Executing collateral warranties

United Kingdom
Emma Dalton considers the use of powers of attorney in collateral warranties

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 Company
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 warranty.

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 originally intended.

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 ead@cms-cmck.com or on +44 20 7367 3524.