Having bought a piece of land and being satisfied that it is capable of being developed, the owner may then want to construct a building on the site. The relationships between the different parties in a construction project are complex and not easy to comprehend.
To simplify things, here is an example looking at the parties involved in a construction project. Generally, 5 different groups of people are involved: the owner (as employer), building contractor, architect, quantity surveyor, and engineers.
The owner of the site will employ various professionals to design and construct a building on their land. For the purposes of this example, assume that the owner is not a member of the construction industry and that they need to employ other people to do the design and construction work.
In a traditional building contract, the building contractor is employed by the owner to construct a building according to the plans and specifications prepared by the owner's architect.
The contractor has a direct contractual relationship with the owner and will then enter into sub-contracts with other builders who will carry out the work. If the employer is allowed to choose who will be the sub-contractors, these sub-contractors are called 'nominated sub-contractors'. In other building contracts, the main contractor will be responsible to select the sub-contractors, who are called 'domestic sub-contractors'.
Under the building contract, the main building contractor agrees to complete the work set out in the contract in the form of the architect's plans and specifications. Whether the work is satisfactorily completed is a matter to be judged by the architect who, if satisfied, will issue interim certificates certifying the amount due for the work done to date. This will end with a certificate of practical completion which will entitle the main contractor to receive the balance of the contract price.
Design-and-build contracts are more modern forms of building contracts that operate differently from the traditional building contracts. All the design work is carried out by the main contractor's architect. Thus, the owner does not have to engage an architect themselves. In practice this means that after indicating to the main contractor their requirements, all the owner has to do is to wait for the building to be finished.
In a traditional contract, the architect will be engaged by the owner to prepare plans and specifications of the building work. The architect will also supervise the execution of work by the building contractor (and sub-contractors). When the architect is satisfied with the work done by the building contract, they will issue a certificate of practical completion.
The quantity surveyor is engaged by the owner (or by the architect on behalf of the owner) to estimate the quantities of the materials to be used and to set them into bills of quantities. On the basis of these bills of quantities, the building contractor is able to work out the cost of their tender.
In large construction projects, there may be a team of consulting engineers engaged by the owner to give advice on matters relating to structural design, ventilation, heating, etc.
If the project results in the owner obtaining a completed building which turns out to be defective due to faulty design, faulty construction, or the materials used, the employer may be able to sue for breach of contract against those members of the construction team who caused the defects.
In the case of a defective building, the position of a buyer, a lender or a tenant is more difficult than that of the owner. Whilst the owner can sue for breach of contract (see above) a third party cannot because no contract existed between them and the members of the construction team. They would however still have the chance to claim for having lost money. This would be a claim in tort law, rather than contract law, and would be for 'pure economic loss'. Success in these claims is very difficult, because it has to be proven that there was the necessary legal degree of closeness between the parties for a claim to even be possible. This can be very difficult to establish.
In the context of building contracts, a collateral warranty is an agreement entered into between the owner and the contracted party involved in the construction or design of a building (such as a builder and/or architect). Within this agreement, the builder and/or architect has a duty to ensure that the building has no defects. This duty is for the benefit of someone who has an interest in the building, which includes those who subsequently purchase the building from the owner who engaged the builder and/or architect.
When a collateral warranty is established, the person with the interest in the building only needs to show that the type of loss suffered as a result of a breach of the warranty could reasonably be said to have been contemplated by the parties at the time the warranty was entered into.
In practice, the terms of collateral warranties are usually dictated by the insurance industry which is naturally concerned to limit its own potential liability.
Most warranties will contain a basic warranty by the granter that they have exercised and will continue to exercise reasonable skill and care in the performance of their duties under their contract with the owner, and that their insurer will maintain professional indemnity cover up to a stated amount.
The policy can be taken out to cover the owner and their financial backers. Most policies will automatically insure subsequent owners and occupiers, which will obviously be the desired aim from the owner's point of view.