Collateral Warranties, Guarantees and Third Party Rights

Have you been asked to sign a document providing security for your client or a subcontractor? Are you being requested to provide a collateral warranty or grant third party rights in your construction contract?

It’s important to be clear on what you are being asked, how the security mechanism works, and where there could be potential risks.

For a confidential and 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 And How Does It Work?

A collateral warranty is an agreement outside of a construction contract. Its purpose is to give enforceable rights to someone who is not a party to the main construction contract.

Let’s say you’re the project owner. Your contractor brings in drywall specialists. If the work is defective, you can sue the contractor who, in turn, can seek to recover from their subcontractor. But what if your contractor goes out of business? You’re not a party to the contract between the contractor and subcontractor, so you can’t sue the drywall specialists directly. This is where having a collateral warranty can be invaluable.

Collateral warranties are an important part of the arrangements for a construction project. They allow an employer to sue a subcontractor directly, and potentially vice versa.

Third Party Rights In Construction Contracts

Historically, it was impossible for a contract to create enforceable rights for anyone who was not party to a contract. That changed with the Contracts (Rights of Third Parties) Act 1999.

The Act gives third parties the ability to enforce rights under a contract they are not party to. In practical terms, it’s similar to granting rights under a collateral warranty. The difference is there is no need for a separate contract (the collateral warranty). Project owners and contractors can now grant rights to third parties either in the construction contract itself or by issuing notices of third party rights.

We’re seeing more and more parties choose to use their construction contracts to grant third party rights. It avoids the need to have to negotiate separate collateral warranty agreements. With both mechanisms, however, it’s vital you understand precisely what rights are being created. Before agreeing to anything, take specialist legal advice to make sure you’re not exposing yourself to unnecessary risk.

Guarantees

Any construction project involves risks. Guarantees are all about allocating those risks more effectively.

Here are some of the types of guarantee we routinely advise our clients on.

Performance Guarantees

These are the most common types of guarantee used in arrangements for construction projects. It allows you to mitigate against the risk of shoddy workmanship, delays, and a contractor’s failure to follow agreed procedures and contractual terms.

Parent Company Guarantees

A parent company guarantee is designed to give you protection in the event your employer or contractor goes into insolvency. It allows you to lean on the financial stability of your contractual partner’s parent company.

Retention Guarantees

Retention guarantees are a way for contractors to boost their cash flow without undermining their clients’ security for remedying defects. We can help you negotiate the early release of a retention with a well-drafted retention guarantee.

Bank Guarantees

There are various types of bank guarantee. These include:

  • Performance bonds – Similar to performance guarantees, if a contractor fails to perform their obligations under the construction contract, the employer can use a performance bond to cover the costs of arranging for the project to be completed by someone else.
  • Payment bonds – These give subcontractors reassurance they will be paid for the work they carry out or the materials they supply for a construction project.
  • Big bonds – Used by contractors to give project owners assurance they will honour their bid and enter into a contract if awarded the project.

Altion Law are specialists in advising and representing parties on commercial construction contracts, claims and disputes.

For a confidential and 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.