The AGS Loss Prevention Working Group has just published another paper for the Loss Prevention Guidance 2017 document, namely “Loss Prevention Guidance 024 – Collateral Warranties”. This gives guidance on the use of collateral warranties to confer rights related to the main contract of appointment on persons or organisations who are not party to that contract, ie third parties.

Many AGS members who do not get involved in the contracts and legal side of geotechnical engineering and geoenvironmental work will not be familiar with the use of collateral warranties. This article explains what collateral warranties are for the benefit of AGS member organisations and their employees who are not contractual or legal specialists.

A collateral warranty is a contract between two parties, separate from and alongside contracts for work, services or supply (the ‘principal contracts’). Collateral warranties create direct contractual links between third parties (such as future occupiers of buildings and funders of projects) and the consultants or contractors with whom such third parties would ordinarily have no contractual link. A collateral warranty gives a third party (or several third parties) rights to sue when they might not otherwise have that right.

It provides for liability to third parties in respect of non-fulfilment or defective performance of the principal contract. The beneficiary of the collateral warranty is not normally the same person as the beneficiary of the principal contract, but the person undertaking the work, service or supply obligation under the principal contract undertakes the liability under the contractual warranty to the third party.

An everyday example of a collateral warranty is the manufacturer’s guarantee that comes with electrical goods purchased from a shop. The manufacture who originally produced the goods is not a party to the contract of sale between the shop-keeper and the purchaser. However, the manufacturer promises the consumer that if the goods are not satisfactory he will put the problem right or provide compensation. The guarantee is a legally binding contract separate from, and alongside (ie collateral to) the contract between the consumer and the shop-keeper.

The manufacturer can use the guarantee to define and limit his liability, subject to the consumer’s statutory rights under the Sale of Goods Act (1979). It can also help to reduce the likelihood of the shop-keeper and intermediate suppliers becoming involved in disputes over liability, and hence reduce or eliminate any additional legal costs that have to be borne eventually by the manufacturer if his goods are found to be faulty.

An example related to the work of AGS members would be where they have undertaken work such as a ground investigation for a developer and are subsequently requested to enter into a collateral warranty by the developer who wants his purchasers and tenants to have a right of action against the designer and builder of the development should some defect be found in the future. This may assist the developer in obtaining funding for the project and assist in selling or leasing the site when work has been completed.

Other ways in which third parties can gain rights of action against AGS members are the use of the Contracts (Rights of Third Parties) Act 1999 and by reassignment of liability by means of a letter of reliance. More details of these and what AGS members should do to limit their exposure to business risks when entering into these agreements are described in the AGS LPG 024.
AGS Loss Prevention Guidance is available for free for AGS Members on the AGS website here. For non-members, the AGS Loss Prevention Guidance costs £50 + VAT and can be downloaded here.

This article was contributed by David Hutchinson, AGS Honorary Member.