Guaranties, Warranties, Insurance
and Risk Allocation
By Shantha Fernando
MRICS,AAIQS,ACIOB,AIQSSL
Chartered 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
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.
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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 period
In 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 1988
The 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.
a)
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)
b)
Workmens Compensation Policy. ( This is for Contractor's own
workmen and is required under the Law of Health and Safety)
c)
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
Allocation
Where 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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