21 June, 2019
A construction project typically involves a number of professionals contracted to provide a variety of services. The role of a contractor and its sub-contractors is to carry out the physical work, whereas the role of a professional is to provide specialist advise relating to the project. The group of professionals involved in a project is known as the professional team.
Most parties with an interest in the project however do not enter into a direct contract with professionals who are designing, constructing or managing the project. Under privity of contract a buyer, funder, or tenant will not be able to make a claim for their losses caused by a defect in design or the workmanship of another. As a solution a collateral warranty provides those with an interest in the project with contractual security, entitling them to recover their losses and claim step-in rights to take over the completion of the contract if necessary.
One of the key clauses incorporated into a collateral warranty is a clause that requires the warrantor to comply with the building contract and to exercise skill, care and diligence in carrying out the design and/or perform the works or services. A purchaser or a tenant may also incorporate a clause giving others the right to inspect the project and to oblige the warrantor to use reasonable skill, care and diligence not to use or specify harmful materials in the project. The warrantor may also be required to maintain professional indemnity insurance to indemnify a beneficiary against any liability arising from defective design or negligent advice. Beneficiaries may also opt to incorporate a clause permitting them to assign the benefit of the contract at their discretion.
Alongside its day-to-day pressures, with Brexit approaching, professionals in the construction industry now face new and complex challenges. It is no secret that Brexit was unwelcomed amongst many in the sector, with only 15% of construction executives voting in favour of a UK exit from the EU. Brexit will impact the investment structure of the sector and the current uncertainty has already resulted in numerous project delays and cancellations. As a member of the EU, the UK currently has access to the European Investment Bank and European Investment Fund, which have invested over £7.8 billion in major infrastructure projects. Although these projects could be replaced it is likely that the investment pool available to UK construction businesses will be reduced. Not only will this have a huge economic impact on the sector, it will also cause further delays to current investment plans.
Fluctuating exchange rates and removing or restricting free movement of goods is likely to increase the costs and quantities of goods imported into the UK. This could lead to a shortage of construction materials or a further increase in costs. A slowing economy is therefore likely to significantly impact the demand for construction work for professionals in the UK. It is anticipated to result in firms battling for contracts, dropping their prices and shortcutting their standards.
In order to prepare, construction companies and professionals should incorporate flexible clauses into their contracts in order to adjust to fluctuating prices and tariffs, enable them to change suppliers, delivery dates and avoid penalties. Existing contracts should also be checked to see who bears the additional costs or penalties for increased tariffs or unexpected delays, and if necessary, be negotiated between the parties. Design and architectural teams for example could potentially mitigate the impact of tariffs by specifying the use of UK produced goods and materials, rather than goods that need to be imported from the EU or elsewhere. Professionals may also focus on new technology and innovation projects to meet the demands of current projects whilst minimising the costs of proposed Brexit changes.
Collateral warranties provide a vital tool to enforce contractual security for the beneficiaries of construction projects. They can provide step-in rights for funders to take over the employer's role in the contract and contractual remedies if the employer breaches the terms of the contract.
Overall contractors and professionals will now face immense pressure to maintain the profitability of projects and ensure that construction standards are upheld post-Brexit. Contractors and professionals should familiarise themselves with new proposed changes to the UK borders for the importation of goods. In addition, construction contracts should be reviewed to ensure that they cover the burden of new tariffs and increased project prices in light of the impact of potential delays.
For more information contact John Pickervance in our Construction & Infrastructure department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.