As a business operating in the construction industry, you will no doubt have come across the term “collateral warranty.” But what exactly is a collateral warranty in construction, and why is it so important in the context of a construction project, both legally and commercially?
Here, our specialist construction solicitors and barristers explain what collateral warranties are, why they matter to a wide range of stakeholders, and, most importantly, what happens when things go wrong, or disputes arise.
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 in Construction?
Collateral warranties play a crucial role in protecting the interests of all parties involved in a construction project. They are legally binding agreements that create a direct contractual relationship between parties who otherwise would not have one.
Typically, the main contract exists between the employer and the contractor or consultant. Subcontractors, funders, and end users may not be directly protected under this contract. This means that, if a party to the main contract breaches their obligations, only the other contracting party would have a right to make a claim against them. Collateral warranties are specifically designed to bridge that gap and extend valuable protections.
What is the purpose of a Collateral Warranty in Construction?
A collateral warranty is essentially a side agreement that runs alongside the main contract. It gives third parties, such as funders, tenants, or purchasers, the ability to rely on the professional obligations of contractors, architects, engineers, or subcontractors. In practical terms, it means that if the works or design are defective, the beneficiary of the warranty has a legal route to claim damages, even though they are not a party to the main building contract.
The central purpose of collateral warranties is therefore to extend rights and remedies. Without them, a legal principle known as ‘privity of contract’ would prevent third parties from pursuing claims for losses they have sustained as a result of a party breaching the main contract. This can be especially significant in large or complex projects where funders, purchasers, and future occupants need reassurance about quality, compliance, and accountability.
Who typically benefits from Collateral Warranties in Construction?
Examples of some of the participants in construction projects who are commonly the beneficiaries of collateral warranties include the following:
- Funders. Banks or financial institutions funding the development need assurances that their investment is protected against construction defects.
- Tenants. Long-term occupiers of commercial premises need direct recourse if building defects disrupt their use or enjoyment of the property.
- Purchasers. Buyers of completed buildings need protection against latent defects that may not be immediately visible at the point of purchase.
What are the key features of Collateral Warranties in Construction?
Collateral warranties are usually drafted to mirror the obligations already found in the main construction contract. Some common features of collateral warranties in construction include the following:
- A warranty that the warrantor has complied with its obligations under the main construction contract.
- A warranty that the warrantor will exercise reasonable skill and care when carrying out their work.
- A warranty that the warrantor will maintain professional indemnity insurance throughout the project and for a specified period afterwards.
- A time limit by which any claim against the warrantor must be brought.
- The ability for the beneficiary of the warranty to step into the main construction contract (usually in the case of funders).
How can we help with Collateral Warranties in Construction?
Collateral warranties in construction provide parties that have an interest in the project an invaluable mechanism through which to gain legal protection when they are not a party to the main construction project. However, they are not without their difficulties. For example, if the drafting of the collateral warranty is unclear or at odds with the terms of the main construction contract, or if the intended beneficiary is not clearly identified, disputes can arise over the extent of the protection it offers. Given the importance of collateral warranties to those affected by them, those disputes can quickly escalate if not effectively managed and resolved.
That is where the specialist solicitors and barristers at Altion Law come in. We have decades of experience in resolving collateral warranty disputes for our countless clients in the construction industry. We understand the importance of resolving disputes of this nature swiftly and effectively, and we offer pragmatic, commercial advice tailored to your situation. Our solicitors and barristers avoid litigation wherever possible, preferring instead to explore negotiations and alternative dispute resolution methods, such as mediation, to resolve issues to our clients’ satisfaction.
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.
