A recent decision in the Technology and Construction Court suggests that the court will go to great lengths to enforce collateral warranty obligations – even where the defendant has already endeavoured to do so.
In the recent case of Liberty Mercian Ltd v Cuddy Civil Engineering, the Technology and Construction Court has given further consideration to the circumstances in which it will order a party to obtain collateral warranties that it has agreed to provide under a construction contract, but has failed to do.
The decision suggests the court will go to great lengths to enforce collateral warranty obligations, even where the defendant has already exercised its best endeavours or where the company to give the warranty is insolvent or dissolved.
The court’s decision is the last in a series of litigation between the same parties.
A decision was given in the litigation last year, where the TCC found that:
- an obligation on a third party to provide a collateral warranty under a contract survives termination of that contract, meaning 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.
The facts of the case were that the contractor, Cuddy, had promised but failed to provide the employer, Liberty Mercian, with collateral warranties from Quantum, a civil engineering subcontractor appointed by Cuddy.
At the time of the earlier decision, the court did not have sufficient evidence to decide whether performance of an order to obtain the warranties would be impossible.
It therefore ordered Cuddy to use its best endeavours to obtain the warranties, but Cuddy’s attempts were unsuccessful. Quantum was in liquidation at the time and its liquidator had used a range of arguments to refuse execution of the warranties. A short while later, Quantum was dissolved.
The matter was brought back before the court again recently and, despite Quantum’s dissolution, Liberty Mercian applied for an order requiring Cuddy to obtain the relevant warranties.
Such an order would require Cuddy to apply to have Quantum restored to the Companies Register and then commence its own court proceedings to compel Quantum’s liquidator to execute the warranties.
Cuddy argued it had already exercised its best endeavours to obtain the warranties and that it should not be put to such lengths in circumstances where the benefit to Liberty Mercian of warranties from an insolvent company was unclear.
The court accepted Liberty Mercian’s submission and ordered Cuddy to obtain the promised warranties from Quantum.
Obligations to be enforced
Central to the court’s reasoning was the prospect that Quantum may have had professional indemnity insurance, which would respond to claims under the collateral warranties.
The court described the position in relation to the insurance policy as “far from clear”, but was nevertheless prepared to make the order in the absence of any clear evidence as to whether the collateral warranties would serve any useful purpose.
The court’s decision will be welcomed by employers, who can now have faith that obligations to provide collateral warranties will be robustly enforced by the TCC.
Contractors would be well advised to ensure that collateral warranty obligations are complied with at the outset of a project to avoid the prospect of being forced to pursue more reluctant consultants or sub-contractors (or their liquidators) at a later date.
Adrian Bell is a partner and Brad Woodroffe is a senior associate at CMS Cameron McKenna LLP