Collateral Warranties

You may have seen the requirement for a Collateral Warranty, but not been sure what this means for you, the builder. The wording of any such document needs to be carefully reviewed and the failure to provide one where called for can have a significant contractual and financial impact.

Collateral Warranties exist to create a contractual link between parties where no direct link would otherwise exist.

It used to be that only a party to a contract could enforce the terms and that anyone else (i.e. a third party) could not. The Contracts (Rights of Third Parties) Act 1999 changed this enabling third parties to enforce terms made in their favour, but not in all cases.

However, because the Act has restrictions, lawyers have sought to overcome them through the use of collateral warranties.

A client may seek to create contractual links between

  • Contractor and the Beneficiary (funder/purchaser/tenant/site owner)
  • Subcontractors/Designers employed by the Contractor and the Beneficiary (funder/purchaser/tenant/site owner)

These links make any development more attractive to potential funders/purchasers/tenants and this is the motivation for a developer seeking to include them.

Top Tips

  • Avoid any collateral warranty that gives the beneficiary greater rights than the Employer
  • Avoid double liability i.e. being liable to both the Employer and the beneficiary
  • Restrict the ability of the beneficiary to assign the benefit of the warranty
  • Do not accept an absolute obligation to procure warranties; restrict the obligation to use “reasonable endeavours”
  • Do not accept an obligation to provide warranties in the exact wording provided in any tender/contract documents – you will not have yet procured the subcontractors/designers that you may need, so qualify to obtain the warranties “with such amendments as the Employer acting reasonably may agree to”
  • Do not accept that money can be withheld. Instead, qualify that payments will not be made to the subcontractor/designer until the warranties are executed
  • Do not accept an obligation under the contract that gives the Employer Power of Attorney to execute a warranty on your behalf. Instead, offer to execute “blank” warranties to be held in escrow where the name of the beneficiary is not known
  • Limit the wording to reference only “Building Contract” or the “Works” and avoid attempts to widen your obligation through the use of words such as “Development” or “Project”
  • Avoid any clause that gives you an obligation not specify or use any of the Prohibited/Deleterious materials in the Works. Even on design and build contracts or those with Contractor’s Design Portions (CDP’s), the materials may be specified in the Employer’s Requirements
  • Ensure that any liability is restricted through the use of clauses that limit liability to repair/renewal and/or reinstatement. Alternatively, ensure that a value cap is included that falls within the limits of the insurance policies that you have. Failure to do this exposes you to unlimited liability for consequential losses of the occupiers that may include loss of profit, loss of production / business disruption, removal and renting costs for alternative premises etc.

Remember:

  • Regardless of what any tender says, if your bid is attractive there will always be room to negotiate the wording of any warranty
  • If this is not something you are comfortable dealing with, engage the services of someone that is – a small outlay to resolve this will potentially save a great deal more at a later date.
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