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Collateral Warranty Advice

What is a collateral warranty?

A collateral warranty is an alternative form of warranty provided directly by third parties. For example, a third party can be the structural engineer or architect that designed the property or the contractor that completed the building work under a building contract. A collateral warranty is usually provided by a professional involved in the design of a property or development or construction projects.

The professional consultant or contractor will usually warrant (promise) that it has complied with its obligations under the underlying building contract. If the professional consultant or contractor breaches the collateral warranty, and the beneficiary of the collateral warranty suffers a loss, the beneficiary has a contractual claim under the underlying contract and can then sue the professional consultant or contractor for breach of contractual obligations.

When are collateral warranties used?

These are usually used as an alternative if a warranty scheme such as Checkmate, LABC or Premier Guarantee is not being provided and a collateral warranty provides a direct contractual link for example where a sub contract is used. It’s worth noting that the sub contractor has to agree to provide collateral warranties.

Who do they benefit?

This will be set out in the particular collateral warranty but usually, a collateral warranty benefits a third party such as a buyer, tenants, or lender of a development by creating a contractual obligation. Some professional consultants or contractors will want to limit the number of beneficiaries under the collateral warranty to reduce the pool of third parties that could claim for breach of contract.

Why are they used?

If there is no collateral warranty in place and a property is built and it later transpires that the design or workmanship is defective, then a beneficiary may not be able to recover any losses it has suffered as a result of the defect from the professional consultant. The collateral warranty will ‘bridge the contractual gap’ and provide a direct contractual link between the professional consultant and beneficiary to enable it to bring a claim for breach of contract if needed.

Collateral warranties are a complex area of law and a developer should discuss whether their professional consultants are willing to provide these at the outset of construction projects. The exact terms of the collateral warranty need to be drafted carefully to ensure the beneficiary has sufficient protection and benefit in the event a defect comes to light. For further information on collateral warranties, then please contact our commercial property team direct.

If you need any advice on collateral warranties, please contact a member of our commercial property law team in confidence here or on 02920 829 100 for a free initial call to see how they can help.

To speak to one of our experts today, please contact us on 02920 829 100 or by using our Contact Us form for a free initial chat to see how we can help.

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