Insurances, Guarantees,

Bonds and Warranties

 Insurance
• Nature of Insurance: An Insurance is a legal contract whereby one person, the
Insurer, agrees in return for a consideration, the premium, to pay to another
person, the Insured, a sum of money or its equivalent upon happening of certain
specified events.

• Contract of Insurance is a special kind of Law of Contract which is based the

doctrine of uberrimae fides — utmost good faith — and meaning and effect of
warranties. Therefore, usual rules of Law of Contract — offer, acceptance,
consideration, intention to create legal relationship and contractual capacity —
govern contracts of insurance subject to the aforesaid doctrine.

• Disclosure: Under utmost good faith the proposer, the Insured, has a duty to
disclose all material facts about the proposed risk(s) to the Insurer. Failure to do so
may make the contract (policy) void.

• The reason for this is that in many insurance contracts the true facts of the risk are
better known to the Insured than to the Insurer. The insurer trusts the
representation made by the Insured and proceeds on confidence that the Insured
does not keep back any fact in its knowledge to mislead the Insurer into a belief
that the fact does not exist and to induce him to estimate the risk as if it did not
exist. Therefore it can be said that an insurance contract is a contract on
speculation.
 Insurance (cont’d)
• Categories of Insurance: There are two categories:
Contingency and Indemnity.

• Contingency Insurance: In a contingency insurance the

Insurer promises to pay a specified sum of money,
which is stated in the insurance contract (policy), to the
Insured or its beneficiaries on the happening of a
contingent event (death, illness, personal accident).

• Indemnity Insurance: In an indemnity insurance the

Insurer promises to prevent loss to or to hold harmless
the Insured, but not a promise to pay money.
 Insurance (cont’d)
• Indemnity insurance can be further divided into two categories:
First Party and Third Party.

• First Party Insurance: In a first party insurance the Insurer promises

to indemnify the Insured as soon as the Insured suffers a loss. Thus
if construction works are destroyed by fire the Insurer’s liability to
indemnify the Insured accrues immediately upon the happening of
the fire. If the Insurer defaults to indemnify the Insured and if the
Insured takes legal action against such default for the purposes of
limitation the critical date is the date on which the fire occurred.

• Third Party Insurance: In contrast, in a third party insurance the

Insured promises to indemnify the Insured once the Insured legal
liability and losses to third party are ascertained.
 Insurance (cont’d)
• Ascertainment of Liability and Loss: The need for ascertainment is not
expressly referred to in the insurance contract (policy) but is implied into
the policy as a pre-condition to a right to recover under the policy. The
liability and the loss have to be ascertained through a judgement, an
arbitration award, an adjudication decision or a settlement agreement.

• Complication may arise if the ascertainment is achieved through a

settlement agreement rather than through any other methods as
mentioned above, as, despite the settlement agreement, the Insured will
have to prove with extrinsic evidence that:
1. he was, in fact, liable to the party with whom he has settled;
2. that liability fell within the scope of the policy coverage; and
3. the amount paid in settlement was reasonable having regard to the
to the amount of damage that he would have had to pay if the issue
had gone to trial. (Limbermens Mutual Casualty Company v Bovis
Lend Lease Ltd [2004])
 Insurance (cont’d)
• In the said case, parties entered into a global settlement
agreement — one that settles both insured and uninsured
claims. The judge’s ratio was that that agreement should
identify the specific costs to the Insured of settling insured
liabilities.

