Collateral warranties and third party rights on construction projects: a quick guide

A quick guide to construction collateral warranties and third party rights aimed at those seeking to understand collateral warranties and third party rights for the first time.

What is a collateral warranty?

On a construction or engineering project, a collateral warranty (www.practicallaw.com/1-107-5937) is a contract under which a professional consultant (such as an architect), a building contractor or a sub-contractor warrants to a third party (such as a funder) that it has complied with its professional appointment, building contract or sub-contract. (See Practice note, Collateral warranties on construction projects (www.practicallaw.com/0-371-6962).)

However, some weaker forms of collateral warranty only refer to a "duty of care" or selected obligations under the professional appointment, building contract or sub-contract. (See Practice note, Collateral warranties on construction projects: Key clauses in collateral warranties (www.practicallaw.com/0-371-6962).)

 

What are third party rights?

A third party right allows a person who is not a party to a contract (a third party) to enforce the benefit of a term of that contract. (See Practice note, Third party rights on construction projects (www.practicallaw.com/2-372-2962).)

For example, that could include a right for a funder to enforce a term of:

Typically, a construction contract states that a third party cannot rely on the Contracts (Rights of Third Parties) Act 1999 (Third Party Rights Act 1999) unless the contract expressly grants third party rights. Usually, a construction contract that uses third party rights sets them out in a schedule to the building contract or professional appointment.

 

Why are collateral warranties and third party rights needed?

A construction or engineering project needs collateral warranties or third party rights for three main reasons:

 

Who gets collateral warranties or third party rights?

While specific requirements vary from project to project, an employer typically asks its professional consultants and the contractor to agree to provide collateral warranties or third party rights to:

  • Any funder.
  • Any buyer (often referred to as a purchaser).
  • Any tenant (or a given number or class of tenants).

(See, for example, Practice note, Collateral warranties or third party rights: design and build procurement: Diagram: collateral warranties or third party rights and "design and build" procurement (www.practicallaw.com/8-383-2024).)

An employer may also require its contractor to obtain collateral warranties in favour of the employer from all the contractor's sub-contractors or selected key sub-contractors.

 

What is the difference between collateral warranties and third party rights in practice?

In one sense, there is no difference in practice between collateral warranties and third party rights on a construction or engineering project. Either may give effective construction security.

However, collateral warranties remain popular, in part because:

 

Key reading

Collateral warranties

Practice notes

Standard documents

Third party rights

Practice notes

Standard documents

Other useful links

Practice notes

Quick guide


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