Builders’ Problems SOLVED What is a collateral warranty and do I need to provide one?

Problem: I own a small mechanical and plumbing contracting business and a few months ago my company started work on a new build project for a main contractor.

After starting work, the main contractor asked me to sign a collateral warranty. I do not have any experience of collateral warranties and I assumed that this was something just to say that my company would guarantee its work for a certain period. However, the developer (who employs the main contractor), said to me that his company will pay £1 for consideration. I do not quite understand what is happening – can you enlighten me?

My company never received a written contract from the main contractor and also said that it would not deduct retention, but I am now getting pestered by the main contractor to sign the collateral warranty. The developer has said that the collateral warranty is a design contract between the developer and main contractor and that it is only valid if something that my company has designed in the project fails – but we have designed nothing!

Response: First and foremost, always ensure that any agreement for building works is in writing, and do not commence any works until the agreement has been signed or at least clearly agreed.

I have previously written about collateral warranties. It is quite common to see a construction project requiring designers and specialist contractors to provide collateral warranties. The reason for their use is that if a building turns out to be defective, the person with an interest in the defective building will find it very difficult to successfully pursue a third party (i.e. a specialist sub-contractor that has been directly employed by the main contractor), who is responsible for the defect if they do not have a contractual relationship with them. This is because, someone who is not a party to a contract can only bring an action in the tort of negligence, but recovery of the financial losses (i.e. pure economic loss) are limited, unlike that in an action for damages arising from under a contract.

Gerard

Author background

Michael is a Solicitor, Chartered Builder & Registered Construction Adjudicator, and is a director at Michael Gerard Law Limited, a solicitors practice regulated by the SRA.

The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.

As the name suggests therefore, the purpose of a collateral warranty is to create a direct contractual relationship that is collateral to the main contract: the £1 consideration is a nominal fee that ensures the contract is valid – in the absence of any consideration, there would be no valid contract, consideration being an essential ingredient to create a legally binding contract.

If the T&C’s of the contract you have with the main contractor (albeit a verbal contract), are silent on your company providing a collateral warranty, then you are under no obligation to provide one. From your outline above, it would appear that you are under no obligation to provide a collateral warranty and my advice would therefore be, do not provide one.

If you agree to provide one, you will incur costs for a solicitor to review the terms and conditions (it is imperative you instruct a solicitor in order to understand what you are signing up for), and you will also increase your risks as to be responsible for any defects and faults with your work – even if the main contractor ceases trading, you have a contract with the developer and [most probably] with other [unknown] companies should the collateral warranty be assigned.

The main contractor may have a term in its contract with the developer to execute collateral warranties with certain professions and / or trades, but has overlooked this obligation when engaging you – however, this is not your problem.

Further, I also note from your brief that you have no design liability – even if you were under an obligation to execute a collateral warranty, if this obligation only extended to design, then there is no requirement to execute a collateral warranty.

If the main contractor withholds payment because of your failure or refusal to provide a collateral warranty, you have the HGC&R Act 1996 to fall back, which includes right of suspension and adjudication.

© Michael Gerard 2023

The advice provided is intended to be of a general guide only and should not be viewed as providing a definitive legal analysis.

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