• Further reasons for the requirement of extrinsic evidence

are to ensure that the Insured has not profited from the
insured event as the Insurer’s liability under a contract of
indemnity is to indemnify the Insured for its losses and the
Insurer’s liability is characterized as a liability to pay
unliquidated damages, even though of an unusual type,
which requires proof and quantification.
 Insurance (cont’d)
• First Party Insurances comprise the following:
1. Specified risks of physical damage to the Works
during construction (part of CAR policy).
2. Increased costs of construction consequent on
damages to the Works.
3. Cost of delay to completion.
4. Emergence of inherent defects after handover of
the Works (latent defects).
5. Product recall which covers the cost to suppliers of
recalling and replacing faulty products.
 Insurance (cont’d)
• Third Party Insurances – Physical Loss comprise the
following:
1. Employers’ Liability: covers employers where they are
at fault for injury and sickness suffered by their
employees as a consequence of their employment.
2. Public Liability: covers liability for damage to property
and bodily injury, excluding employees and damages to
the Works.
3. Product Liability: covers liability of suppliers for damage
to property and personal injury caused by product they
supply.
4. Non-negligence: covers building owners for damage
liability to adjoining property for errors which arise
without fault on the part of either the contractor or the
design consultant.
 Insurance (cont’d)
• Third Party Insurances – Financial Loss comprise the following:
1. Professional Indemnity: covers the liability of construction consultants
(architects, engineers, quantity surveyors practising solely as
consultants. These policies are the most comprehensive source of
recompense to building owners and contractors for financial losses
(delay, increased cost and rectification of inherent defects) caused by
professional errors in the design, specification and inspection of the
Works.
2. Contractors’ Professional Indemnity: covers the liability of contractors
and specialist suppliers for professional liability assumed under
building contract for the design and specification of any part of the
Works. The cover is more restricted than consultants’ professional
indemnity when it comes to pricing errors and supervision of the
contractors’ own work during construction.
3. Directors and officers’ Liability: covers directors for breaches of
regulatory duties owed to their companies and shareholders including
costs of legal representation.
4. Captive Insurance: covers any type of risk and is simply a financially
advantageous way for some businesses to arrange part of their
insurance programme. It is a common way for large businesses to
finance a portion of their construction risk.
 Insurance (cont’d)
• The aforesaid policies can be bought in different combinations that result
in bewildering overlap.

• Financial liability extensions can be bought for both public and product
liability policies which overlap with professional liability cover. Extensions
to physical damage to Works policy can be bought to cover public liability
policy.

• Generally, however, Insurers do not like provide contractors with cover for
their own defective workmanship, for wrongly pricing their contracts and
for delays caused by errors in planning their works.

• First party covers offer more certain protection to owners against the risks
they intended to cover than the uncertain rights of recovery against
consultants and contractors under third party insurances.

• The only common first party cover in commercial development is

insurance of the Works. In a world of cost saving, many developers
consider other first party products, such as inherent defects insurance, as
too expensive.
 Insurance (cont’d)
• Placing a Policy: Unlike other contracts, an insurance contract is
characterised as a contract of speculation but, almost invariably, the
person wishing to obtain insurance will know more about the
circumstances of the risk (special facts) he wishes to insure than will
Insurers.

• These inequalities of knowledge between the Insured and the Insurer

have led to the creation of a special duty which exists only in insurance
context: the duty of utmost good faith.

• In order to elicit the ‘special facts’, the person seeking insurance (the
‘Proposer’) will routinely be asked, either direct or through his broker, to
complete a questionnaire known as a proposal form.

• Even filling a proposal form, which contains specific questions relative to

the risks the Proposer seeks insurance, does not necessarily diminish the
Proposer’s duty to disclose all material circumstances known, or deemed
to be known to them unless it can be said that by asking specific questions
Insurers have waived their right to disclosure of material circumstances
falling outside the scope of the questionnaire.
 Insurance (cont’d)
• It is noteworthy that the single largest source of
insurance disputes relate to alleged non-
disclosure and/or misrepresentation made during
completion of the proposal form and all
negotiations leading to a concluded insurance
contract.

• Therefore, it is of paramount importance that the

Proposers understand their obligations during
this period.
 Insurance (cont’d)
• Avoidance: Where the Insured breaches their duty of utmost good
faith Insurer’s remedy is avoidance of the policy.

