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 Construction or Works Project 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 institutes for lending purposes, the buyers of
the property(ies) 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 of 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 as to what
defines a "pure economic loss" to the extent that buyers or lessees
of a property within 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 the
original Construction or Works Project contract.
A collateral
warranty is a separate and distinct contract granting rights to third parties
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 that enables buyers or lessees of a property to claim
damages against the professional consultants or contractors in cases of
negligence, amongst others.
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, it would need to state expressly within
the Construction or Works Project contract that professional consultants or
contractors must provide third-party collateral warranties, which may be
provided during or after the Construction or Works Project 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), amongst others. However, it is common
for major contractors to use their own generic forms of collateral warranty.Additional
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