Contracts are the backbone of construction projects, detailing the rights and responsibilities of the numerous parties involved. One such contract is a collateral warranty, meaning an agreement that gives rights to third parties, such as funders and purchasers, who are not a party to the main construction contracts.
Collateral warranties offer invaluable protection to key parties in a construction project. However, they are also a common cause of disputes, primarily because they create additional legal relations and responsibilities beyond those detailed in the main construction contracts. At Altion Law, our team of construction solicitors and barristers specialises in assisting businesses in the construction industry in resolving disputes swiftly, cost-efficiently, and with minimal disruption to their commercial operations.
For a confidential free discussion, call us today on 01908 414990, alternatively email us at Hello@altion-law.co.uk or complete our Free Enquiry Form and we will call you back.
What is a Collateral Warranty?
Usually, only a party to a contract can enforce its terms against the other parties. This can cause issues for some stakeholders in a construction project. For example, if a subcontractor were to breach its contract with a contractor, only the contractor would have a claim against it. Even if other parties, such as the employer, suffered a detriment as a result of the breach, they would have no recourse.
A collateral warranty is a contract that sits alongside the main construction contracts. In simple terms, it is a mechanism whereby a party involved in a construction project, such as a contractor, provides warranties directly to parties who are not a party to the main contracts. The third party then gains the right to make a claim against the contractor if the contractor breaches their contractual duties.
Why are Collateral Warranties important?
Collateral warranties are commonplace in the construction industry, where projects typically involve multiple stakeholders. Just a few reasons why collateral warranties are important include the following:
- They provide security for funders. Those providing funding for a project, like a bank or building society, need to protect their investment. Collateral warranties give funders reassurance that they can take direct action against those who breach the main construction contracts, to which the funder will not be a party.
- They protect purchasers and tenants. A collateral warranty enables the new owner or tenants of a building to address issues such as defects with those responsible, even though the owner or tenant was not a party to the construction contract.
What issues can arise with Collateral Warranties?
Collateral warranties are a common cause of disputes between businesses operating in the construction industry. One example of a common dispute relating to collateral warranties is whether a collateral warranty should be classed as a construction contract. This can be an incredibly important issue because, if it is, the parties enjoy specific rights, including the statutory right to refer a dispute to adjudication.
The matter has caused issues for businesses in the construction industry for some time. However, following a recent Supreme Court judgment, the position has been clarified to a certain extent. The court decided that, generally speaking, collateral warranties cannot be classed as construction contracts.
That said, the issue may still lead to disputes between businesses involved in a construction project. For example, parties may seek to include wording to get around the judgment, and disputes may arise over the meaning and effect of that wording.
How can we help?
Collateral warranties are a crucial mechanism in UK construction projects, bridging the gap between parties directly involved in construction and those with a financial or long-term interest in the completed development. By providing parties such as funders, purchasers, and tenants with recourse against parties who breach construction contracts, collateral warranties can help to encourage those parties to get involved in a project, knowing that their position and investment are protected.
However, collateral warranties are a common cause of disputes in the construction industry. These disputes must be managed carefully to avoid them escalating, disrupting the parties’ commercial operations, and causing significant financial losses.
At Altion Law, we specialise in business and commercial disputes, and our construction team has extensive experience in handling complex construction cases, from contractual disagreements and payment issues to professional negligence and defect claims. We understand that disputes in the construction industry often involve multiple parties, tight project timelines, and significant financial stakes. We provide commercially focused, pragmatic advice aimed at resolving matters as swiftly as possible. We see litigation as a last resort, instead prioritising quicker and more cost-efficient solutions, such as negotiation, mediation, or adjudication to achieve our clients’ goals. Our practical, results-driven service and proven track record of achieving excellent results for our clients makes us the ideal choice for businesses operating in the construction industry.
For a confidential free discussion, call us today on 01908 414990, alternatively email us at Hello@altion-law.co.uk or complete our Free Enquiry Form and we will call you back.
