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Collateral Warranties On Construction Projects

EM Law are experts in advising clients on collateral warranties. Our lead construction lawyer is Anna Rabin who has extensive experience in advising clients on a wide range of construction law matters.

What are collateral warranties?

Collateral warranties are contracts under which a professional consultant, building contractor or sub-contractor usually warrants to a third party that it has complied with its professional appointment, building contract or sub-contract.

Why are collateral warranties needed?

If a funder, buyer or tenant of a construction project or a completed construction project suffers a loss caused by one of the parties who designed, constructed and managed the project (where there is no privity of contract), a collateral warranty can make all the difference to the funder, buyer or tenant’s legal rights by enabling a claim to be made despite the lack of privity.

Key clauses in collateral warranties

The commercial property development sector often refers to “purchaser or tenant” collateral warranties and “funder” collateral warranties. Other specialist sectors use different forms of collateral warranty (sometimes called “direct agreements”) in favour of parties specific to their sectors. A collateral warranty in favour of a purchaser or tenant of a commercial property development typically includes certain core features, many of which are common across all construction and engineering sectors.

A collateral warranty in favour of a funder is typically slightly different to a purchaser or tenant collateral warranty.

A collateral warranty in favour of the purchaser or tenant of a commercial property development is usually:

  • A bilateral contract, between a professional consultant or contractor (a warrantor) and the purchaser or tenant (the beneficiary).
  • Executed as a deed.
  • If it is not executed as a deed, it should include nominal consideration such as the beneficiary paying £1 to the warrantor.

A collateral warranty in favour of a purchaser or tenant of a commercial property development usually includes clauses that:

  • Require the warrantor to comply with the professional appointment or building contract it entered into with the developer. Additionally, where the warrantor has a design responsibility, some collateral warranties include an obligation to both comply with the professional appointment or building contract and an obligation to exercise skill, care and diligence in carrying out design.
  • Limit the warrantor’s liability.
  • Confirm that the beneficiary may not give instructions to the warrantor. (The developer instructs the warrantor.)
  • Confirm that the beneficiary may appoint others to inspect the project, without affecting the warrantor’s obligations under the collateral warranty.
  • Oblige the warrantor to use reasonable skill, care and diligence not to use or specify deleterious (harmful) materials in the project.
  • Grant a copyright licence (or wider intellectual property licence) in favour of the beneficiary, allowing it to copy documents and designs for use in connection with the project.
  • Oblige the warrantor to maintain professional indemnity insurance (often for 12 years from practical completion), provided that the warrantor has a design or management obligation.
  • Limit the beneficiary’s right to assign the benefit of the collateral warranty.
  • A right to assign the benefit of the collateral warranty to a person taking the beneficiary’s interest in the project on two occasions is common. Assignment on two occasions is a generally accepted balance between a beneficiary’s desire for flexibility and freedom of assignment and the warrantor’s concern that it may be exposed to claims from many different parties.

Common beneficiaries

It is best practice to agree, in the professional appointment or building contract, who may be given what form of collateral warranty. (The form of collateral warranty or collateral warranties often forms a schedule to a professional appointment, building contract or engineering contract.) This avoids the difficult task of seeking to negotiate a list of beneficiaries and a form of collateral warranty after signing the professional appointment or building contract.

An attempt to agree an appropriate form of collateral warranty and list of beneficiaries after signing can be time-consuming and may reach a stalemate. Having agreed a professional appointment or building contract, a contractor or professional consultant may not be willing to extend its liabilities to third parties, unless the employer makes this requirement clear from the beginning of negotiations.

Professional appointments and building contracts commonly require a collateral warranty to be given to:

  • A buyer of all or part of the completed project.
  • A tenant of all or part of the completed project.
  • The employer’s funder of the construction phase of a project.

Additionally, on a larger project, some professional appointments and building contracts may require a collateral warranty to be given to:

  • A funder of any stage of the project and a funder of a purchaser of the completed project.
  • A management company of the completed project.
  • A group company, in the same group of companies as the employer.
  • A joint venture partner.
  • The operator of a completed facility.
  • The sponsor (also known as the procuring authority) of a PPP project.
  • The employer, after a professional appointment is novated to a design and build contractor.

On a larger project, the employer may expect sub-contractors or sub-consultants to provide collateral warranties to the employer and, in some instances, additionally to buyers, tenants and the funder. As a possible middle ground, the employer may require sub-contractor and sub-consultant collateral warranties only from those with a key design or construction responsibility.

For any questions you may have concerning collateral warranties contact Anna Rabin.

Collateral Warranties EM Law Anna Rabin

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