• This the only remedy the Insurer has in relation to non-disclosure —

it cannot seek damages for breach of contract nor can they merely
deny liability for a particular claim.

• Insurer’s only choice is to avoid the policy or to affirm the policy.

• The position is slightly different relative to misrepresentation where

the Insurer do have a choice of other remedies in particular
circumstances (fraudulent or negligent misrepresentation).

• In practice, however, avoidance of the policy is always preferred as

reliance on this remedy does not require proof of damage or
quantification of damage.
 Insurance (cont’d)
• The remedy of avoidance is available whether the non-disclosure or
misrepresentation was innocent, negligent or fraudulent and even
the non-disclosure or misrepresentation had nothing to do with the
loss.

• As an example, where the Insured fails to disclose the fact that he

has an unspent criminal conviction for arson when seeking a
building insurance, Insurers will be able to avoid the policy even
where the non-disclosure is discovered during investigation of a
claim for losses caused by flood.

• Because the consequences of avoidance can be so severe for an

insured, moves have been, including Insurers themselves, to soften
what can otherwise be a disproportionately harsh remedy.

• For example, a policy cannot be avoided for innocent or negligent

non-disclosure where the Insured is an individual insuring in his
private capacity.
 Insurance (cont’d)
• Many commercial policies also, especially professional indemnity policies,
now contain clauses that limit the Insurers’ right to avoid policies.

• The scope of these clauses can vary considerably: they can (a) exclude
Insurers’ right to avoid altogether or only in particular circumstances or (b)
release the Insured from its obligation to disclose either altogether or in
particular circumstances.

• Once the Insurer avoid the policy the Insured’s only recourse is to seek a
declaration from the court that the indemnity should be honoured. In
such circumstances the burden of proof rests on the Insurer to show that
their avoidance was lawful: that (a) the alleged non-disclosure or
misrepresentation was material, and (b) they were induced by the non-
disclosure or misrepresentation to accept the risk either at all, or the
terms they did.

• Alternatively, the insured may be able to prove that the Insurer elected to
waive its right to avoid the policy, or should be estopped from doing so
based on some representation made and relied on by the Insured, and
that the policy has been affirmed.
 Insurance (cont’d)
• Materiality: As the duty of utmost good faith continues
until a contract has been concluded, any material
circumstance that comes into existence after the
proposal form has been submitted, but before the
contract has been concluded must also be disclosed.

• As an example, a person who is healthy when his

proposal form for health insurance is submitted, but
who then learns prior to completion of the contract
that he has cancer, must disclose that fact.

• This need to disclose new material circumstances that

surface after the proposal had been submitted but
before the contract has been concluded can easily
cause problems in construction where design changes
can occur during that period.
 Insurance (cont’d)
• An analogy to the above can be drawn from St. Paul Fire and
Marine Co. (UK) Ltd. v McConnell Dowell Construction Ltd. [1996]. In
that, a quotation slip was accompanied by plans and drawings
provided by the Insured which plainly showed pile foundations.
However, a decision to construct spread foundation was made after
the proposal was submitted but before the contract was concluded
and the Proposer failed to disclose this change to Insurers. The
Court of Appeal held that the Insurers were entitled to avoid the
policy for non-disclosure even though the court accepted that this
‘error in presentation’ was the result of a mistake made in good
faith which would undoubtedly have been communicated to
Insurers immediately had anyone become aware that it had been
made.

• A duty to disclose notifiable circumstances also arises where the

policy is not renewed but merely extended but because the nature
of the agreement is more limited than renewal, so is the ambit of
the duty.
 Insurance (cont’d)
• Subrogation: Subrogation is commonly understood to mean the
substitution of one person for another. In insurance law,
subrogation involves two distinct rights:
1. The right of the insurers, after they have indemnify their
Insured, to step into the shoes of the Insured so as to exercise
any rights and remedies that the Insured may have against
third parties in relation to the indemnified loss.

