Collateral warranties are often misunderstood within the construction and property sectors. 

 

At its core, a collateral warranty simply gives a third party (such as a funder, purchaser or tenant) a direct contractual right against a consultant or contractor - a party with whom they have no existing contractual relationship. It does not create a higher standard of care; it merely extends rights to someone who is not a party to the original contract. The aim of the warranty is to tackle the often criticised Common Law doctrine of privity of contract. The doctrine prevents anyone not party to a contract from obtaining rights over, or imposing obligations upon those who are party to a contract. 

 

A common misconception is that insurers "approve" or somehow "insure" collateral warranties. In reality, Professional Indemnity insurers typically instruct solicitors to review warranty wording and identify provisions that fall outside the scope of the consultant's PI cover. 

 

The key point is that insurers are not deciding what can or cannot be signed. A consultant can agree to almost any contractual obligation they wish. The right to contract freely is a fundamental tenet of our legal system. The question is whether their PI policy will respond if that obligation is breached. 

 

Professional Indemnity policies are designed to reflect the position that would apply under common law. This is, in simple terms, reasonable skill and care. 

 

Occasionally, warranties introduce stricter obligations, fitness-for-purpose duties or refer to consultants exercising diligence. In reality the risk of a consultant being found liable for a negligent act, and that act falling between ‘reasonable’ and ‘diligent’ is much less than the guaranteed risk of the burden on the system of the countless hours and legal/insurers fees negotiating these warranties. 

 

The whole process of collateral warranties is burdensome and largely unnecessary, the construction industry may well be better served by making use of The Rights of Third Parties act, 1999, which allows for third party rights without the need for warranties.But maybe that’s a matter for a separate post! 

 

Should you need help or support with any of the issues raised above, get in touch today.