Watch out for warranties

Whilst consultants are attuned to providing collateral warranties, Michael Janney considers what consultants should consider when negotiating them.

Limit the number of beneficiaries
Whilst in a large-scale project or a commercial development some warranties will usually be required, limiting the number of beneficiaries will reduce your claims exposure. This can be done by either setting separate limits for each type of beneficiary, such as tenants, buyers and funders or by limiting them to the first beneficiary of each type. For example, the first funder, the first buyer and the first tenant of each part of the project. For tenants, a limitation by reference to the internal area leased can often be agreed i.e. warranties may only be granted to those taking a lease of a net internal area “greater than 1,000 square feet”. The client may be willing to agree such limitations, provided they do not limit its ability to market the project. This will depend on the size and nature of the project, especially if the client intends to let the completed project on a fully repairing lease. For example, tenants of a residential apartment do not usually require collateral warranties whereas tenants of a high quality office block often require a comprehensive suite.

Agree the form in advance
Parties should attach the agreed form to the appointment. Where the identity of the beneficiaries is unknown when the appointment is negotiated, to allow for some changes once known, the client may require the right to call for warranties “in substantially the same form” as attached. If this is agreed, add wording that the client cannot make any amendments that increase your liability under the warranty. Whilst some professional appointments purport to make the obligation to provide warranties subject to payment of fees, clients may resist this in case it prejudices their position in any fee dispute.

Limit liability
Consider whether the potential liability is proportionate to your fee. If it seems excessive look to limit it to the level of professional indemnity insurance cover but not the cap will only apply if insurance obligations are complied with. Alternatively, if more appropriate, look to limit it to a multiple of the fee but be clear whether it is a total limit (regardless of the number of claims) or per claim. Liability for losses arising from pollution, contamination and asbestos can also be limited if this reflects exclusions in the insurance policy. A cap may be subject to the Unfair Contract Terms Act 1977 and when dealing with an inexperienced client or an individual, remember the cap should be specifically to be enforceable. Liability for death and/or personal injury due to negligence can never be excluded where the client is a consumer (such as a residential occupier) and any exclusion will be subject to the consumer protection legislation.

Seek net contribution clauses
Such clauses are increasingly being accepted and provide that, where two or more parties involved in a project are jointly liable for the same loss or damage, the liability of each party will be limited to the amount which would be apportioned to that party by a court. Without it if, for example, the consultant and contractor are each liable to the client for the same defective work, the client can recover 100% of its damages from the consultant, despite the joint liability of the contractor. Whilst these appear in standard forms of appointment such as ACE they are unusual in documents prepared on a bespoke basis for a client and, if refused, request a cap as a compromise.

Read the warranty clause carefully
The warranty will usually contain wording along the lines of the following: “The Consultant will use all the reasonable skill care and diligence to be expected of a qualified and experienced member of the Consultant’s profession undertaking the Services on works similar in scope and character to the Project”. This means you will be seen as negligent if your standard of skill and are falls below this. This is standard but the words, ”similar in scope and character to the Project” means that you will be judged as being expected to know what consultants carrying out those type of works know not just consultants generally”. Beware of wording that upgrades further to being “highly experienced” unless you have marketed yourselves on that basis!

Protect yourself from contributory negligence by the client
Where a client deliberately goes against your advice, this may amount to “contributory negligence” in any claim by that client but would not protect in a claim under a warranty. Therefore you should add wording that, in the event of a claim that you have breached your duty of care, you can rely on any limit of liability or other term of appointment; and raise equivalent rights of defence i.e. contributory negligence as if the beneficiary had been named as a joint client.

This content is correct at time of publication