2. The right of Insurers to claim from the Insured any benefit

received by the Insured as compensation for an insured loss.
For example, where Insured settle a claim against a third party
in circumstances where they have already received payment
under their insurance policy. Equity will, in such circumstances,
enforce the Insurer’s right of subrogation by subjecting the
damage to an equitable lien in their favour.
 Guarantees
• Nature of Guarantees: A guarantee is a contract whereby the
guarantor (sometimes called surety) undertakes the responsibility
for promisor’s debt or performance towards a promisee if the
promisor does not pay or perform.

• The essential characteristics of a guarantee is that the primary

obligation of the promisor towards the promisee is underwritten by
the guarantor. Hence, it is a collateral contract designed to protect
the promisee from loss in the event the promisor fails to pay or
perform. Therefore, guarantees relate to future occurrences of
default.

• Must be in writing: The guarantees must be in writing if they are to

be enforceable. This is established by Section 18 of the Prevention
of Fraud and Perjuries Ordinance of Sri Lanka (Ord. 60 of 1947,
originally Ors. 7 of 1840) ‘no promise to be in force unless in writing
and signed’. In the UK this is established by Section 4 of Statute of
Frauds (1677).
 Guarantees (Cont’d)
• Types of Guarantees: Guarantees most frequently used in the
construction industry are performance guarantees, advance
payment guarantees and retention money guarantees.

• Performance guarantee ensures that the contractor constructs,

completes and remedies defects of the Works without committing
any breach.

• Advance payment guarantee ensures that the contractor repays

whole of the money advanced to it for mobilization and paying for
materials and equipment initially required for the Works.

• Retention money guarantee ensures that despite the retention

money held under the contract being released, the contractor
proceeds with remedying defects identified at the time of issuing
the Taking Over Certificates and those identified during the Defects
Notification period.
 Guarantees (Cont’d)
• A transaction of a guarantee involves at least three parties
(guarantor, promisor and promisee).

• It is noteworthy that the words ‘Bond’ and ‘Guarantee’ are

used interchangeably. Bonds, in their original legal form
were archaic appropriate only to discharge simple
obligations. Bonds usually executed as deeds rather than
simple contracts. The guarantees, on the other hand, are
simple contracts. However, if parties desire, they can be
executed as deeds.

• Condition Precedent: If a contract requires to provide a

guarantee (or surety or security), the construction of such
provision in the contract indicates whether providing a
guarantee is a condition precedent to exercising of other
rights of the contractor under the contract.
 Guarantees (Cont’d)
• Sub-Clause 4.2 of SBD/2 provides, inter alia, ‘The Contractor shall
obtain (at his cost) a Performance Security for proper performance
of the Contract ...’. Such provision, especially the wording ‘... for
proper performance of the Contract ...’ indicates that providing a
‘Performance Security’ is a condition precedent in contracts let
under SBD/2.

• An analogy to the above can be drawn from Robert v Brett (1865)

where two parties contracted, one to procure a ship and the other
to have telegraphic cables ready to put on board her. The contract,
inter alia, provided that ‘... for the due performance of the
covenants hereinbefore contained ...’ each part should give to the
other a bond with two sureties, for £5,000, the court held that the
giving of the bond was a condition precedent to the right to sue for
breach of contract.
 Guarantees (Cont’d)
• Generally, the provision of a guarantee required by the contract will be regarded
as a fundamental condition of the contract.

• Consideration: In a guarantee contract consideration may not be present as

between the promisee and the guarantor to support a promise to guarantee a
contractual obligation. As bonds are executed as deeds, consideration is not
required. However, it is considered that consideration need not be any benefit
obtained by the guarantor: it is sufficient that some detriment or inconvenience
should be suffered by the party for whose benefit such obligations are performed.

