Construction projects are governed by a series of contracts, but collateral warranties are often required to give third parties the protection they would not otherwise have.
Construction projects rarely involve just two parties. Alongside the customer and main contractor, there are funders, tenants, specialist subcontractors and consultants.
Collateral warranties bridge the gap created by privity of contract, allowing third parties to enforce obligations under the building contract.
The Head of our Construction Law department, Adam Davis, explains why collateral warranties are required and what they mean for contractors.
What is a collateral warranty?
A collateral warranty is where a warrantor confirms that it has complied and will continue to comply with its obligations under the underlying building contract or professional appointment.
It creates a direct contractual link between you and a party who is not part of your main contract.
Without this warranty, the third party would usually have no right to bring a contractual claim against you.
When are collateral warranties needed?
Collateral warranties are commonly required for commercial, mixed-use and residential developments, particularly where there is funding or a sale involved.
They are typically requested:
- By funders or banks to protect their investment
- By purchasers buying the completed development
- By tenants, particularly under commercial leases
- In funding or sale agreements, where the end user is not the original employer
The building contract will often oblige the main contractor to provide warranties and to procure warranties from subcontractors and consultants.
What does a collateral warranty cover?
Although the wording can vary, most warranties include:
- A promise that you have complied and will comply with the building contract.
- An obligation to exercise reasonable skill and care.
- A commitment to maintain professional indemnity insurance for a defined period.
- Step-in rights for funders, allowing them to step into the employer’s position if the employer becomes insolvent.
- Limitations of liability, such as financial caps and net contribution clauses.
How does a collateral warranty affect contractors?
Instead of facing one claim from the employer, you could be liable for multiple claims from different parties.
The warranty should not exceed your obligations under the underlying contract and the documents must align.
If you do not review the warranty or if it is poorly drafted, you could be putting yourself at further risk.
How can we support you with collateral warranties?
Collateral warranties may not feel entirely beneficial for you, but they are often a necessity for contracts.
You must be proactive in reviewing a collateral warranty to ensure it is accurate and so you can assess the risks.
Our Construction Law solicitors can review and negotiate warranty wording and ensure liability caps and insurance obligations are consistent with your policy.
Collateral warranties can still be controlled and negotiated on terms that protect your business.
If you need further advice on collateral warranties in construction contracts, contact our team today.
