A collateral warranty is a contract under which a consultant (such as an architect), a contractor or a subcontractor warrants to a third party, such as a funder, purchaser or tenant, that it has complied with its professional appointment, building contract or subcontract.
Collateral warranties are needed because a third party with an interest in a building would not otherwise have a direct contractual right of action against the people who designed and built it. Funders often require step in rights, allowing them to take over the contract if the client defaults. As an alternative, rights can be given to third parties under the Contracts (Rights of Third Parties) Act 1999, using a schedule of rights in the contract or appointment.
- Check the number, beneficiaries and form of warranties required at tender stage.
- Subcontractor warranties should be tracked, as they are often slow to obtain.
Related terms: third party rights, step in rights, bond, professional indemnity insurance.