• Duration: A guarantee may be for the performance of one or more acts of a

defined nature, or it may be a continuing guarantee of the performance of all such
acts. For example, a person may guarantee the payment of a supplier for supplying
so many cubic metres of concrete to a builder, or he may guarantee the builder’s
account with the concrete supplier, either at large or with the restriction that
credit beyond a specified amount at any one time shall not be given. Whether a
guarantee is continuing or not is a question of construction in each case. In a
construction contract a guarantee is for the performance acts of a defined nature
(construct, complete and remedy defects) and it is not a continuing guarantee.
Usually the duration of a Performance Guarantee is from Commencement Date to
28 Days after the expiry of the Defects Notification Period.
 Guarantees (Cont’d)
• Discharge of guarantee: A guarantee can be discharged in three ways: 1) when the
guaranteed obligations come to an end or 2) due to change in the law or 3) by
conduct of the promisee.

• Completion of Obligation: When the guaranteed obligations come to an end the

guarantor is under no further obligation under the guarantee.

• The guarantee for due performance of a construction contract by the contractor is

discharged on completion of the works, if completion of the works is the subject of
the guarantee. But question may arise whether completion in such case means
completion in fact or completion to the satisfaction of the architect or the
engineer. This is a matter of construction.

• In Lewis v Hoare (1881) one of the terms of the contract was that the houses were
to be built to the satisfaction of a surveyor and payment made on his certification.
Although the payment was made no certification of completion had been
obtained. It was held that completion in guarantee meant completion in fact.
Therefore, if the satisfaction of the architect or the engineer is a condition
precedent to the taking over of the works, then that matter has to be clearly
stated in the contract of guarantee.
 Guarantees (Cont’d)
• If a certificate of completion is expressly required, a certificate obtained
by fraud or collusion of the contractor and the guarantor, or by the fraud
of the contractor only, will not serve to discharge the guarantee.

• In Kingston-upon-Hull Corporation v Harding (1892) the contractor

concealed the defective works from the engineer to obtain the final
certificate and release of retention. The court held that the mere giving of
the certificate did not alter the position of the guarantors and as both
certificate and retention money were obtained dishonestly, the guarantors
were liable on their guarantee.

• In Petty v Cooke (1871) S and C made a joint promissory note, C being the
guarantor for S for the payment of money due from S to P. S, being
insolvent at time of payment, paid to P the amount of the note expecting
bankruptcy, although C was ignorant of this fact. When S went bankrupt
his trustees claimed the sum so paid as being a fraudulent preference, an
P returned the payment. Held that C was not discharged from his liability
as guarantor by reason of the payment by S.
 Guarantees (Cont’d)
• Change in the law: If the works, for which a guarantee of the
performance of such works is given, in a construction contract is
legal when the contract is entered into, but subsequently become
illegal, both the promisee and the guarantor are discharged.

• On general principles, however, if a contract is capable of being

operated by the parties to avoid an illegality, neither the original
contract nor the contract of guarantee dependent upon it will be
avoided.

• So a building contract was held valid notwithstanding that the

original contract drawings (which were also annexed to the
guarantee) contravened the by-laws due to a design error, since the
terms of the contract permitted the works to be altered so as to
comply with the by-laws: One Hundred Simcoe Street Ltd. v Frank
Burger Contractors Ltd. (1968).
 Guarantees (Cont’d)
• A guarantor cannot be compelled to accept any modification of the plan or
the scheme of the works, consequent upon the change of the law, unless
the contract of guarantee expressly bind him to do so.

• Conduct of the Promisee: In a construction contract, generally, the

promisee (the owner) must not act, in dealing with the contractor, or in
any connection where the guarantor’s interest is affected, in a manner
inconsistent with the contract of guarantee, or do anything to prejudice
the right of guarantor to contribution or indemnity. If the owner does, the
guarantor will, most of the time, be released wholly.

