What is a collateral warranty?

A collateral warranty is a simple document designed to create contractual links between the provider of goods, works or services (the warrantor) and a party with a financial interest in the project (the stakeholder).

[This definition is taken from the Introduction to How to Write Simple and Effective Collateral Warranties in Just 500 Words.]

Who is involved?

There are three key parties:

  • the stakeholder (beneficiary/recipient): a company with a financial interest in the project – usually a funder, landlord, tenant or purchaser; for subcontractors, this would also include the developer
  • the provider (warrantor): a member of the project team – the main contractor, consultants or subcontractors
  • the client (employer): the party who entered into a contract with the warrantor, received the benefit of their goods, works or services and who paid their fees.

What are the benefits?

A collateral warranty allows the stakeholder – who was not a party to the contract between the provider and its employer – to bring a claim if the provider breaches that contract and causes the stakeholder a loss.

The core purpose of a collateral warranty is to create an additional contractual link, providing a smooth avenue for the stakeholder to bring claims. A collateral warranty is in addition to that stakeholder’s claims under its own contract.

Collateral to what?

A warranty is always collateral. It is linked to and dependent on the underlying contract and creates a secondary obligation ie it piggy-backs on that underlying contract.

In this image, the stakeholder is Company C. The provider is Party B. The provider’s employer is Party A. The underlying contract, the one in which the warrantor sets out the scope of its performance and related quality standards, is referred to as contract 1.

An image showing the use of a collateral warranty. There are three entities represented by text boxes stacked in a column: company C interested in property X (recipient of the warranty), Party A (receiving goods, works or services) and Party B (providing goods, works or services). There is thick black arrow between the text boxes for Party A and Party B representing the contract between them. There is single-headed curvaceous arrow flowing from the textbox for Company C towards the textbox for Party B representing the collateral warranty from the provider to the company interested in the property. Image by Sarah Fox

The essence of a warranty is a promise from the provider to carry out its project contract – so any breach of the project contract is also a breach of the promise in the collateral warranty. 

All current collateral warranties provide for more than this simple promise… and these extra clauses are where most of the problems lie. But that discussion will need to wait for another post!


What should you do?

Understand the role of a collateral warranty, consider whether any alternative approaches might better suit your project, and ask come critical questions before agreeing to any warranty.

If you want to know more, grab my book on the subject.


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