The parties directly involved in a construction project will usually enter into written contracts detailing the duties and obligations each has to the other. For example, building contracts are entered into between developers and contractors, appointments between developers or contractors and consultants and sub-contracts between contractors and sub-contractors.
However there will almost always be other third parties who have an interest in the project but are not a party to these contracts such as funders, end purchasers or tenants.
What does a collateral warranty do?
Collateral warranties create a contractual link where none had previously existed and give these interested third parties a right to bring a contractual claim against the parties that designed or built the project.
Who needs a collateral warranty?
As an example, a party purchasing a recently constructed commercial unit would not have been a party to the building contract/appointments which governed the design and construction of that unit. If defects appear in the structure a year or two after the purchase and the owner wanted to raise a claim against the contractor or consultants involved in the original construction - raising a contractual claim would usually only be possible where they had obtained collateral warranties.
Likewise, a tenant taking a commercial unit under a full repairing and insuring lease would be responsible to make good any defects arising at the property. Without the benefit of collateral warranties from the contractor and consultants involved in the unit’s design and construction the tenant would be unable to pass on the costs of putting right any such defects.
What does a collateral warranty include?
It is important that a collateral warranty is consistent with the underlying contract that it relates to and there are certain clauses that would be expected in any collateral warranty such as:
- A covenant that the warrantor has and is continuing to fulfil their obligations under the underlying contract (be that the building contract, appointment or sub-contract) and will carry out any design with reasonable skill and care;
- The granting of a copyright licence to use/reproduce any designs, drawings, calculations etc produced by the warrantor; and
- An obligation to maintain professional indemnity insurance at a certain level for a set number of years following completion of the project.
Collateral warranties may also include various caps on liability which seek to limit the warrantor’s liability to the beneficiary of the collateral warranty. Such clauses can include a financial cap on the warrantor’s liability, a net contribution clause and a no greater liability clause which restricts the warrantor’s liability to that which they have under the underlying contract.
It is worth noting that as the warrantor’s covenant (that they are fulfilling their obligations under the underlying contract) is only as strong as that underlying contract. Any review of a proposed form of collateral warranty must not be undertaken in isolation and a copy of the underlying contract must be provided to ensure it includes all the key terms.
If you would like further information about collateral warranties, a member of our commercial property team will be happy to help.
