Current trends in Collateral Agreements

RDJ Partners Finola McCarthy, Alison Bearpark, Solicitor Georgina Wallace and James Burke BL review the practical issues and risks with collateral agreements and relevant case law surrounding contractual interpretation and limitation clauses.

Collateral Warranties and their effect

• Creates a direct contractual link between the parties.
• Without a warranty, third party’s recourse is solely in tort, where recovery of damages for pure economic loss in Ireland remains uncertain. In Ireland, the decision of Keane CJ in Glencar Exploration plc v Mayo County Council^[1] which addressed in obiter comments that the Plaintiff was not entitled to recover for pure economic loss in circumstances where a contractual relationship did not exist between the parties (this case did not relate to collateral warranties).
• In the UK, the case of D&F Estates Limited v Church Commissioners for England[2] established that a third party could not recover damages for pure economic loss

Standard of Care

• The provisions of a warranty should be consistent with the underlying primary contract. If the primary contract provides for a standard of reasonable skill and care, be careful not to sign up to a standard of fit for purpose. A construction professionals PI insurance is likely only to cover a standard of reasonable skill, care and diligence even if higher standard of care is agreed to by the construction professional.

Limitation of Liability Clauses

• The scope of liability remains a key concern and a construction professional will try and limit its liability to a beneficiary. Limitations of liability can arise in a number of ways, by way of time bar (6 v 12 years), an overall financial cap or the exclusion of certain heads of loss.

1. Net Contribution Clause (“NCC”) confines a consultant’s liability to the loss which is attributable to that consultant only. The purpose of a NCC is to protect against S.12 of the Civil Liability Act 1961 in relation to concurrent wrongdoers. There is no Irish case law on NCC and it remains to be seen whether such a clause would be upheld.

• The UK case of West v Ian Finlay and Associates[3] would be considered to be of persuasive authority in Ireland. In this case, the Court of Appeal upheld a net contribution clause in an architect’s appointment and capped its liability at 30%.

2. Time Limitations

• Claim in contract- Where a contract is signed under hand, a 6 year limitation period to bring proceedings from the date of breach will apply. The limitation period may be extended to 12 years if a contract is executed under seal (Section 11 of the Statute of Limitations Act 1957) unless there is an express provision to the contrary. Always advisable to execute a collateral warranty under seal to avoid any argument that the warranty is void for lack of consideration. Often a warranty will include express wording to state that a limitation period runs from, for example, -practical completion of the development rather than the date of breach which provides greater clarity with respect to the commencement of the limitation period.
• Claim in Tort- 6 year period to bring proceedings however if the claim involves property damage the clock will only run from when the defects manifest as per the decision in Brandley and WJB Developments Ltd v Deane and Lohan[4]. In Gallagher v ACC Bank plc[5], (a misspelling of investments fund case) the Court found that the date of loss in contract and tort occurred at the same time i.e. on the entering into the contract.

3. Exclusion of Common Law Rights- Generally, a collateral warranty will specify that the beneficiary’s common law rights are preserved. This allows a beneficiary to take a claim in tort rather than in contract which can be useful if a collateral warranty contains significant exclusions on liability. If the parties are of equal bargaining rights, the beneficiary can agree to exclude any remedy under its common law rights. In the Robinson v PE Jones (Contractors) Ltd[6] decision, it was held that two avenues could not be taken and contractual rights take precedence. No Irish case law in this regard.

• Any limitation of liability clause must contain clear and unambiguous language and the general principle on interpretation of contracts should be applied. In Motor Insurance Bureau of Ireland v The Law Society, the court applied the principles in the Investors Compensation Scheme Ltd. v West Bromwich Building Society[7] decision. It examined the need to review the background to the creation of a contract. Lord Hoffman in Investor provided that words do not mean anything unless they are put into context. Such agreements should make business common sense. Ultimately, in the MIBI case, the court held that MIBI’s interpretation of the particular agreement was more plausible and correct. The decision of the Court of Appeal in Point Village Development Limited (In Receivership) v Dunnes[8] reiterated the importance of clear and unambiguous wording.

For more information on any of the issues discussed above, please contact the event speakers:

• Finola McCarthy, Construction Partner, RDJ | E. finola.mccarthy@rdj.ie
• Alison Bearpark, Partner, RDJ | E. alison.bearpark@rdj.ie
• Georgina Wallace, Solicitor, RDJ | E. georgina.wallace@rdj.ie
• James Burke BL | E. jburke@lawlibrary.ie