Collateral Warranties

Question 1

What is a collateral warranty?

Answer 1

• A formal contractual agreement which runs alongside another contractual agreement.
• Purpose is to create a contractual relationship between two parties where one would not otherwise exist.

Question 2

Can you provide a working example how a collateral warranty could be used?

Answer 2

• Employer enters into a contract with a contractor. Contractor then places several subcontracts with its suppliers.
• As the employer has no direct contractual relationship with the suppliers, a collateral warranty can provide a mechanism for enforcing contractual obligations, or creating other obligations between them.

Question 3

Who might want a collateral warranty?

Answer 3

• Any third party with a financial or inherent interest in the project but is not party to the contract.
• Employer may require warranty with key subcontractors. If contractor goes into liquidation, it can provide a contractual link for redress in case of defective workmanship etc.

Question 4

What is the difference between a bond and a warranty?

Answer 4

• A bond is usually a financial commitment backed up by a third party whereas a collateral warranty passes on contractual obligations.
• Bonds are contained within the contract.
• Collateral warranties are a side agreement to the contract.

Question 5

Are there any alternatives to collateral warranties?

Answer 5

• An alternative method to confer rights is provided by the Contracts (Rights of Third Parties) Act 1999.
• This allows third parties to obtain the benefits from contracts, which are entered into by others.

Question 6

What are the three ways that benefits can be transferred under a building contract?

Answer 6

• Collateral warranties
• Third party rights
• Assignment

Question 7

Are you aware of any case law relating to collateral warranties?

Answer 7

Parkwood Leisure v Laing O’Rourke
- In light of particular wording used in the collateral warranty, there was no doubt that it should be treated as a construction contract under section 104 of the HGCR Act 1996.

Question 8

Why is there a higher probability that collateral warranties will be needed under a D&B contract?

Answer 8

• It can provide a contractual link between the employer and the design team working for the contractor.