Kara Price from Bond Dickinson summarises what collateral warranties are and what you should consider before signing one.

What is a collateral warranty?

Defective design or workmanship by a  professional consultant (e.g. an architect), contractor or subcontractor can cause parties with different interests in a construction project to experience different losses. Whilst the employer (the client) is likely to have a contract with the party responsible for a defect, other affected parties may not.

Without a contract, an affected party may not be able to recover its losses from the  professional consultant, contractor or  subcontractor responsible. A collateral warranty solves this problem by creating a direct  contractual relationship between parties that would not otherwise exist.

A collateral warranty is a contract under which a professional consultant, a building contractor or a subcontractor warrants to a third party  (such as a funder) that it has complied with its  obligations in its professional appointment, building contract or subcontract.

What should be considered before entering into a collateral warranty?

Collateral warranties are popular and are used extensively on construction projects. If you are asked to sign a collateral warranty, you should ensure that you are comfortable with its  contents before signing. The following are useful points to look out for:

  • Parties – Parties to the collateral warranty should be correct and should be consistent with the information on the Companies  House website.
  • Services – The particular services to be  undertaken should be carefully reviewed.
  • Insurance – Insurance requirements should reflect the wording contained in your insurance policy documents.
  • Warranties – The number of warranties to  be provided and the reasons for the provision of warranties to particular parties should  be agreed.
  • Limitation of liability – Limitation should mirror the limitation of liability within your professional appointment, building contract or subcontract.

Whilst this list is a good starting point,  should the contents of a collateral warranty  be of concern, FIS members can call the FIS Legal Helpline.

We would be happy to complete a high-level review of the collateral warranty you have been asked to sign.




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