In basic terms, 3 parties are involved in collateral warranties:

- A contractor

- A beneficiary (third party)

- An employer

Collateral warranties provide a contractual link between a third party (the beneficiary) and a contractor which has carried out certain works or provided certain services for the employer.

So when is it appropriate to use one?

It is often appropriate to expect collateral warranties when:

• A first purchaser acquires a new build development
• The employer is the developer and sells the completed site to the purchaser

The purchaser should be in a position to seek recourse against the contractor direct in case of any defects in workmanship or quality; collateral warranties would allow this.

While every collateral warranty agreement is different, the majority will see regular key clauses appear. Outlined below are the most common.

• Parties - all parties must be clearly and correctly entered.
• Preamble - there should be a brief outline referring to the contract between the contractor and the employer, explaining the interest of the purchaser.
• Duty of care - a statement confirming that the contractor has used reasonable skill and care and will continue to use reasonable skill and care in carrying out the works or services. In a design and build contract this must relate to both the design element and the construction works.
• Obligations ensuring the contractor grants a licence to the beneficiary in respect of the use and reproduction of all plans, drawings, specifications etc. in which copyright remains vested in the contractor.
• Professional liability insurance - there should be obligations on the contractor to maintain a specific level of insurance for a specified period.
• Assignation - the warranty should include confirmation that it may be assigned by the beneficiary to third parties. This obligation is often limited to no more than two such assignations.
• Limitation on liability - if there are any limitations on the liability of the contractor in the contract with the employer, these will be repeated in the warranty to be granted to the beneficiary.
• No loss - a beneficiary should consider whether the warranty includes a clause providing that the contractor's liability under the warranty is not diminished by virtue of the fact that the employer has suffered no loss under its contract with the contractor.

As each collateral warranty is different, advice should be sought in each case. For more information and advice, please contact our team.