Collateral Warranties – what are they and why do we need them?

Why do you need collateral warranties?

In most building projects, the client will have contracts in place with their builder and their professional team. This gives the client the right to take action directly against the builder or professional if a problem arises.

The builder will usually have sub-contracts in place with their sub-contractors and any professionals that they have engaged (particularly if the project is design and build). This allows the builder to take action against those sub-contractors/professionals but the client has no direct contractual link. If, say, the builder goes bust then the client would be left without direct recourse to the sub-contractors/consultants. That can be addressed by the use of collateral warranties.

Similarly, if the client is relying on funding being provided by a bank or third party for the project then the funder will usually require a direct link to the builder and any consultants engaged by the client. If the funder has to take over the project as a result of some default by the client then they have a direct contractual link to the builder and consultants.

What is a collateral warranty?

It is a contract that is “collateral” to the main agreement. It will require the builder or consultant to confirm that they will carry out or have carried out their work properly. Often it will include requirements that allows the beneficiary to “step into” the main contract and become the client. It may also include provisions that require the builder or consultant to maintain insurance.

Are there standard form warranties?

Some of the industry bodies produce standard form collateral warranties. The most common standard forms are those produced by JCT and CIC. However, the terms of these warranties are often not acceptable to beneficiaries, particularly funders, as they contain limits on liability. It is therefore common for collateral warranties to be bespoke forms produced by the client or beneficiary. Ultimately the precise wording of the warranty will be a matter of negotiation between the parties.

Jim Gorrod is a partner and heads up our construction team. He is a specialist in construction law and has been recognised in national independent legal directories as a ‘leader’ in this field. If you have any queries regarding construction please call 01392 210700 or email drx@stephens-scown.co.uk.