A collateral warranty is a contract that runs alongside a principal appointment or building contract. It creates a direct contractual link between a construction professional and a third party who was not a party to the original appointment. Typical beneficiaries are funders, purchasers and tenants who want a route of recourse against the designer if defects later emerge.
Without a warranty, a third party who suffers pure economic loss usually has no contractual claim against the designer, and the tort route is narrow after Murphy v Brentwood District Council [1991] and Robinson v PE Jones [2011]. The warranty fills that gap by promising the beneficiary that the professional has exercised, and will continue to exercise, reasonable skill and care in performing the underlying appointment.
A collateral warranty does not, of itself, create a new standard of care. It should mirror the primary appointment. The exposure arises when the warranty widens the professional's obligations beyond the appointment it references. Three drafting points recur:
Most warranties permit assignment, often twice without consent. The professional therefore cannot always know who ultimately holds the benefit. Step-in rights allow a funder to take over the appointment if the developer defaults. Neither feature changes the standard of care, but both extend the population of potential claimants across the life of the building.
The Supreme Court in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP [2024] UKSC 23 held that a collateral warranty was not, on its wording, a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996, so the dispute was not amenable to statutory adjudication. The decision turns on wording and does not affect the underlying liability the warranty creates, but it matters for how a claim under a warranty is resolved.
Because a warranty is a fresh contract, it should be checked line by line rather than signed on the assumption that it simply repeats the appointment. The points that most often need attention are the standard of care, any cap on liability, whether a net contribution clause is carried across, the number of permitted assignments and the length of any limitation period, which for a deed can run to 12 years. Where the warranty asks for more than the appointment gives, the sensible course is to align the two before signing rather than to discover the mismatch when a claim arrives. A firm should also keep a register of every warranty it has given, because on any large project the total number of beneficiaries able to sue on the same work can be considerable.
When Apex arranges cover for architects, engineers and design-and-build contractors, the collateral warranty position is part of the demands-and-needs discussion. Apex reads the warranty against the appointment and against the policy wording, so the firm can see whether a warranty obligation falls outside the cover before it is signed. Professionals reviewing their own exposure will find the pillar guides for architects, engineers and design-and-build contractors a useful starting point.
Apex Insurance Brokers Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 724952. This entry is general information, not advice on any particular policy.