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Collateral warranties are just waiting to be awoken

legal matters

'Has anyone ever successfully sued on a collateral warranty? , ' leading construction lawyer Ann Minogue recently bewailed in a well-known industry publication. The reason for her complaint was that rounding up warranties from all those involved in a complex project is a time-consuming task. What is the point, she wondered, if nobody bothers with them afterwards.

The need for collateral warranties sprang from the line of cases which culminated with Murphy v Brentwood (1991).

Before then, the age-old problem, that the ultimate owner or occupier of a building seldom had a contract with those who designed or built it, had been solved by the law of tort. It did not matter that those saddled with a defective building had no contractual claim, because those responsible for the defects owed them a duty of care.

If the defects were attributable to negligent design or construction, the owner or occupier could still recover the cost of repairs. The House of Lords put an end to all that when it decided in Murphy that, in general, local authorities, contractors and construction professionals owed no common law duties to the ultimate user.

Needless to say developers did not, overnight, decide that they would hang on to their buildings or do away with the notion of leaseholders' full repairing obligations. Nor were purchasers particularly keen to assume responsibility for all the defects that might be lurking, latently, in their new building. Thus the collateral warranty was born - a contractual arrangement that bridged the gap between a project's original providers and its ultimate consumers.

By the mid 1990s collateral warranties had become the hot topic, with sell-out seminars bringing legal draughtspeople up to date with the myriad ways of protecting the building-users, while not overexposing the building- producers. Since then collateral warranties have become a fact of life, sitting forgotten in filing cabinets across the country. Until the roof starts to leak, that is, when the warranties are pulled out and pored over to see whether they can, indeed, be relied upon.

It is said, no doubt apocryphally, that it takes, about six years for latent defects to manifest themselves. This six-year period coincides with the ordinary limitation period for claims for breach of contract. Since Murphy, most contracts for sizeable projects, and their attendant warranties, are executed under seal, and have a 12-year limitation period. Consequently it seems that it now takes about 12 years for a building to fail, as was illustrated neatly by the recent Court of Appeal case of Northern & Shell plc v John Laing Construction (16.7.03).

The defendant contractor (JLC) built an office block for a developer in London's Millwall Dock. It was completed in 1989.

It was a term of JLC's contract that it would enter into warranties under seal with the purchaser and its successors. In January 1990 JLC duly warranted that it had complied with the terms of the main contract. Eleven-and-a-half years later the building had changed owner and changed name. Furthermore the cladding had failed, with the result that the building was not effectively weatherproof or thermally secure.

In late 2001, the new owner claimed against JLC on the warranty. JLC argued that time started to run from the date of practical completion in May 1989 and that the claim was out of time. The claimant said that time did not start to run until the warranty was entered into in January 1990 and they were in time. They could not, they argued, have a claim before they had a contract.

The Court of Appeal held that it was clear that the parties intended that the warranty should be backdated to the date of practical completion and agreed that the claim was out of time.

The purpose of the warranty was plainly that the claimants should step into the shoes of the employer under the building contract, that had 12 years from practical completion within which to bring a claim. Although the warranty had retrospective effect, it still provided the certainty of the normal limitation period to both the contractor and the warranty holder.

So the answer to the opening lament is: 'They try, Ann, they try.'

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