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.

as

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)

THANK YOU