In any construction project, there will be multiple parties with an interest in the works to be constructed, who have no contractual nexus with some or all of the parties responsible for designing and building those works. Collateral warranties create a contractual link between the construction professional (e.g. the building contractor, sub-contractor, professional consultant) and the third party, such as a funder, purchaser or tenant (or indeed an employer seeking a direct right of recourse against a sub-contractor/sub-consultant).
As their name implies, collateral warranties are ancillary to the “primary” agreement, namely the building contract, sub-contract or consultant appointment. In providing a collateral warranty, the warrantor is promising the beneficiary that it has complied with the primary agreement and/or will comply with the terms of the primary agreement such that the beneficiary will have a right to sue the warrantor for any breach of contract.
This briefing looks at some of the key clauses and issues which can arise in negotiating collateral agreements.