• The rule in Holme v Brunskill (1878) provides that if the promisor and the
promisee make any alteration of the promisor’s duties for the better or
worse, then the guarantor is discharged altogether. The reasons for this
rules are twofold. Firstly, that if the primary obligation is altered, then that
is not the one the guarantor has underwritten. Secondly, that if any
indulgence is given to the promisor, then that may irredeemably prejudice
the guarantor.
 Guarantees (Cont’d)
• The first reason is easily understood and creates no difficulty. The
guarantor is deemed only to underwrite the obligation it has underwritten
and nor more.

• The second creates difficulties in that the obligation of promisor is not

changed but is forgiven or ameliorated. As an example the employer
(promisee) may agree to release retention early to the contractor
(promisor). In that event the guarantor will be discharged because of that
indulgence. But the rationale behind that rule is that the guarantor’s
exposure is increased by that indulgence because in the event that the
promisor goes bankrupt, then the obligation of the guarantor relative to
cost of remedial works will be increased by the amount of the retention
surrendered.

• Although this as a theory is impeccable, it is rigid and may operate unfairly

to the promisee. An employer may release retention to assist the cash
flow of the contractor so that the defects are remedied to the ultimate
benefit of the guarantor. Hence, discharging the guarantor wholly from its
obligation in such circumstance seems inequitable.
 Guarantees (Cont’d)
• To overcome such problems a guarantee contracts must
contain an indulgence clause whereby the prejudice to the
guarantor by the indulgence is measured and decreases the
guarantor’s obligations pro tanto to the amount of that
prejudice. This is referred to as the ‘pro tanto’ rule.

• Alternatively, such problems can be contracted off by

inserting wording similar to ‘The obligations and liabilities
of the Guarantor shall not be discharged by any allowance
of time or other indulgence whatsoever by the Beneficiary
to the Principal, or by any variation or suspension of the
works to be executed under the Contract, or by any
amendments to the Contract or to the constitution of the
Principal or the Beneficiary, or by any other matters,
whether with or without the knowledge or consent of the
Guarantor.’ in the guarantee contract.
 Guarantees (Cont’d)
• Categories of Performance Guarantees: There are two
categories of performance guarantees or bonds:
‘Conditional’ and ‘On demand’.

• Conditional Performance Guarantees: In these guarantees

the guarantor’s obligation to pay the beneficiary (promisee)
eventuates when the beneficiary writes to the guarantor
stating the default committed by the obligor (promisor) and
loss incurred by him because of that default with
reasonable proof. The aforesaid provisions are only
applicable to conditional guarantees.

• Under conditional guarantees the employer (promisee) can

bring subsequent actions for future breaches up to the
balance of the amount of the guarantee remaining from
the first recovery.
 Guarantees (Cont’d)
• Where the condition of performance bond included a
condition that, on default by the contractor, the surety
should satisfy and discharge damages sustained by the
employer, the Court of Appeal construed “default” to mean
breach of contract and held that the contractor was not in
breach of contract upon going into administrative
receivership. The terms of the contract provided for what
should happen on the insolvency of the contractor and it
did not make sense to talk of the contractor’s obligations to
continue the work once the employment of the contractor
had been terminated: Perar BV v General Surety and
Guarantee Co. Ltd. (1994).

• Other conditional guarantees may be conditional on facts

or events other than the contractor’s performance.
 Guarantees (Cont’d)
• On demand Performance Guarantee: These are unconditional guarantees
obliging the guarantor to pay the guaranteed amount simply on demand.
These guarantees are equivalent to a standard letter of credit. The
business purpose behind them is to ensure that the beneficiary does not
have to go to the trouble of proving default before it can receive the
money payable under the guarantee.

