Guaranties, Warranties, Insurance and Risk Allocation

By Shantha Fernando MRICS,AAIQS,ACIOB,AIQSSLChartered Quantity Surveyor

Difference between Guaranties & Warranties In respect of a construction contract this can be demonstrated as follows:Warranties are obtained from manufacturers of plant, materials and goods they supply for incorporation in the works.

Sub Contractors and Suppliers give guaranties to the Contractor

The Contractor provides a Guaranty to the owner

Difference between Guaranties & Warranties The ultimate producer of the construction facility is the Contractor and he guarantees to the owner that he has constructed the facility to the details and dimensions shown on the drawings and using the materials and workmanship as required by the contract specification.

The sub contractor also guarantee that materials that he has procured from his suppliers have been guaranteed by his suppliers as being of the respective kind as specified in the contract specifications.

Difference between Guaranties & Warranties A Warranty on the other hand is a written guaranty given by the manufacturer to the contractor or sub contractor who ever the purchaser is.This in fact an agreement assuming responsibility for the proper functioning of the product.It is a promise or assurance given in writing.

If a Warranty is also a Guaranty, why should it be identify differently?

Difference between Guaranties & Warranties Warranty is a written guarantee, in clear with unambiguous terms and must bear the vendors stamp of authenticity.Some times warranty is effective only when the buyer returns the manufacturers registration card to the manufacturer to the address stated in the card.Warranty is a document to protect consumer rights. It is a promise by a seller with a buyer for complete replacement of the item ( article or product) in the event of any manufacture defect within the stated period, in the Warranty.It is clear by now that there is no difference between a guaranty and a warranty, except that a warranty is a written guarantee.

Terms & Conditions

It is always advisable to check terms and conditions of the warrantee. For example you may need to register with the manufacturer for certain conditions to be met.Also check whether the small print spells out what happens if you give or sell the item to somebody else during the guarantee period.For some electrical items, you may have to pay particular attention to what is covered by the guarantee all parts or specific parts, any limit of the value, is labour included or not etc.

Extended Warranties For some plant or equipment like air conditioners, chillers, generators, heat exchangers and the like, the manufacturer provide warranties extended beyond the normal defects liability period.In most Middle East countries the Contractor and the Designer is jointly and severally liable for stated defects for ten years from the date of completion.A ten year guarantee of this nature is worthless if the Contractor and the Designer both go out of business during this periodIn the UK and all European, American and North American countries, this is underwritten by insurance companies.

Collateral Warranty The owner protected from the contractors guarantee by the provision of the contract for the duration of the defects liability period. Also he protects from any manufactures warranty granted to the contractor during that period.What happens after the Contractor is relieved from his obligations on the issue of the Final Certificate by the owner? Court Cases,MacPherson v Buick Motor Co (1916)Donoghue v Stevenson (1931)In common law, a person can claim damages from another person where that other person owed the first person a duty of care and harmed that person through their conduct in breach of that duty

Collateral Warranty A Collateral Warranty is a contract which gives a third party rights collateral to rights in an existing contract entered into by two separate parties.For instance, an architect is appointed to design a block of flats for a developer. That developer intends to sell the blocks of flats to a Housing association. Due to Privity of Contract the architect would normally only be contractually liable to the client (developer) should defects arise.The Collateral Warranty establishes a contractual relationship between the Housing association and the architect against defect.

Collateral Warranty The difficulty in a construction contract arises when the facility is taken over and the operations and maintenance of the facility is thereafter transferred to the owners staff.How can the owner protect himself from a litigious situation arising out of this?Prior to 1980 owners were able to obtain damages against negligent contractors and consultants through the courts without the need to demonstrate that they had any contractual right.This situation changed after the decision in the case of D & F Estates v Church Commissioners in 1988The Collateral Warranty guarantees a clear right for the owner to take action against the third parties who provide these warranties

Insurances Three types of insurances are required to be provided under the Contract. In addition the Contractor will have other insurances for vehicles, health etc.Contractors All Risk Policy. This policy is usually required to obtain in a value of 10% above the Contract Sum. (10% more to clear debris if the Construction is damaged by Fire, flood etc)Workmens Compensation Policy. ( This is for Contractor's own workmen and is required under the Law of Health and Safety)Third Party Risks Policy ( Parties who are not party to the Contract such as Consultants, the Employers personal, trade representatives, passers by and the adjacent buildings and its occupiers)

Joint Name Insurance and Risk AllocationWhere the parties to a building or engineering project have agreed that one of them is to take out joint names insurance for the benefit of two or more parties, the risk of certain types of loss is transferred away from the jointly named parties to the insurer regardless of who was at fault.Court Cases,John F Hunt Demolition v ASME Engineering (2007)Tyco Fire & Integrated Solutions (UK) v Rolls- Royce Motor Cars (2007)

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