We have reviewed and updated this note, making minor changes.
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.
This is one of a series of quick guides, see Quick guides.
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).)
A third party right is the right of 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.
A construction or engineering project needs collateral warranties or third party rights for three main reasons:
Privity of contract prevents third parties relying on other people's contracts. Unless you are a party to a contract or section 1(1) of the Third Party Rights Act 1999 applies, you cannot enforce a term of a contract. (See Practice note, Third party rights on construction projects: Section 1 of the Third Party Rights Act 1999 (www.practicallaw.com/2-372-2962).)
They provide construction security. If something goes wrong on a project, a funder does not want to be out of pocket; it wants to be able to claim its losses directly from the person who caused the loss, such as an architect or a contractor. (See Practice note, Collateral warranties on construction projects: Construction security (www.practicallaw.com/0-371-6962).) Without a collateral warranty or third party rights, a funder may be unable to make an effective claim.
A claim in tort is unlikely to succeed. The law of tort in England and Wales does not generally allow a claim for pure economic loss, such as damage caused to a building by a defect in that building; you need a contract. (See Practice note, Professional negligence: Pure economic loss (www.practicallaw.com/3-107-4970).)
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:
(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 from all the contractor's sub-contractors or selected key sub-contractors.
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: