What are Collateral Warranties? Explaining the Basics

July 1, 2011

What are collateral warranties?

Collateral warranties are contracts which are designed to establish a contractual link between a third party (the beneficiary) and a contractor or consultant who has carried out certain works.

Why are they required?

In the case of a building contract, collateral warranties are a promise from the contractor to the beneficiary that the works have been carried out in accordance with the building contract.  If the works have been carried out negligently, the beneficiary has a right of recourse against the contractor.

When are they used?

Focussing on collateral warranties provided by constructors under building contracts; it is normal for a first purchaser of a new development to receive such a warranty.

Not limited to building contracts, collateral warranties can also be used when a purchaser is granting a security over its property to a lender.

What should the collateral warranty contain?

  • Reference to the original appointment
  • Clear outline of the works or services to be undertaken
  • Confirmation from the constructor or consultant that it has exercised and will continue to exercise all reasonable skill and care
  • Obligations in relation to professional indemnity insurance
  • Clarification if

    liability is to be limited – constructors or consultants normally limit their liability to twelve years

  • Confirmation that the warranty can be assignable to third parties
  • A liabilities clause may be included, limiting the constructor or consultant’s liability to the amount in the original documentation
  • A “no loss” clause – this states that the constructor’s liability is not diminished by virtue of the fact that the client under the contract has suffered no loss

What are the benefits of collateral warranties?

  • The direct contractual link mentioned above
  • A third party can then rely on this link if any works or services are found to have been carried out negligently

Do they have any limitations?

Collateral Warranties are very useful, but they are only as good as the entity granting them and can only confer the same rights as the original appointment or building contract and no better.

We have advised a number of clients, including RSLs, on the best way to guarantee work and services and when collateral warranties are appropriate.  If you’d like advice specific to your circumstances we’d be pleased to help.  Get in touch with our experienced team for more information or advice.

Source: www.tcyoung.co.uk

Category: Credit

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