Collateral Warranties, Construction Bonds, Guarantees and Third Party Rights

When undertaking a construction project, you will likely have been asked to provide a number of documents, including; collateral warranties, construction bonds, third party rights, and parent company guarantees. It's important to understand what these are and what risks could be involved.

The use of collateral warranties, performance guarantees and bonds has become widespread in construction contracts and it is increasingly rare to see contracts and sub-contracts that do not require them.

If entering into a collateral warranty or performance guarantee or bond of any sort, or providing third party rights, it is important that you are not exposing yourself to unnecessary risk.

What is a collateral warranty?

A collateral warranty is an agreement to give a third party rights under a contract that they are not a party to.

Construction projects routinely involve more parties than simply an employer and a contractor. Parties with an interest in the development could include; consultants, funders, purchasers, and tenants. As some of those parties will not have a direct contractual link so could not be able to sue under the construction contract, but will be directly affected if things go wrong, the rights given under a collateral warranty can be an extremely important part of the arrangements made for construction projects.

Collateral warranties and third party rights

An example of where a collateral warranty comes into play would be; if the work of a specialist sub-contractor is defective, the employer can sue the contractor, who can then seek to recover from the sub-contractor.

The employer cannot however sue the sub-contractor under the contract between the contractor and the sub-contractor because the employer is not party to that contract.

If however the employer has a collateral warranty from the sub-contractor or third party rights under the sub-contract, then the employer can sue the sub-contractor directly. In cases where the has become insolvent a collateral warranty becomes invaluable.

Construction bonds and performance guarantees

Construction bonds and performance guarantees provide additional security and are issued as security against the failure of one of the parties involved (usually a contractor or a sub-contractor) to meet contractual obligations. There are technical differences between construction bonds and performance guarantees and the protection that they offer can differ greatly, depending on the precise wording used and this is where using an experienced construction consultant can really help your construction project.

Parent company guarantees

Parent company guarantees are used to provide security from the parent company (the ultimate or holding company) of a party. Where for example a contractor that has given a parent company guarantee defaults on its obligations, its parent may be required to remedy the breach, carry out the contractor’s obligations or make good the losses caused. Sub-contractors are sometimes required to provide parent company guarantees.

Construction consultancy services

We are experienced construction consultants based in Bristol and working for clients across the UK and worldwide. We see a lot of construction contracts and the associated collateral warranties, performance guarantees and bonds, third party rights and parent company guarantees. We will advise you on what you are being asked to sign up to and what the risks are, in plain English terms and with no-nonsense explanations.

We can draft warranties and construction bonds and can provide advice to anyone being asked to sign up to them, or other third party rights. The consequences of signing up to an excessively onerous warranty or bond could be millions of pounds, so it is extremely important to take advice from experienced construction consultants.

Free initial consultation

All initial enquiries from new clients are completely free of charge, so please contact us by phone, email or using our contact form for a free initial consultation to discuss how we can help you in relation to collateral warranties, performance guarantees and construction bonds.