Collateral warranty – Extending protection to purchasers?

It’s time to consider a new clause in the statutory sale and purchase agreement to allow purchasers to “inherit” the manufacturers’, contractors’ and suppliers’ warranties given to housing developers.

A collateral warranty is a contract that supplements a primary contract that extends the benefit of the warranty given by a party under the primary contract (known as warrantor) to a third party who is not a party to the primary contract (known as beneficiary).

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Such a contract gives a direct contractual relationship between the warrantor and the beneficiary which will otherwise not exist.

Property development is an intricate work involving multiple stakeholders – from a developer to a main contractor and from a main contractor to various subcontractors. At the other end of the chain are the purchasers who buy the property from the developer. As it goes along, the same property may be sold to subsequent purchasers in the secondary market.

In a typical scenario, a developer, who is known as an employer in the construction field, engages a main contractor by way of a building contract to construct the building as a whole.

The main contractor then awards different types of work to various subcontractors by way of letters of award or letters of appointment. Meanwhile, the developer enters into sale and purchase agreements (SPAs) with purchasers.

Such contractual relationships in a property development are mutually exclusive. The developer is contracted to the main contractor, while the main contractor is contracted to the subcontractors. On the other hand, the developer is contracted to the purchasers of the property. These contracts do not overlap or override one another.

Specialist works

Specialist contractors are subcontractors engaged for their expertise and speciality in select areas of construction such as –

• water proofing work

• proprietary roof truss system

• paint work

• aluminium works such as door, window and louvre

• mechanical and electrical works such as fire-fighting systems, auto-gates, lifts and escalators

• termite treatment

These specialist works normally come with extended warranties, with some up to 10 years. However, unless otherwise provided for, the extended warranties are only given to the party who engages them, i.e. the main contractor.

In some cases, they may be required to be extended to the developer. Nonetheless, they typically do not extend to the property purchasers.

Purchasers are third party

Development of residential property in Malaysia is governed by the Housing Development Act (Control and Licensing) Act 1966 and the rules enacted thereunder.

In a SPA for residential property provided under the housing development laws, a developer must provide protection to purchasers for defect liability for a period of two years from the delivery of vacant possession. This is known as the defect liability period (DLP).

Once the DLP lapses, the purchasers will be without cover should further defects appear. This is despite the fact that warranties from the contractors may continue to run beyond the two-year DLP undertaken by the developer.

The doctrine of privity of contract only extends contractual rights to the parties to a contract. As purchasers are not contracted to the main contractor or subcontractors, they do not enjoy the benefit of any warranties given under these contracts.

Purchasers are regarded in law as a third party to these contracts (or warranties), hence they generally cannot enforce the warranty given under these contracts.

Collateral warranty should extend to purchasers

The essential question is, if specialist works do in fact come with warranties for extended periods, why aren’t these warranties extended to the purchasers who are the end-users?

After all, purchasers are the ones who will be affected by defects that may only surface after the expiry of the DLP covered by the developer.

Unlike other jurisdictions in other countries, such as the United Kingdom, third party rights are not given legislative protection in Malaysia. This makes an appealing case for parties to seek additional rights through other means. One option is collateral warranty.

A properly drafted collateral warranty will extend contractual rights to the purchasers to claim warranty on the work within the given warranty period. In cases where the warranty period is longer than two years, it will naturally extend protection to the purchasers beyond the DLP of two years.

The notion of collateral warranty is especially pertinent in specialist works for the following reasons —

• repair or remedial work on specialist works require expertise and are generally more costly

• specialist works would have come with extended warranties in the first place

• exposure of specialist contractors may be covered by insurance or professional indemnity insurance

While a developer may require specialist contractors to extend the warranties to them, it must be borne in mind that the developer’s liability to purchasers is limited to a period of two years.

Beyond this period, purchasers are at best only able to request the developer (on goodwill basis) to claim on the warranty from the specialist contractors – that is, provided that the existence of extended warranties is disclosed to the purchasers.

Since a developer is not legally bound to make good the defects after the DLP, the purchasers may end up losing out on the benefit of the extended warranties. A collateral warranty may be a solution to this issue.

Assignment of manufacturer’s warranty clause

The housing and local government ministry (KPKT) has often advocated in the media that the ministry will be passing new laws for the protection of house buyers. Then why don’t we have a new clause in the statutory SPA to allow purchasers to “inherit” the manufacturers’, contractors’ and suppliers’ warranties given to the housing developers?

The warranties should cover any of the materials, equipment and appliances installed by the developers or their agents.

Notwithstanding the proposed assignment of warranties to purchasers, the housing developers must remain entirely responsible for the performance of its obligations to the purchasers during the DLP.

Datuk Chang Kim Loong is the Hon Secretary-general of the National House Buyers Association (HBA) and Kennie Ang Joo Koon is one of the HBA volunteer lawyers. HBA could be contacted at:

Email: [email protected]
Tel: +6012 334 5676

This story first appeared in the E-weekly on March 19, 2021. You can access back issues here.

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