May 11, 2021

5 Key Points to consider before giving a Collateral Warranty

Construction professionals and named sub-contractors, particularly those with design liability, are often asked to provide collateral warranties so as to create a direct contractual link between them and third parties.  This allows the party with the benefit of the warranty to bring a claim directly against the party giving the warranty, in the event of a breach of contract.

Holmes & Hills specialist Construction solicitors have extensive experience in relation to the negotiation and provision of collateral warranties.

Here are our 5 key points for those being asked to give collateral warranties to consider. 

1. Who will obtain the benefit of the warranty?

This may be a single party (e.g. the employer under the main contract) or it may be a broader class of beneficiaries (e.g. any tenants).  It is important to consider how broadly any class(es) of beneficiaries is/are defined.  Parties should also be mindful of any right to assign the benefit of the warranty, often multiple times, such as to successive purchasers of a building.

2. How long will the collateral warranty last?

Typically, collateral warranties will specify a limitation period (that is a long stop date within which any litigation must be commenced) of either 6 or 12 years from practical completion of the main contract works.   In some instances, that may be substantially longer than the party’s primary obligations under their deed of appointment/sub-contract.

3. What is the extent of the party’s liability?

It is important for a party to understand whether it is being asked to accept any greater obligations under the collateral warranty than it owes to its direct employer under the relevant deed of appointment/sub-contract.  What, if any, express limitations are there on the party’s obligations?

4. Has the collateral warranty been drafted “back-to-back” with the deed of appointment/sub-contract?

In order to avoid ambiguities in relation to what is required of the party giving the collateral warranty, it is important to ensure consistency between the terminology used in the collateral warranty and the party’s deed of appoint/sub-contract.  Any inconsistencies can lead to uncertainty and increased potential for disputes to arise.

5. What are the party’s obligations to give and/or procure collateral warranties?

It is good practice for an employer not to enter into a deed of appointment/sub-contract unless the professional/sub-contractor simultaneously enters into (and procures from third parties) all relevant collateral warranties.  However, that does not always happen.  Where there is a delay in the professional or sub-contractor being asked to enter into, or procure, collateral warranties, they should revert to the deed of appointment/sub-contract to determine the extent of their liability to do so.  If the form of collateral warranty has not been agreed (often this is seen in the context of incomplete drafts) then it may be that the professional/sub-contractor can refuse to do so.

Depending on the parties’ relative bargaining positions, there may be scope for negotiating the terms of collateral warranties; if not, those being asked to give them should at least understand the degree of risk they are accepting.  Anyone seeking advice on proposed collateral warranties can contact Holmes & Hills’ team of specialist construction lawyers.

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