Jonathan Bond, Partner and Alastair Dean, Partner at DAC Beachcroft and FIS Legal Helpline Provider explain the intricacies of collateral warranties, exploring their purpose, implications, and the reasons we must approach them with caution.

Collateral warranties are in the news following the recent Supreme Court decision of Abbey Healthcare (Mill Hill) Limited v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23. But before we get this landmark decision what is a collateral warranty? A collateral warranty is a contract, that is associated with another contract (such as a construction contract, a sub-contract, or design consultant appointment), and is entered into between the person employed under the contract to provide works or services (the contractor, subcontractor or design consultant) and a third party who either has or acquires an interest in the project to which the contract relates.

Why are collateral warranties used?

In the context of a fit-out project to an existing building by a landlord the third party would be a tenant where the tenant has repairing obligations under the terms of its lease. This means the tenant needs to be able to rely on the performance of the contractor, subcontractor, or a design consultant in the event any of their works or services are defective.

So far so good but why is a collateral warranty needed? A third party is not a party to the construction contract, the subcontract, or the design consultant appointment. In simple terms, only the parties to a contract can enforce the contract (i.e. the landlord and the contractor). Anyone who is not a party to a contract cannot rely on it. A collateral warranty solves this problem. Where a collateral warranty is provided to a third party (which would be the tenant in our example) it creates a contractual link between those responsible for designing and constructing the works (the contractor, the subcontractor, or a design consultant) and the third party.

Under the collateral warranty, the provider warrants to the beneficiary that it has complied and/or will comply, with the contract (construction contract, subcontract, or professional appointment, as the case may be). As a collateral warranty is a contract in its own right, this gives the third party the right to sue the provider of the warranty for breach of contract if the warrantor breaches the terms of the warranty. This is one of the key benefits of a collateral warranty for any third party and allows them to take steps to recover the costs of making good any defective works or services.

Read the full article at https://heyzine.com/flip-book/SpecFinish_Oct24#page/26