Collateral Warranties: The Safety Net Behind Every Construction Project

Collateral Warranties are often used in construction contracts. Such warranties are given by a contractor, sub-contractor and professional consultants. A warranty creates a contractual obligation from the warrantor to the beneficiary named in the warranty. A beneficiary typically includes a developer, funder or an ultimate purchaser. A warranty gives a beneficiary a right of recourse against the party giving the warranty.

What are the common items for consideration in a Collateral Warranty

• Duration: A warranty is typically for a period of either 6 or 12 years.  
• Insurance: The party giving the warranty has an obligation to maintain insurance for the term of the warranty.
• Assignment: The party giving the warranty will want to limit the number of times that a warranty can be assigned. In practice, a warranty is assigned on two occasions without the consent of the party giving the warranty.
• Step-in Rights: This allows a beneficiary, in certain circumstances to step into the shoes of the employer. If, for example, a Contractor wishes to terminate its appointment with an employer, a Contractor must first give notice to the beneficiary, and the beneficiary can then choose to step into the employer’s shoes, to facilitate completion of a project

Collateral Warranties should be carefully reviewed, and an agreement reached on a form of warranty at the earliest opportunity. This can often involve negotiation.

Funders, however, will often have their own preferred form of warranty, and so a developer should ensure, prior to commencement of construction works, that the parties giving the warranties are agreeable with the form of warranty sought.

For more information on this topic, please contact Godfrey Hogan on godfrey@gibneyhogan.ie

The content of this article is provided for information purposes only and does not constitute legal or other advice.