Guide to Using the RIBA Professional Services Contracts 2018 - Other - Page 41
40 z
Guide to RIBA Professional Services Contracts 2018
can be agreed or, indeed, the Architect/Consultant may have had a bad experience
with the Contractor and wouldn’t want to work with them again. In such cases, the
Architect/Consultant can, under the original PSC, decline the novation and terminate
the Contract by giving at least 7 days’ written notice and complying with clause 9.3.
Collateral Warranties
As part of the novation process, the Architect/Consultant may be asked by the
Client to agree and deliver a Collateral Warranty executed in favour of the Client on
terms to be agreed. Collateral Warranties were conceived to protect third parties
who do not have a direct contractual relationship, such as funders and tenants, a
contractual right to bring a claim to recover losses against any of the project team,
where otherwise there would not have been such a right, should a defect arise in the
building. They are used as a supporting document to a primary contract where an
agreement needs to be put in place with a third party outside the primary contract.
It is important to note that the existence of a warranty does not guarantee that
any claims made will be successful as it still has to be proven that the individual
warrantors were responsible for the defect that caused the loss.
Collateral Warranties are necessary to protect third parties with an interest in the
Project because of the law of ‘privity of contract’. The legal principle of ‘privity of
contract’ effectively prevents third parties relying on other people’s contracts.
This means that unless, say, a purchaser, lender, tenant etc. is actually party
to the Contract or section 1 of the Contracts (Right of Third Parties) Act 1999
(the Third Party Rights Act) applies, they cannot enforce a term of a Contract
between other parties such as the Architect/Consultant and a Client or Contractor.
This can cause problems in the context of the development of a building where,
for example, a tenant with a lease of a new build property does not have a
contractual relationship with the project team that designed and built the property.
If, subsequently, a defect arises in the building due to the negligence of the Design
Team, the main contractor or a sub-contractor, then without the further contractual
protection of a Collateral Warranty, the tenant will not be able to bring a claim to
compensate it for the fact that, under the terms of its lease, the tenant is liable to pay
for the costs of repair. In this case, the tenant does not want to be out of pocket and
wants to be able to claim its losses directly from the person who caused the loss,
such as the Architect/Consultant or the Contractor. Without a Collateral Warranty or
third party rights the tenant may be unable to make an effective claim. The alternative
would be that the tenant would have to make a claim in tort but it is unlikely that this
would succeed. The law of tort is the branch of civil liability law under which people
can be sued for breach of obligations imposed by law rather than by Contract. In
England the law of tort does not generally allow a claim for pure economic loss, such
as for damage caused to a building by a defect in that building.
Any Collateral Warranties should be added to the PSC as a numbered appendix.
See 4.14 Supplementary Agreements.
Do we need Collateral Warranties?
Although it is usually essential for the types of third parties outlined above to
be provided with contractual protection in relation to professional services and
construction projects, Collateral Warranties do have a number of disadvantages. The
most significant is the fact that producing of warranties for each party connected
with the project requires the drafting and negotiation of many documents. This can
be extremely time consuming from a solicitor’s perspective, which inevitably leads to
significant costs being incurred by the Client.
The alternative of invoking the Contracts (Rights of Third Parties) Act 1999 allows the
underlying contract to grant rights in favour of third parties who are not signatories to
it, rather than producing separate documents that are collateral to that contract.
40
