Collateral warranties are stand-alone contracts under which contractors, sub-contractors and professional consultants warrant to third parties that they have complied with their obligations under the relevant underlying contract (i.e. a building contract, subcontract or professional appointment).
Collateral warranties can contain a wide range of duties and obligations, but will often include the following key provisions:
- A provision that the warranty provider will comply with their obligations under the underlying building contract and / or professional appointment with the employer;
- A provision requiring the warranty provider to undertake the works with the requisite level of skill and care, including not using and / or specifying harmful materials in the project;
- A provision granting a copyright licence to the beneficiary of the warranty, such that they can use and / or reproduce any drawings and designs in completing the project;
- A provision requiring the warranty provider to maintain professional indemnity insurance for a specified period following completion of the works; and
- In circumstances where the warranty is being provided to a funder, a provision entitling the funder to take over the employer’s role if there has been a breach of the underlying contract or if the employer becomes insolvent.
It is also important to ensure that the terms of any collateral warranty are consistent with the underlying building contract and / or professional appointment – a review of a proposed collateral warranty cannot be undertaken in isolation.