The Technology and Construction Court (TCC) handed down a decision in the recent case of Liberty Mercian Ltd vs Cuddy Civil Engineering (Employer vs Contractor). The decision sends a very important warning to Contractors that Collateral Warranties must be taken seriously and hints that the court will go the extra mile to enforce collateral warranties, even in situations where a party has already endeavoured to do so.

Background.

This latest decision follows a series of litigations between the parties. Last year in its previous decision, the TCC found that:

  • an obligation on a third party to provide a collateral warranty under a contract survives termination of that contract, put simply that the obligation remains even if the contract is terminated; and
  • an order to provide a collateral warranty will usually not be made if it is impossible for such an order to be performed.

In this case, the contractor, had an obligation under contract, but had failed to provide the employer, with the necessary collateral warranties from a civil engineering subcontractor, appointed by the contractor.

When the court had provided this earlier decision it did not have sufficient evidence to decide whether or not it would be possible for the contractor to obtain the warranties under the court’s order.

Despite this lack of evidence of potential success, the TCC ordered the Contractor to use its “best endeavours” to obtain the warranties. The contractors best endeavours proved unsuccessful. At the time the subcontractor was in liquidation and the liquidator had argued against execution of the warranties. Not long after this the subcontractor was dissolved.

Current Ruling

The case came before the court again this year. Even though the subcontractor had been dissolved, the Employer applied to the court for an order compelling the Contractor to acquire the necessary collateral warranties.

If the Employer was successful the contractor would need to apply to have Quantum (the subcontractor) restored to the Companies Register. Subsequently the contractor would need to commence its own court action to force Quantum’s liquidator to execute the warranties.

The Contractor argued it had employed its very best efforts to obtain the collateral warranties. Further that the Contractor should not have to fulfil such an obligation where it was unclear if there could be any benefit to the Employer, given the subcontractor was insolvent.

The court found in favour of the Employer and ordered the Contractor to acquire the necessary warranties from the Subcontractor/Liquidator.

In Summary

I am sure Employers throughout the land will breathe a collective sigh of relief. Despite lacking any tangible evidence of success, with the exception of the possibility of the subcontractor perhaps having some Professional Indemnity Insurance, the TCC decided that the Contractor was still obliged under the contract to obtain the warranties. There was a chance after all that in the event there was some PI Insurance this could in theory respond to the claims under the collateral warranties.

It is interesting to note this decision and is a stark warning to Contractors and dare I say it, Liquidators that they should ensure the terms of any collateral warranties are in place at the start of a contract. When you think of the costs of having to pursue erstwhile consultants, contractors or in extreme circumstances their liquidators, it really makes sense.

Insurance companies will no doubt find this development of interest too.

I thank you for taking the time to read this article and I hope you found it useful. Please feel free to connect with me, like, comment or share this article.

Wishing you the very best wishes for the forthcoming festive season.

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