Within the UK, the
"privity of contract" doctrine prevents an outside party to a
contract from enforcing any contract terms. The parties named within a contract
may enforce the contract's terms and/or seek damages from any other parties
named in the contract for the failure to perform under the contract.
Within Construction or Works
Project contracts, the employer can enforce the contract terms with any party
named or obligated by the contract, such as structural engineers, architects,
or other professional organisations.
However, many other parties
may have a vested interest in the Construction or Works Project as it
progresses and after its completion, such as financial institutions for lending
purposes, the buyers of the property(s) or those to whom the property will be
leased.
These interests may exist
for some time after the completion of a Construction or Works Project,
especially in the areas of end-of-project snagging or defects that arise in the
property after a period.
Third parties, such as
buyers or the lessees of a property, will want to preserve their right to seek
damages in the event of their incurring a loss due to defects occurring in the
property from professional consultants or contractors who were involved in the
Construction or Works Project, where the professional consultants or
contractors were negligent in their performance in constructing the property or
undertaking the Works.
A limiting factor for buyers
or lessees of a property in their ability to seek damages from professional
consultants or contractors would be that they were not a party to the
Construction or Works Project contract. The buyers or lessees of a property may
have limited rights to undertake a tort claim if there is a reasonable chance
of proving a negligence claim caused by professional consultants or
contractors.
However, there are legal
limitations on what defines a "pure economic loss" to the extent that
buyers or lessees of a property in construction claims for injury might be
successful, subject to satisfying the requirements for a tort claim.
The cost of rectifying the issue that caused the injury would not be covered by a claim under tort. It is in the area of being able to claim for the costs of repairs to a property that buyers or lessees of property have an interest in if such a repair was caused by the professional negligence of the professional consultants or contractors during a Construction or Works Project.
As the buyers or lessees of a property were not parties to the original
Construction or Works Project contract, it would be unlikely that they could
bring a claim for the cost of repairs under that contract.
A collateral warranty is a
separate and distinct contract granting third parties the right to claim or sue
for damages where professional consultants or contractors have been found
negligent in their performance. The warranty sits with, but is usually
much shorter in content than the Construction or Works Project contract.
However, it (the collateral warranty) will be governed by the terms of the
Construction or Works Project contract.
The collateral warranty
provides a contractual link to the professional consultants or contractors
engaged in the Construction or Works Project contract. It enables buyers or
lessees of a property to claim damages against them in cases of negligence,
amongst other things.
Within the collateral
warranty, the professional consultants or contractors will warrant to vested
third parties that they have performed their obligations and duties in
accordance with the Construction or Works Project contract.
If there is a breach of the
Construction or Works Project contract by a professional consultant or
contractor, it would generally follow that a collateral warranty breach has
occurred. A collateral warranty effectively promises that professional consultants
or contractors will comply with the terms and obligations of a Construction or
Works Project contract.
“Pure economic loss” claims
limitations for claims made under tort do not apply to claims made under a
collateral warranty. Therefore, injury claims and claims for correcting
building defects can be made where collateral warranties are catered for under the
Construction or Works Project contract.
However, the construction or
works project contract would need to expressly state that professional
consultants or contractors must provide third-party collateral warranties,
which may be provided during or after the Project's completion.
Collateral warranty terms
and conditions exist within most Construction standard forms of contract, such
as the Joint Contracts Tribunal (JCT), the Institution of Civil Engineers (ICE),
and the Royal Institute of British Architects (RIBA). However, it is common for
major contractors to use their generic forms of collateral warranty.
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