What is a collateral warranty, and should I sign one?
A collateral warranty is a direct promise about your work to someone outside your subcontract, so check what it costs you before signing.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
The answer
That someone is usually the client, its funder, or a buyer or tenant of the finished building. Without a warranty, they usually have no direct claim against you for defective work. With one, they do. Main contractors pass the request down in the subcontract, often with the form left to be agreed later. JCT publishes standard forms for subcontractors: SCWa/E for the employer, SCWa/F for a funder and SCWa/P&T for a purchaser or tenant. Check five points before you sign. First, your liability should be no greater than under your subcontract, with the same defences and any cap. Second, look for step-in rights, which let a funder or the client take over your subcontract if the main contract fails. Check that whoever steps in must pay what you are already owed. Third, ask for a net contribution clause, which limits you to your fair share of a loss that others also caused. Fourth, check how long it lasts. Most warranties are signed as deeds, which gives the other side 12 years to claim, not 6. Fifth, check the insurance it asks you to keep, and that your insurer accepts the wording. Also check whether payment or retention is held back until you hand the warranties over. Ask for the agreed form of each warranty to be attached to the subcontract, and price the insurance and the extra risk. What the wording means in law is a question for your solicitor.
Example
Illustrative example. The scenario and figures are invented.
The facts
A mechanical subcontractor is offered a £780,000 subcontract on a block of flats. It must give warranties to the client, the funder and up to 6 buyers, on forms to be agreed later.
What happens
- The subcontractor asks for the forms before signing. They make it liable to each party for any loss its work causes, with no cap and no net contribution clause.
- It asks for liability no greater than under the subcontract, a net contribution clause, and step-in terms that require its unpaid sums to be paid.
- Its insurer confirms it will accept the revised wording, and the subcontractor prices the insurance and the time to issue 8 warranties.
The outcome
The main contractor agrees all three changes and attaches the agreed forms to the subcontract. The subcontractor signs knowing what each warranty commits it to.
To have the warranties checked with the rest of the subcontract, and what they cost you priced before you sign, see our Pre-Signing Contract Review service.