What are Collateral Warranties?
In the construction industry, warranties are unusual documents. The two parties to the warranty (the companies who sign the contract) rarely meet. The parties have little communication with or control over the other.
My definition of a warranty is that it is
a contract entered into between a member of the project team (the warrantor) and a tenant, purchaser or funder (the beneficiary) which is collateral to – and depends upon the terms of – a contract already in existence between the warrantor and her employer
As a result of a warranty, the warrantor promises to the beneficiary to perform her existing obligations under her contract and allow the beneficiary to bring a claim if she doesn’t.
According to Wikipedia “For the benefice of a third party, [a collateral warranty] imposes an extended duty of care and a broader liability on two separate parties involved in a contract.”
Not only is a collateral warranty in the construction industry between two companies who do not have a contract. But also no warranty can impose an extended duty of care or broader liability than the original contract, subcontract or appointment.
Questions for Tenants, Funders or Purchasers
When faced with the tenant, purchaser or funder of a development, what questions come immediately to mind?
You might think first of questions relating to collateral warranties – as the blog title suggests – which are commonly required on developments for tenants, funders and purchasers. Questions such as:
- Which members of the project team are providing warranties?
- What forms of warranty are being offered and are they worth having?
- Is your client on the list of categories of potential beneficiaries?
- When will the warranties be provided?
- Will the warranties be properly signed?
As important as these questions often are, I actually think these are secondary questions.
Tenants, funders and purchasers have a financial interest in the outcome of the development, and may suffer loss if the development is not completed as intended.
Surely the critical question to ask is “what are your objectives for this development?”
This question should result in a more precise understanding of the extent of their financial interest as well as the likely losses they might suffer in the event of a problem. It may be that a funder will be paid in full at practical completion and so its interest in the use, occupation and maintenance of the development is limited. Or the tenant may not start paying rent or agree a lease of a part of the development for 2 years after completion so the duties of the project team during the defects period are irrelevant.
Questions for the Project Team
Although the questions above are also important for warrantors, what you really need to know is does it protect me from wider or longer liability, or from unscrupulous beneficiaries?
A short warranty report, from an experienced adviser, should provide some comfort that you’re not letting yourself in for trouble for 12 years!
But the key issues to ask are:
- are the descriptions of the project, your contract and the goods/works/services you are providing accurate?
- are clauses in the warranty on eg copyright, insurance, duty of care and deleterious materials the same as those in your contract with your employer?
- are the terms compatible with your professional indemnity insurance policy?
- are any limits on your liability the same as those under your contract in time and amount?
- are the number of assignments limited to allow you to know to whom you are liable?
- does any step-in clause entitle you to get paid for any existing debts?
If you want some help, please contact me.