• In Edward Owen v Barclays Bank [1978] contractors agreed with Libyan

customers to supply and erect glass houses in Libya. There was to be a
performance guarantee for 10% of the contract price. The guarantee,
given by an English bank, was payable “on demand without proof or
conditions”. There was no evidence of any default or breach of contract by
the contractor. It was held that, subject only to proof of fraud of the
employer, the guarantee could be enforced with the result that the
contractor became liable upon its indemnity to the bank. Lord Denning
said that, in so far as such guarantee was enforceable without any breach
at all, it bore the colour of a discount, which the contractor, if he were
wise, would take into account when quoting his price.
 Guarantees (Cont’d)
• In the absence of fraud the court will normally not grant an injunction
restraining the enforcement of an on demand guarantee, but the
underlying contract cannot be ignored. If the contractor had lawfully
avoided the underlying contract or there was a failure of its consideration,
the court might prevent a call on the guarantee.

• Clarity in the wording of the guarantee is of great importance not only

because of the uncertainty it creates legally but also because an on
demand guarantee is usually more expensive to secure than a conditional
one.

• Illustrative this fact is the case where the Court of Appeal has recently
held that an on demand letter from a government was not an on demand
bond. On the wording ‘the undersigned ministry ... unconditionally pledge
to pay to you upon your first simple demand all amounts payable under
the Agreement if not paid when the same becomes due’, the Court of
Appeal construed that the obligation was conditional as the words were
not clear enough to create an on demand obligation, especially
considering the words ‘all amounts payable’.
 Warranties
• Nature of Warranties: The word warranty has three primary
senses: 1) in property law, a covenant by which the grantor in a
deed (a) bind itself, as well as any heirs, to secure to the grantee the
estate conveyed by deed, and (b) pledge to compensate the grantee
with other land of equivalent value if the grantee is evicted by some
one possessing paramount title; 2) in contract law, an expressed or
implied undertaking by a seller of goods that they were or are as
represented or promised to be; 3) in insurance law, a pledge or
stipulation by the insured that the facts relating to the person or
other interest insured or risk insured are as stated.

• As opposed to a guaranty, which relates to future defaults or

breaches through a collateral promise, a warranty relates to the
present or the past and it is an independent promise designed to
protect the promisee from loss in the event that the facts
warranted are not as the promisor states them to be when the
contract is made. A warranty is broken as soon as it is made if the
facts are not as represented, whereas a guarantee is not breached
until a future default occurs.
 Warranties (Cont’d)
• Temporal warranty: A temporal warranty in respect of defects may
be made an expressed term of a contract or it may be implied by
statute. Temporal warranties are usually expressed in terms that a
person who has performed work will be responsible for defects in
the works which become manifest within a period of X years
following completion of the works.

• The nature of the responsibility may be prescribed in the warranty,

for example in the case of a defect the owner’s remedy may be
limited to it being entitled to call upon the contractor to remedy
the defect. The obligation of the contractor, in such case, is to repair
the notified defect within the period prescribed by the contract, or
no period is prescribed then within a reasonable time.

• If, however, notification of the defect is not given to the contractor

within the warranty period, no liability — including possibly any
liability to pay damages — will arise on the part of the contractor.
 Warranties (Cont’d)
• General warranty: A general warranty is an expressed undertaking by a
person who provides goods or services as to the quality of those goods or
services. There may be no need for a general warranty of quality to be
included expressly in a construction contract, as the law implies
warranties of quality in the absence of expressed terms. Nevertheless, it is
common for warranties of quality to be included in such contracts, so as to
give the parties certainty as to the nature and scope of their respective
rights and obligations.

• The time at which a general warranty takes effect is dependent on its

terms. A warranty of the quality or adequacy of the work performed may
take effect from the time at which the work in question is complete, which
may be a point in time before the totality of the works are completed.

• In Phillips Petroleum Co UK Ltd v Snamprogetti Ltd (2001), a contractor

provided a warranty that “the Work will be free from defects in design and
workmanship”. The “Work” was defined as “any and all work”. It was
argued that the warranty only took effect from the date of issue of a
completion certificate for the whole of the work. That argument was,
however, rejected.