Authors: Mark Kenney, Partner and Karl Higgins, Solicitor
It is now commonplace on most major projects for subcontractors and suppliers (referred to generally in this article as subcontractors) to be asked to provide a collateral warranty deed in favour of the principal under the head contract, or in favour of other stakeholders with a general or specific interest in the delivery of the project. In this article, we set out some of the key risks for subcontractors to look out for when reviewing collateral warranty deeds.
Introduction
Collateral warranty deeds may be given a different label (such as a ‘side deed’) or executed in the form of a simple agreement rather than a deed, but their effect is generally the same. They ensure that the principal of a construction project has direct contractual rights against subcontractors that the principal can rely on in the event the head contractor cannot satisfy the principal’s claim (or if the principal prefers to claim against the subcontractor).
Often, head contractors will take the position in the negotiation of the subcontract that collateral warranty deeds are ‘not up for negotiation’ with the subcontractor. Invariably, the reason given is that the form of the warranty deed has already been agreed to under the head contract with the principal. Perhaps more honestly, it might be because the head contractor has very little motivation to secure amendments to the collateral warranty deed for the benefit of the subcontractor.
For this reason, and perhaps also because they can be as brief as one or two pages, these collateral warranty deeds can be an afterthought in subcontract negotiations. They are often given far less attention than more trivial issues.
However, it can be disastrous for a subcontractor to ignore these documents – every collateral warranty deed should be carefully reviewed and considered (even if they are described as the principal’s ‘standard form’) because in the event of a breach, subcontractors can be completely exposed to the principal’s claims for uncapped damages (including for consequential loss). Such claims are fertile ground for dispute, because often the subcontractor’s responsibility for the principal’s claim is unclear, especially where the project involves multiple contractors performing interdependent works packages. This can significantly increase the overall project risk for the subcontractor.
