The primary objective of a collateral warranty is to impose a duty of care on a building contractor, professional consultant, or subcontractor on behalf of a third party.
In this article, what is the purpose of a collateral warranty, we take a look at the process involved and the options available to you.
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What is a collateral warranty?
Every construction project is supported by a variety of documents, including blueprints, specifications, permissions, and contracts; some are even subject to a collateral warranty. Although collateral warranties have a long history in the construction business, they can be time-consuming and challenging to arrange.
Naturally, any uncertainty in construction documentation, including collateral warranties, creates risk; therefore, it is essential that anyone entering into a collateral warranty agreement understands what they are, how they function, and some of the rights and responsibilities they typically stipulate.
How is a collateral warranty defined?
A collateral warranty in construction is a contract in which a professional consultant, such as an architect, engineer, surveyor, or building contractor/subcontractor, warrants to a third party, such as a funder, buyer, or tenant, that they have complied with their professional appointment, building contract, or subcontract.
A collateral warranty is, in essence, a method of granting contract rights to a party having an interest in a construction project when those rights are not offered under the main contract.
Frequently, collateral warranties include responsibilities that influence the consultant or contractor, such as using materials of an acceptable quality and performing work professionally. In addition, they provide the third-party funder, tenant, or purchaser with contractual rights allowing them to seek compensation for damages incurred as a result of poor design or construction.
What sort of provisions are typically included in a collateral warranty?
- A collateral warranty may include a variety of additional clauses, including but not limited to:
- The obligation to exercise reasonable skill and care in the performance of the underlying contract’s services.
- The phrase ‘equivalent rights of defence’ (which gives the granter the protection of any limitations built into their appointment carrying through to the collateral warranty).
- A grant of unrestricted copyright permission.
- Clear limitation period.
- Step-In Clauses
- An obligation to maintain Professional indemnity (PI) insurance.
Contractors, sub-contractors, consultants, and sub-consultants, regardless of discipline, are required by law to provide collateral warranties if required to do so under their primary contract/appointment.
Who would need a collateral warranty?
A purchaser of a recently finished commercial unit, for example, would not have participated in the building contract/appointments that governed the unit’s design and construction. If defects appear in the structure a year or two after the purchase and the owner intends to bring a contractual claim against the contractor or consultants involved in the initial construction, it is usually only possible if the owner has acquired collateral warranties.
Similarly, a tenant who occupies a commercial space under a full repairing and insuring lease is liable for all 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 costs associated with repairing defects.
Step-In Rights
Some collateral warranties may also contain ‘step-in’ rights, which allow the beneficiary to assume control of the underlying contract and provide instructions.
If there is no contractual agreement, the subcontractor is not compelled to accept the employer’s instructions to continue the job if the project’s prime contractor becomes insolvent. Adoption of a collateral warranty in this situation establishes a direct contractual link that enables the employer to provide instructions to the subcontractor, so ensuring that the subcontractor performs its obligations.
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?
In the absence of a collateral warranty, the greatest risk is that reliance must be placed on the current contractual ties, namely the Main Contract and Subcontractors. There is no need to view collateral warranties as “essential” if the Main Contract and its supply chain continue to trade; perhaps “desirable” is a more relevant term.
There is no reason why collateral warranties cannot be requested retrospectively, but the contractor is under no duty to offer them, and it would not be out of the ordinary to attach a monetary value to their delivery in such a situation. This is appropriate given that the Contractor is offering a benefit to the warranty, namely the option to pursue him personally for a solution in the event of problems with the building or warranted work.
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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