collateral warranties have been provided to a landlord, funder or tenant.

The nature of a collateral warranty

A collateral warranty is usually a stand-alone document, in so much as it is a distinct contract in its own right. However, its scope is typically established by reference to other documents. The most important such document in this case is the underlying sub-contract or professional appointment.

Key questions

The key questions is this type of situation are:

  • What is the precise wording of the collateral warranty? Most collateral warranties define terms like Building Contract, Contractor and Sub-Contractor or Professional Consultant. Do those definitions work in the new contract structure? Can they be read to include a new Contractor and Building Contract? Is that a definite interpretation or subject to argument?
  • Does the collateral warranty’s wording fit in with the changed contractual structure? In particular:
    • Is the replacement contractor entering into a new contract with the sub-contractor or professional consultant? This may provide a good indication of the wider contractual situation and also impact on whether the precise wording of the collateral warranty captures the new situation.
    • How is the replacement contractor being engaged? Is the original building contract being novated to the replacement contractor or is an entirely new contract being negotiated and executed. Again, this may impact on how a defined term such as Building Contract can be interpreted in the collateral warranty.

If in doubt…

If there is any doubt, it may be best to procure a fresh collateral warranty for the works or services provided under the new contract structure. Even greater comfort would be provided by a new collateral warranty that expressly warranted works or services provided under both the original and replacement contractors.

Is this practical?

In practice it can sometimes be difficult to procure sub-contractor collateral warranties, but that may be feasible in this situation because:

  • The works are likely to be ongoing, so the sub-contractor or professional consultant has an incentive for co-operating (as does the replacement contractor).
  • The sub-contractor or professional consultant may already be negotiating or executing new contract documents, so an additional collateral warranty may not be a great additional demand, particularly if it is in substantially the same form originally agreed for the project.

Original collateral warranty may remain valuable

Lastly, it is important to remember that the original collateral warranty should not be discarded, even if it does not cover the new contract structure. It may still provide comfort for work done under the original contract structure. Depending on how far the project has progressed, that may be of some value. In some circumstances, a new collateral warranty may only cover the works or services going forward and the original collateral warranty may be the beneficiary’s only protection for past works or services.

One thought on “Ask the team: the building contractor has been replaced, do I need new sub-contractor and professional consultant collateral warranties?

  1. One the one hand, the “if in doubt” approach is appealing whereby a new collateral warranty is given by the sub – contractors and consultants to cover their liability under their sub – contracts and appointments in respect of both the replaced contractor and the new contractor.

    On the other hand, however, the sub – contractors and consultants may justifiably refuse to increase liability by giving a new collateral warranty if they are not contractually obliged to do so. They have already given one. They may say any risk of their previous and continuing performance / non – performance in relation to the new contractor, not covered by a collateral warranty, is a developer’s risk. Works are ongoing and the sub – contractors and consultants’ rights of performance and payment cannot be prejudiced by demands for a new warranty which are out with the sub – contracts / appointments. Having said that, they may negotiate as they may want the next job (if there is one) particularly in the current market!

    Also, if the original warranties are not to be discarded then the new warranty should contain a clause dealing with priority of the new warranty in case of any conflict or ambiguity with the original.

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