Warranties, in construction, are unusual documents. The two parties (the companies who sign the warranty) rarely meet and have little communication with and no control over each other. A collateral warranty is:
an agreement between a provider of goods, works or services (the warrantor) and a tenant, purchaser or funder (the beneficiary), under which that provider promises to carry out and comply with the terms of its existing project contract
As a result of a collateralwarranty, the warrantor promises to the beneficiary to perform its existing obligations under its contract and allow the beneficiary to bring a claim if it doesn’t.
Q1: does the collateral warranty accurately identify the underlying contract (and have you got a copy of that?)
Questions for Tenants, Funders or Purchasers
Typical questions for beneficiaries are:
- Which members of the project team are providing collateral warranties?
- What forms of collateral warranty are being offered and are they worth having?
- Is your client on the list of categories of potential beneficiaries?
- When will the collateral warranties be provided?
I actually think these are secondary questions. The critical question is Q2: what are the stakeholder’s objectives for this development?
The answer refines our understanding of the stakeholder’s interests and any likely losses. For example, if a funder is repaid in full at practical completion, its interest in the use, occupation and maintenance of the development is zero; if a tenant is not due to pay rent until 2 years after completion, its interests in the duties of the project team during the defects period is minimal.
Questions for the Project Team
What you really need to know is does the collateral warranty protect the provider/warrantor from wider or longer liability, or from unscrupulous beneficiaries?
Extending Your Liability: A mere promise to carry out of the terms of the original contract (the bare minimum you need for a collateral warranty) does not impose an extended duty of care or broader liability than that original contract, subcontract or appointment.
However, as most collateral warranties contain stand-alone clauses such as those relating to copyright, indemnities, step-in, it is arguable that they have become are a mix of direct promises to the beneficiary (ie primary liability) and promises to comply with the underlying contract (secondary liability). Any secondary obligation is restricted by the terms of the underlying contract.
Q2: does the collateral warranty include a clause expressly stating that the warrantor’s liability will be no greater or of longer duration than imposed by the underlying contract?
Q3: where your collateral warranty contains clauses that are also in the underyling contract (eg copyright, insurance, duty of care and deleterious materials) are they exactly the same?
Q4: are any limits on your liability? Are they the same as those in the underlying contract or do they further limit your liability?
What should you do?
Consider carefully whether you need to give or receive collateral warranties, how simple they will be to finalise, and what extra rights they really offer.
The definition is taken from the Chapter 1 in How to Write Simple and Effective Collateral Warranties in Just 500 Words, available from Amazon in paperback and kindle.
[Updated November 2023]
