A re-appraisal of collateral contracts by David Simons.
From the late 1980's there has been a growth in the popularity and use of collateral warranty agreements in connection with building developments. In my work, as a Quantity Surveyor, 1 have spent many hours vetting such documents and also clarifying their implications. This article is my analysis of the practical implications for contractors and sub-contractors.
Warranties seek to give purchasers, or tenants who are not direct parties to a construction contract, actionable contractual rights against the builder or designer for defective work. Without these warranty agreements in place, the purchasers or tenants would only have limited remedies in the tort of negligence where building defects cause other physical damage.
The existence of a defect per se, is not normally actionable in negligence in the absence of a special relationship of "reliance" between the parties, as it amounts to pure economic loss. This is a position which was clarified in the landmark case of Murphy - v - Brentwood District Council (1990) All ER 908 and as a result, the use of collateral warranty agreements in parallel with main construction contracts, has become commonplace.
As a consequence of this trend, most of us now think in terms of formally executed documentation when collateral agreements are mentioned, but it is worth re-visiting a leading case on the subject and considering two more recent cases, which all confirm that in appropriate circumstances, such contracts may in fact be implied.
In Shanklin Pier Limited - v - Detel Products Ltd (1951) 2KB854, the pier company, relying upon representations made by the defendant paint manufacturer, specified a particular type of paint for the redecoration and protection of their pier.
The redecoration work was carried out by a painting contractor who purchased paint from Detel Products and when the product later proved to be defective and failed, the contractor could point to compliance with the pier company's specification, as a defence. Also, Detel argued that as they had not supplied paint to the plaintiff under a purchase agreement, there was no contract with Shanklin Pier, who could not therefore recover damages.
However, the court decided that collateral to the redecoration contract, there was an implied agreement between the plaintiff and the defendant, whereby the choice of the defendant's product was made in response to their (false) representations as to* its suitability. Shanklin Pier Ltd therefore recovered damages for breach of this collateral undertaking on the part of the paint supplier.
Those of us who have been involved in the preparation of tender documents or in tendering, will be familiar with the usual disclaimer '....the Employer is not bound to accept the lowest or any tender....' which accompanies tender invitations with monotonous regularity. After all, an invitation to tender is only an invitation to submit an offer and an offer may or may not be taken up. Or is there more to it than this suggests?
In Blackpool and FyIde Aero Club Ltd -v- Blackpool Borough Council (1990) 3 All ER 25, the Council had previously granted the plaintiffs a concession to operate pleasure flights from Blackpool airport. However, when the time for renewal came, the Council invited tenders for the concession which were to be received by 12 noon on 17th March 1983. The defendant's letter box was supposed to be emptied by 12 pm each day, but was not emptied on the final day and the Club's tender was rejected as being late. The Club maintained the Council had warranted that if a tender was returned by the deadline, it would be considered. They sought damages in contract for breach of that warranty, and in the common law of negligence for breach of the duty they claimed was owed to them.
It was held by the court that the form of the invitation to tender was such that, provided an invitee submitted his tender by the deadline, he was entitled, under an implied collateral contract, to be sure that his tender would be considered with any others, notwithstanding the usual disclaimer as to acceptance.
The plaintiffs were awarded damages equal to their tendering costs and the award of damages did not take into account potential success or failure of the tender. It is clear that the court applied similar reasoning to the Shanklin Pier case, albeit in circumstances where the "parallel" main contract did not materialise and no third party was involved.
Recently, similar principles were applied again in the case of George Fischer Holding Limited - v - Multi Design Consultants & Others (1998) CILL 1362, which concerned a building development local to our Coventry office.
The dispute arose from the defective design of a warehouse roof which leaked causing substantial damage, due to the insufficiency of end lap joints in the sheet coverings. The warehouse was built in 1989/90 under a JCT'81 design and build contract by an organisation called Multi Group, and Multi Design Consultants (MDC) were a member of the Multi Group responsible for the design.
However, MDC left the Multi Group by way of a management buy out in 1991 and Multi Group became insolvent and was dissolved in 1996. At the time Fischer Holding discovered the defect in their roof, the original design and build contractor had therefore disappeared and only MDC, with whom they (apparently) had no contractual relationship, were available to blame for the problem.
Undaunted, the plaintiff commenced litigation against MDC, arguing that a collateral contract existed with MDC who, as the contractor's designeir, warranted the sufficiency and operational performance of the project works. For good measure, Fischer Holding also sued their own consultants, Davis Langdon and Everest, for breach of Employer's Agent duties under a separate written agreement.
In finding Multi Design Consultants liable for breach of a collateral contract, His Honour Judge Hicks QC took into account the following facts and circumstances:
The design and build main contract had come into existence with direct input from MDC, who had originally advised, and carried out certain preliminary design tasks for, Fischer Holding.
Fischers had at first requested MDC to be their contractor, but had subsequently followed MDUs advice that the undertaking should involve Multi Group as main contractor. MDC's design fees were then to be met by Multi Group, as part of an overall "Guaranteed Maximum Price" arrangement for the project.
Fischers, relying upon their pre-existing relationship with MDC, had sought further clarification of Multi Group's role as contractor and there was evidence of Fischer's continuing wish to deal with MDC on design matters, notwithstanding their direct contractual relationship with the Multi Group.
The judge confirmed that the collateral contract involved MDC in exercising due skill and care and warranting the operational performance of their design. However, there was no obligation to inspect or supervise the works as this was the responsibility of Davis Langdon and Everest as Employer's Agent. DLE were also held to be in breach of their consultancy agreement in this respect. There are important lessons which we can learn from these cases. Clearly, where there is evidence of an exchange of promises, or a reliance upon advice in exchange for some benefit, then a collateral relationship can arise in connection with a construction contract involving separate issues of liability. This 'parallel' contract can involve parties who are not in a direct relationship under the main contract and it's existence can often be inferred from surrounding facts and circumstances. Thus not all collateral contracts require formal, written agreements but broken promises will often nevertheless, return to bite the unwary!
David Simons, is a Senior Consultant based at Trett Consulting's Kenilworth office.