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 collateral warranty in favour of a purchaser or tenant of a commercial property development usually includes clauses that:
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:
Additionally, on a larger project, some professional appointments and building contracts may require a collateral warranty to be given to:
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.
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