Building projects: You may not have engaged them but you can sue them

20 March, 2011
by: Cripps Pemberton Greenish

If you haven’t got a contract you cannot sue on it. That much (reassuringly) is accepted by most. But it is not always obvious in which situations you do (or don’t) have a contract or indeed some other remedy. This is a particular issue in construction projects, and all the more so for “Interested Parties” – end users, and those financing them.

So what’s the problem?

Interested Parties (IP for short) are rarely signatories to the construction documents (the contracts and agreements that are entered into for the design and the construction of the development) but are often faced with problems when the construction is not up to scratch.  They can’t sue the designer or the contractor for breach of contract – because the IP doesn’t have a contract with them.  But surely they can sue for negligence instead?

The answer is generally no as the courts have held that only in very exceptional cases will an IP be able to do so. This means that unless the IP has the proper documents in place it will end up picking up the bill for rectifying the defect and will not have the chance to recoup its expenditure.

So what can be done?

The solution is to create a contractual relationship between the IP and the designers, contractors or subcontractors.

Collateral warranties have been used in construction projects for the past 20 years for precisely this purpose. In a properly documented project, collateral warranties should be available to all IPs from:

  • Professional consultants;
  • The main contractor;
  • Trade contractors if a main contract is not used; and
  • Design subcontractors.

Problem solved?

Not necessarily as collateral warranties can vary quite markedly in quality and this will affect the rights and the remedies available to the IP. As a rule of thumb, bespoke collateral warranties drafted by lawyers tend to give better cover than those produced by construction and property industry publishers.

The earlier the better.

Timing can be important.

If an IP acquires or agrees to acquire an interest in a development before the construction documents are agreed and signed then it should be able to influence the form of the collateral warranties it will receive. If the interest in a development is acquired after the development has started and the construction documents have been signed then it will be more difficult to do this.

Are they worth having?

It is sometimes argued by the parties giving the collateral warranties that they are ineffective and are not worth the paper they are written on.

The following case shows that this is not necessarily the case.

A tenant took occupation of a building in 1996. The building had been extensively refurbished and the tenant received collateral warranties from the main contractor appointed to undertake the works and various subcontractors appointed by the main contractor.

In 2006, 10 years after practical completion of the refurbishment works, the tenant had to replace corroded and rusty chilled water pipes in the building which it was liable to do under the terms of its lease.

The tenant was able to successfully sue both the main contractor and one of its subcontractors under collateral warranties given by both of them. In 2010, 14 years after practical completion of the refurbishment works, the tenant obtained judgment against them both for about £2.85 million.

Recent developments.

Further scope to protect an IP rests with The Contracts (Rights of Third Parties) Act 1999.  This enables third party rights to be granted in favour of an IP, akin to those under a collateral warranty, but they are much easier and quicker to obtain. These rights are not created automatically so the construction documents need to be carefully drafted to enable them to be created.

Precautionary measures?

As with so many projects, planning is central to the outcome.  However, it is not so much a question of implementing a flawless building project from the very start but rather ensuring you’ve factored into the documentation suitable remedies if it all goes wrong.  With proper legal advice from the outset, you might just find you can sue that stranger!