Emma Dalton considers the use of powers of attorney in
Of concern to both developers and third parties to
a development is the protection to be afforded to them in the event
of a breach by a consultant, contractor or sub-contractor of its
contract if they are not parties to that contract.
Traditionally collateral warranties are procured
from the consultants, contractor and sub-contractors. An
alternative has been presented by the recent Contract (Rights of
Third Parties) Act 1999 which provides that third parties may
directly take the benefit of and enforce rights under contracts.
However, the parties to the contract may choose to restrict or
exclude the rights which would otherwise be granted to third
parties by the Act, in which circumstances collateral warranties
are still likely to be sought.
As the recent case of White Property
Limited v Birse Construction Limited shows, if collateral
warranties are to be used, regard should be had to the consequences
in the event that a party fails to provide a collateral
In White v Birse, Wilcox J held that a
contractor which, in breach of contract, had failed to provide
collateral warranties, was not liable in damages to a company which
retained the development in a rising property market and so
successfully mitigated its losses that it suffered no loss.
In that case White was the developer of a
shopping centre and Birse was the contractor. When a dispute arose
over delays and disruption to the project, Birse refused to
finalise the remaining warranties and sub-contract warranties until
all sums due to it under the contract were paid.
In the absence of warranties, the property was
valued at £45,000,000, representing a diminution in value of
£2,500,000. White resolved to mitigate its loss by retaining the
property and receiving rental income.
Having obtained declarations that Birse was obliged
to provide the warranties upon White's request, White claimed
£2,500,000 for the diminution in the value of the property and a
further sum of £1,129,507 which it claimed it would have received
in excess of the rental income had the property been sold as
Rejecting the claim for damages, Wilcox J held that
the capital appreciation of £2,885,000 upon the property and rental
income of £5,104,941 received as a consequence of White's efforts
at mitigating its losses in the face of Birse's breach were
sufficient to extinguish those losses entirely.
White v Birse illustrates the necessity for
consideration to be given by developers to the consequences of a
party's failure to provide warranties in accordance with that
contract. Whilst it is possible to obtain declarations from the
court that a party is obliged to provide warranties, the delay
involved can substantially impact upon the developer's
opportunities for managing the property and the varying fortunes of
the property market cannot be relied upon to ameliorate the
consequences of the breach.
Although a claim for specific performance might
seem an attractive alternative, the appropriate remedy is likely to
be in damages. Even assuming that the conduct required of a
reluctant party who is obliged to grant a warranty to be the simple
act of executing an agreed form of collateral warranty, it is
anticipated that a court would have little difficulty in finding
that damages provided an adequate remedy. It is very unlikely that
a court would be dissuaded from such a course by the mere
difficulty of establishing the reduction in the value placed by the
intended recipient of the warranty upon its interest in the
property. Moreover, in the event that a party so successfully
mitigates its loss as to extinguish it entirely, that event would
not render damages an inadequate remedy, rather the remedy of
damages would remain the appropriate one, with an applicable
quantum of zero.
As a pre-emptive alternative, a provision can be
drafted into a contract providing the developer with a power of
attorney to execute warranties upon behalf of the party giving the
warranty should that party subsequently fail to provide warranties
in breach of its obligations. The power may take a number of forms,
ensuring as wide or as narrow-ranging a power as the parties may
agree and providing a specific period within which the warranties
must be provided.
The provision of a power of attorney not only
creates the certainty that a warranty will be obtained, but it also
reduces in the time delay which may be engendered by a party
reluctant to grant a warranty, for the time expressly required to
elapse before the employer may execute the warranty on that party's
behalf will inevitably be considerably less than the time spent
vainly waiting for the return of the executed warranty, attempting
to obtain a declaration from the court that such a warranty should
be provided and pursuing the execution of the warranty thereafter.
Additionally, by ensuring that no loss will be suffered as a
consequence of the party giving the warranty's failure to
cooperate, it eliminates the need to bring a claim for damages, as
White would no doubt appreciate.
For further information please contact Emma at
firstname.lastname@example.org or on +44 20 7367 3524.