UK: Collateral Duties to Third Parties

Last Updated: 14 April 2005
Article by Paula Abrahamian

Originally published January 2005

Let’s start with the most obvious question: what is a collateral warranty? The problem is that historically, English law would not permit a claimant to recover "financial" losses unless there is a direct contract between the parties. This is a severe drawback where, for example, a bank lends to a developer but there is no direct contract between the bank and, say, the architect who designed the building. A purchaser or tenant has the same potential problem. The collateral warranty has been devised to provide a "contractual bridge" to overcome this difficulty. Banks will invariably insist on warranties being provided by all consultants, contractors and others with a responsibility for design or construction. Prospective purchasers or tenants will similarly wish to have warranties entitling them to proceed directly against the design or construction team if defects are discovered.

The collateral warranty is the instrument through which the consultant or contractor warrants that it will carry out and complete its obligations under its consultancy agreement or building contract – and in so doing it grants to the third party a right to claim for breach of contract against it if it fails to perform.

The Basic Contents of a Collateral Warranty

These are briefly as follows:

(a) Duty of Care

The consultant warrants to the beneficiary of the warranty that it has exercised the degree of reasonable skill and care in the performance of its duties that it originally owed to the employer. Always remember, however, that the warranty relates to the consultant’s duties under the appointment and therefore the standard of duty and care demanded in the collateral warranty will not generally exceed that standard. It is important therefore always to ask to see the actual contract to which the warranty refers before agreeing any warranty.

(b) Deleterious materials

Developers will invariably have their own list of "banned" materials which they do not want used in a development. The prohibited materials will normally be those regarded by current "Codes of Practice" as being detrimental to the environment or health and safety – asbestos being a prime example – or those regarded in the industry as not conforming to good building practice. In the collateral warranty the consultant will warrant that the banned materials will not be, or have not been, used.

(c) Copyright

Within the warranty, the consultant will usually grant a licence to use and copy all those documents which it has prepared for any purpose relating to the premises. It is important to try to secure in the collateral warranty the right for the beneficiary to use the drawings and other copyright material in future projects.

(d) Professional Indemnity Insurance

A developer or other beneficiary of the collateral warranty should always insist that the consultant maintains adequate professional indemnity insurance to cover any future claims made against the consultant. Obviously a warranty which is not covered by appropriate insurance would be potentially worthless in the event of a claim if the consultant does not have the resources to meet the claim itself.

(e) Assignment

The developer or other beneficiary of the warranty should seek the right to assign the benefit of the collateral warranty on any number of occasions in the future.

(f) Limitation

The limitation period or "lifespan" within which any actions or proceedings for any warranty breach may be taken will vary from 6 years (if the warranty is signed as a simple agreement) or 12 years (if it is executed as a deed). It is obviously in the interests of the beneficiary of the warranty to have the greater protection period of 12 years.

The Contracts (Rights of Third Parties) Act 1999

An attempt has been made by Parliament to replace the need to give a collateral warranty through passing the Contracts (Rights of Third Parties) Act 1999. Under this Act, Parliament has tried to give a third party the right to proceed against a consultant or contractor directly, but the drawbacks of the legislation are two-fold.

Firstly, to succeed to these rights, the third party must demonstrate that the contract purports to confer a benefit upon the third party or expressly says that the third party can enforce it. This may be a difficult onus to fulfil unless the third party is specifically referred to in the agreement either by name or by a particular class.

Secondly, Parliament permitted the parties to expressly exclude the operation of this 1999 Act if the parties agreed.

In our experience, despite the 1999 Act, banks and other lending institutions which finance large developments will require collateral warranties as a condition of lending. This is compounded by insurers of consultants and contractors being hostile to the 1999 Act and insisting upon the 1999 Act being excluded from all agreements. It is unsurprising, therefore, that the 1999 Act is widely regarded as failing to eliminate the need for collateral warranties and for the foreseeable future at least, the collateral warranty is "here to stay".

The drafting of collateral warranties requires great care and the points highlighted above are in no way a conclusive list of all the points to be taken into account.

© RadcliffesLeBrasseur

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.

Disclaimer

Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.

Registration

Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.

Cookies

A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.

Links

This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.

Mail-A-Friend

If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.

Security

This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.