Guide to construction collateral warranties/third party rights

On a construction project a collateral warranty is an agreement whereby the professional consultant and building contractor warrants to a party in the development agreement that they have complied with their professional appointment, building contract or sub-contract.

What is a third-party right?

A third-party right can be defined as the right of a person who is not part to the contract, to enforce certain terms of the contract. Third-party rights are usually set out in the schedule of the building contract or professional appointment.

Constructions contracts typically state clearly that a third-party cannot rely on the contract unless expressly stated.

Why should you include a collateral warranty or third-party rights into your contract?

For a construction project third-party rights and collateral warranties can play a very important role. There are a number of reasons why they could prove to be important:

• A person can only rely on and enforce a contract if they are a party to it. In a construction environment a person who is not a party to the contract will have an interest in certain parts being performed. For example, a funder may want to be able to enforce a contract between an employer and the contractor.
• For construction security. The funder does not want to be out of pocket or lose out because something went wrong and they had no control over enforcing agreements.
• A claim for torts for pure economic loss including damage caused by a defect in the building would probably not succeed. Contracts are required to enforce obligations between the parties.

What is the difference between a collateral warranty and a third party right?

In practice there is no difference between collateral warranties and third-party rights, they both offer security for the completion of the construction contract.

Collateral warranties are currently the more popular option, mainly because:

• Collateral warranties are more familiar to many construction solicitors. Third-party rights are relatively new and because the outcome in practice is essentially the same many solicitors will stick with what they know better.
• Many want to include step-in rights to their contracts so if something goes wrong the third party can step-in to complete the project. Many believe that this is easier to do with a collateral warranty.