Kara Price from Bond Dickinson summarises what collateral warranties are and what you should consider before signing one.
What is a collateral warranty?
Defective design or workmanship by a professional consultant (e.g. an architect), contractor or subcontractor can cause parties with different interests in a construction project to experience different losses. Whilst the employer (the client) is likely to have a contract with the party responsible for a defect, other affected parties may not.
Without a contract, an affected party may not be able to recover its losses from the professional consultant, contractor or subcontractor responsible. A collateral warranty solves this problem by creating a direct contractual relationship between parties that would not otherwise exist.
A collateral warranty is a contract under which a professional consultant, a building contractor or a subcontractor warrants to a third party (such as a funder) that it has complied with its obligations in its professional appointment, building contract or subcontract.
What should be considered before entering into a collateral warranty?
Collateral warranties are popular and are used extensively on construction projects. If you are asked to sign a collateral warranty, you should ensure that you are comfortable with its contents before signing. The following are useful points to look out for:
- Parties – Parties to the collateral warranty should be correct and should be consistent with the information on the Companies House website.
- Services – The particular services to be undertaken should be carefully reviewed.
- Insurance – Insurance requirements should reflect the wording contained in your insurance policy documents.
- Warranties – The number of warranties to be provided and the reasons for the provision of warranties to particular parties should be agreed.
- Limitation of liability – Limitation should mirror the limitation of liability within your professional appointment, building contract or subcontract.
Whilst this list is a good starting point, should the contents of a collateral warranty be of concern, FIS members can call the FIS Legal Helpline.
We would be happy to complete a high-level review of the collateral warranty you have been asked to sign.
FIND OUT MORE
0191 230 8860