RES exam question on Contract & Agency Law: legal instrument would most directly give the fund a right of action against the main…
A property fund purchases a newly completed office building from a developer. The fund later discovers structural defects caused by the main contractor's negligent construction. Which legal instrument would most directly give the fund a right of action against the main contractor?
- AAn assignment of the S&P Agreement from the developer to the fund
- BA performance bond issued by the contractor's surety to the developer
- CA letter of intent from the original developer to the main contractor
- DA collateral warranty from the main contractor in favour of the fund
Show answer & explanation
Answer
D. A collateral warranty from the main contractor in favour of the fund
Explanation
A collateral warranty is a deed entered into between the contractor (or consultant) and a third party such as a purchaser or funder, creating a direct contractual right of action. Without it, the fund — not being a party to the original building contract — has no direct claim in contract against the main contractor (privity of contract rule). An assignment of the S&P Agreement transfers ownership rights, not construction liability. A performance bond protects against contractor insolvency/non-performance, not latent defects after completion. Letters of intent are non-binding preliminary documents.
Study the concept behind this question: Misrepresentation & an Estate Agent's Liability
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