A collateral warranty is a contract that gives a party with no direct contract with the contractor, Subcontractor or consultant a right to claim against them if their work is defective. Funders, purchasers and tenants usually ask for them, because they do not have a main contract to rely on. The warranty runs alongside the building contract, which is why it is called collateral.
Worked example
A Developer builds a £6m office block, funded by a bank and pre-let to a tenant. The Main Contractor employs a mechanical subcontractor on a £480,000 order. The bank and the tenant each ask for warranties from the contractor and key subcontractors.
Four years later, the cooling system fails because of a design fault in the subcontractor's work. The tenant has no contract with the subcontractor, but the warranty lets it claim for its loss directly.
What a warranty usually contains
- A promise that the work has been or will be carried out with reasonable skill and care, to the standard in the underlying contract.
- Step-in rights for a funder, allowing it to take over the contract if the developer defaults.
- A limit on liability to what the beneficiary could have claimed under the original contract.
- Rights to assign the warranty to a later purchaser, often once or twice.
The length of time a claim can be brought depends on whether the warranty is signed as a simple contract or as a deed, and the usual limitation periods differ. Take legal advice on drafting.
Collateral warranties in the money
Warranties are a cost and a cash issue. Each one takes time to negotiate and sign, and a contractor with ten subcontractors may need ten sets. Some contracts make final Retention release or final payment conditional on delivering the warranties, so a missing document can hold up money.
Hold warranties as an item on your handover checklist, track each one against the Subcontract order that requires it, and chase them before the Final Account stage. In some cases the contract allows an alternative to warranties, such as third party rights under the Contracts (Rights of Third Parties) Act 1999.
Related terms
Retention, Subcontractor, Performance Bond, Main Contractor, Defect Liability Period.
Planyard's subcontractor orders keep each order, its terms and its retention in one place, so you can see which subcontractors still owe warranties before retention is released.
