What is a collateral warranty?

The employer under a suite of construction documents will often seek to compel his contractor and consultants, and any material design sub-contractors, to enter into collateral warranties with third parties. Typically, these third parties are funders, purchasers or tenants. Collectively, they are known as beneficiaries. The employer normally seeks warranties in its favour from design sub-contractors as well.

The warranty ensures a contractual link is preserved between a beneficiary and the warrantor in circumstances where the beneficiary is not party to the underlying appointment or building contract. A funder, for example, would take a collateral warranty from a contractor under which the contractor warrants to perform the building contract (to which the funder is not a party) in accordance with its terms. If there is a breach of contract, the funder has a right of action against the contractor under the warranty if the funder suffers loss or damage as a result of the breach.

Typical terms in a warranty include:

• Duty to design with skill and care and to carry out the project in accordance with the underlying contract
• Obligation to maintain PI insurance to cover negligence
• Copyright licence to allow use of design documents
• Assignment rights
• Step-in rights where the beneficiary is a funder for example

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