Parties actively participating in a building project will typically sign into written contracts outlining their respective responsibilities and obligations. For instance, developers and contractors enter into building contracts, developers or contractors enter into appointments with consultants, and contractors enter into subcontracts with subcontractors.
However, there will almost always be other third parties, such as funders, end purchasers, and tenants, who have an interest in the project but are not parties to these contracts. Collateral warranties create a contractual relationship where none previously existed and offer interested third parties the ability to file a claim against the parties who developed or constructed the project. In this article, collateral warranty agreement, we take a look at the process involved and the options available to you.
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Who would need a collateral warranty?
A purchaser of a recently completed commercial unit, for instance, would not have been a party to the building contract/appointments that dictated the unit’s design and construction. If flaws arise in the structure a year or two after the purchase and the owner wishes to file a claim against the contractor or consultants engaged in the initial construction, it is typically only permissible to file a contractual claim if the owner has received collateral warranties.
Similarly, a tenant occupying a business unit under a full repairing and insuring lease would be responsible for any property repairs. Without collateral warranties from the contractor and consultants involved in the design and construction of the unit, the tenant would be unable to pass on the cost of correcting such defects.
What is normally included in a collateral warranty?
It is essential that a collateral warranty be consistent with the underlying contract to which it refers, including specific terms, including:
- A promise that the warrantor has fulfilled and will continue to fulfil their responsibilities under the underlying contract (be it the building contract, appointment, or subcontract) and will execute any design with reasonable skill and care.
- The giving of a copyright licence to use/reproduce the warrantor’s designs, drawings, computations, etc.
- A requirement to maintain professional indemnity insurance at a specified level for a specified number of years following project completion.
Additionally, collateral warranties may incorporate various liability caps intended to limit the warrantor’s liability to the collateral warranty’s beneficiary. Such terms may include a financial cap on the warrantor’s liability, a net contribution clause, and a no greater liability clause that restricts the warrantor’s liability to that of the underlying contract.
It is important to note that the covenant of the warrantor (that they are fulfilling their commitments under the underlying contract) is only as strong as the underlying contract. Any assessment of a proposed form of collateral warranty must not be conducted in isolation, and a copy of the underlying contract must be provided to ensure that all essential provisions are included.
What are the primary considerations for a consultant’s collateral warranty?
The document offers a guarantee from the consultant to the recipient that the consultant exhibited skill and care in their project-related activities. The consultant’s responsibilities under the collateral warranty should not exceed those outlined in the consultant’s appointment by the developer. There is pretty standard language for collateral warranty agreements that has evolved over time.
What specific conditions does the collateral warranty include?
- Definitions
- Warranty
- Noxious substances
- Copyright
- Indemnity insurance
- Assignment and notices of third-party rights
- Law and jurisdiction precedence
- Step in rights
Step-In Rights
Some collateral warranties may also include ‘step-in’ rights, which permit the beneficiary to assume control of the underlying contract and provide instructions.
If there is no contractual agreement, the subcontractor is not required to accept instructions from the employer to complete the job in the event that the project’s principal contractor becomes insolvent. The adoption of a collateral warranty in this circumstance creates a direct contractual link that enables the employer to offer instructions to the subcontractor, so assuring that the subcontractor fulfils its duties.
Is there an alternative to a collateral warranty?
The Contract (Rights of Third Parties) Act of 1999 can be utilised as an alternative to collateral warranties because it permits the creation of third party rights by contract; nonetheless, collateral warranties are currently the favoured method for establishing direct contractual relationships.
What are the risks of not having collateral warranties?
The biggest risk associated with the absence of a collateral guarantee is that reliance must be placed on the existing contractual relationships – the Main Contract and Subcontractors. If the Main Contract and its supply chain continue to trade, there is no need to see collateral warranties as “necessary” – perhaps “desirable” is a more appropriate adjective.
There is no reason why collateral warranties cannot be requested retrospectively, but the contractor would be under no obligation to provide them, and it would not be out of the ordinary to attach a monetary value to their delivery under such circumstances. Given that the Contractor is providing the warranty with a benefit, namely the ability to pursue him directly for a remedy in the event of difficulties with the building or warranted work, this is acceptable.
How we can help
We have a proven track-record of dealing with construction contracts and collateral warranties. Not only does our construction department have extensive legal experience and knowledge of construction law but we also have the benefit of chartered surveying experts. The nature of construction disputes often involves potentially complex areas of law. We will guide you through the process and ensure all checks are carried out swiftly and efficiently and we firmly believe that with the right solicitors by your side, the entire process will seem more manageable and far less daunting.
How to Contact Our Construction Solicitors
It is important for you to be well informed about the issues and possible implications of construction contracts and collateral warranties. However, expert legal support is crucial in terms of ensuring a positive outcome to your case.
To speak to our Construction solicitors today, simply call us on 0345 901 0445, or click here to make a free enquiry. We are well-known across the country and can assist wherever you are based. We also have offices based in Cheshire and London.
Disclaimer: This article provides general information only and does not constitute legal advice on any individual circumstances.
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