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Alternative Dispute
Resolution Collateral Warranties – an
Banking and Overview
Security
Construction has returned and with each
Commercial Law construction project comes a suite of
Commercial construction documents. One of these documents
is a Collateral Warranty and in this article we will Do you need to talk to a Reddy
Litigation
provide an overview of the purpose of the Charlton staff member?
Company Collateral Warranty and some points to look out
Secretarial for when reviewing a draft. Find out how to contact us
Compulsory What is a Collateral Warranty? Are you looking for information about
Purchase Orders & our partners, senior associates,
A Collateral Warranty is a contract under which a
Arbitrations consultant, a building contractor or a sub-
solicitors and team members?
Construction contractor warrants to a third party that is has fulfilled its obligations under its professional Find out more about our team
appointment, building contract or sub-contract.
Corporate
Transactions What is the purpose of a Collateral Warranty? Reddy Charlton - Gold Standard
Disciplinary and The purpose of a Collateral Warranty is to give a third party, who is not a party to the original
Regulatory contract, rights to enforce that original contract.
Employment Law To illustrate the purpose of a Collateral Warranty, we set out below an example:
Insolvency An employer engages with a developer to develop a hotel. This relationship is governed by a
Intellectual Development Agreement.
Property / The developer appoints a contractor to build the hotel. This relationship is governed by a
Information Building Contract
Technology There is no direct contract between the employer and the contractor.
Investment in In order to bridge that gap, a collateral warranty is put in place between the employer and
Ireland the contractor.
A third party funder or a tenant may also require a collateral warranty in order to have a
Landlord and
direct contract with the contractor.
Tenant
If the contractor is in breach of its obligations under the Building Contract an employer or a
Licensing funder, who has the benefit of a Collateral Warranty, can claim its loss directly from the
Probate and contractor who caused that loss.
Private Client
Main points of negotiation
Property
Sport and Insurance – The Collateral Warranty will set out for how long the insurance policy must be
Entertainment maintained and at what level this insurance policy should be. This can be difficult to govern
Reddy Charlton Solicitors has achieved
in practice, particularly after project has completed. It can be difficult to police whether
a gold standard award for a sixth year.
the contractor or consultant, after the project has completed, has the insurance at the
required level still in place. find out more
Duration of Collateral Warranty – Collateral Warranties tend to range from 6 years – 12
years. The beneficiary of the Collateral Warranty will want it for a longer period while the Reddy Charlton - Winner
contractor or consultant will want it for as short a period as possible.
Step In Rights – This allows the beneficiary of a Collateral Warranty to step into the shoes of
the employer, if the employer becomes insolvent, so that the beneficiary can complete the
project.
Assignability – This point is very important to a contractor or a consultant. It will set out
the amount of times a Collateral Warranty can be assigned to another third party. In
practice, it usually provides for assignment twice without consent of the contractor or
consultant and that any further assignments must be with the consent of the contractor or
consultant.

A word of caution
Collateral Warranties should be consistent with the building agreement or professional
appointment as it is a promise to comply with that contract. It is frequently the case that Property, Planning, Probate Law Firm
the Collateral Warranty contains additional obligations or is expressed in an ambiguous way. of the Year 2018.
The contractor or consultant should carefully review the terms of a Collateral Warranty as
find out more
often they are more onerous than terms found in the standard RIAI warranty. This is
particularly so if there is a third party funder involved. The contractor or consultant should
not automatically accept the terms of a Collateral Warranty and, where appropriate, should
seek to negotiate its terms.
The contractor or consultant should bear in mind that a Collateral Warranty can often be
assigned to an unknown third party who may be a subsequent funder or financing party with
whom they are unfamiliar.
For an employer, it is important to agree the form of a Collateral Warranty before engaging
the contractor or consultant and arrange to have them executed at early stage as this can
be required for Practical Completion. The employer does not want to find themselves in a
situation where they are delayed reaching practical completion. /li>
A Collateral Warranty is only of benefit if, at the time it is being enforced, the party who
gave the Collateral Warranty or their insurer is “a mark”.

For further information on the above, please contact Paul Keane at pkeane@reddycharlton.ie

Keywords: Publication, Commercial Litigation, Construction, Paul Keane

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