What are warranties and why do they matter?

Warranties are one of the staples of the construction industry that everyone has heard of, but remain a bit of a mystery to those for whom construction is not the day job. For any new build hotel, or a hotel undergoing a major renovation, warranties offer important protections to hotel owners.

Warranties are, at their simplest, a promise from someone that a work or product is up to scratch, and if it is not, they will be responsible in some shape or form for putting that right.

One type of warranty that is more common in ‘everyday life’ and is therefore easier to understand, is a product warranty. These are usually provided where a contractor is not designing a product or system, they are simply installing something provided by a manufacturer. The manufacturer warranty may promise, for example, that an air conditioning unit has a guaranteed life span of five years. The idea is that if any part should break in those five years, the manufacturer will repair or replace it without cost to you as the owner.

The more abstract concept which is more specific to the construction industry, is the collateral warranty. It is unusual for anyone who has not negotiated construction contracts, worked in construction or undertaken previous developments to have much understanding of a collateral warranty.  Despite that, there is no great mystery to them. The concept is very similar to a product warranty. 

The vast majority of projects in the UK, particularly in hotel construction, are carried out as a “Design & Build” project. That means that the appointed contractor takes responsibility for the design and then carries out the building and construction works, as opposed to the employer/developer handing over a design and the contractor building what they are given.  In a Design & Build project, the contractor appoints the design consultants and the sub-contractors directly. That means that the employer/developer has no contract with the individual designers – the only contractual relationship is with the contractor.

That is where a collateral warranty comes in.

A design consultant, such as an architect or mechanical and electrical engineer, or a sub-contractor with design responsibility would provide the employer/developer with a collateral warranty to create a contractual link. That warranty, at its simplest, is a promise that the warrantor will comply with the terms of their contract with the building contractor and perform their works to the necessary standards. Usually, the warranty will last for 12 years from practical completion.

That is important, because it means as well as the building contractor being directly responsible to the employer/developer, so now is anyone who provides a warranty. Perhaps most importantly, that offers protection in the event of the building contractor you employed to construct your new hotel becoming insolvent. If an employer or developer were  to discover a major error in the heating system 3 years after construction for example, and the contractor ceased to exist, you could rely on the collateral warranty to seek to claim against the designer/sub-contractor responsible for that system. Of course, it would still need to be able to prove a claim against them if they deny any wrongdoing, but the collateral warranty provides that option.

In the hotel industry, the cost of repairing a leaky roof or a malfunctioning air conditioning system is not the only problem – disgruntled guests and poor facilities comes at a huge reputational cost. Having the correct contractual protections can therefore help make sure that both you and your guests get a good nights sleep.

If you want help with any issues, or have any general enquiries, please contact one Gordons LLP’s legal experts.

Written by Michael Downes, Gordons LLP

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