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Collateral warranties: will the courts force pen to paper?
Real Insights - Property Update

Real Insights - Property Update

Author
Alex Barker
Date
30 June 2016

In construction contracts, parties (A and B) commonly agree that B will enter into a collateral warranty with a third party (C). If B refuses, it is clearly in breach, but what is A's remedy? The Scottish Court of Session recently handed down an encouraging judgment for those in A's position.


Collateral warranties: will the courts force pen to paper?

In construction contracts, parties (A and B) commonly agree that B will enter into a collateral warranty with a third party (C). If B refuses, it is clearly in breach, but what is A's remedy? The Scottish Court of Session recently handed down an encouraging judgment for those in A's position.

Facts

Kier Construction -v- WM Saunders concerned a leisure centre in Dumfries. The Council appointed Kier as contractor, who agreed to procure collateral warranties from the consultants it engaged. A collateral warranty is a contract in which B promises to C that B will comply with its contract with A. They provide certainty to the Cs of this world by giving them a direct contractual relationship on which they can sue.

Kier appointed WMS as a consultant. WMS agreed to provide a signed collateral warranty in the Council's favour. For reasons unknown, Kier failed to obtain the signed warranty from WMS. The leisure centre was completed but defects subsequently arose and the Council sought £5.6 million in damages from Kier, who sought to involve and hold liable WMS.

In early 2015 Kier finally asked WMS to sign the collateral warranty. Following a period of non-compliance from WMS, Kier commenced proceedings.

Decision

Kier sought "specific implement" ("specific performance" in England and Wales), where the Court orders a party to carry out a specific act (here, to execute a contract). As an equitable remedy, this is always at the Court's discretion, which is rarely exercised if damages would be adequate.

Lord Woolman held that the parties had clearly agreed that WMS would execute the warranty. Specific implement was therefore granted.

Implications

Whilst the general rule denying an equitable remedy where damages would be adequate remains good law, this suggests the Courts may be prepared to interpret damages as being inadequate in a wider range of situations.

Superficially, this case shows that parties promising to give warranties will be held to that promise. Pen will be forced to paper if necessary. However, effective contract management would surely have averted trouble had Kier obtained the warranty from WMS in advance of the project being completed. Unsurprisingly, it was difficult to secure WMS's compliance after defects had been revealed. Nonetheless, the decision should comfort building owners and developers, whose hopes of securing warranties in their favour have been boosted.