They want a collateral warranty from me and I do not know what I am signing up to
The subcontract says we must give warranties to the client, its funder and the tenants, and part of our retention is held until we do.
Updated: . By Jack Butler-Kettle, Construction Claims Consultant.
What's happening?
A collateral warranty is a direct promise about your work to someone you have no contract with. That is usually the client, its funder, or a buyer or tenant of the building. Your main contractor passes the request down in the subcontract. Often the form is left to be agreed later, or not attached at all. Nobody reads it until the request arrives near the end of the job.
What you sign decides what it costs you. A warranty can make you liable to several parties, for more than your subcontract does. Signed as a deed, it lets them claim for 12 years. It can require insurance for years after you leave site. Step-in rights can also hold up your right to end the subcontract when you are not paid, while a funder decides whether to take over. And some subcontracts hold back payment or retention until every warranty is handed over.
What a warranty's wording means in law is a question for your solicitor. What it costs you, and what to ask for, can be settled before you sign the subcontract.
The solution
Ask for every form of warranty before you sign the subcontract, and for the agreed forms to be attached to it. Check each against five points. Your liability should be no greater than under your subcontract, and there should be a net contribution clause. Step-in terms should pay what you are owed. Then check how long it lasts and the insurance it needs. Ask your insurer to accept the wording, then price the cost.
Pre-Signing Contract Review reads the warranties with the rest of the subcontract. We rate what each could cost you, write the changes to ask for and set out what to price in. Anything about the legal effect of the wording goes to 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. Half its retention is held until every warranty is handed over.
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 works out what that means. Eight parties could each claim, for 12 years, without the cap its subcontract gives it.
- 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. The subcontractor prices the insurance and the time to issue 8 warranties.
- The main contractor agrees all three changes and attaches the agreed forms to the subcontract.
What the warranties put at stake
| Item | Figure |
|---|---|
| Subcontract sum | £780,000 |
| Warranties to give | 8 |
| Retention at 5 per cent | £39,000 |
| Held until the warranties are given | £19,500 |
The outcome
The subcontractor signs knowing what each warranty commits it to. As the flats sell, it signs each buyer's warranty on the agreed form, and the £19,500 is released on time.