Collateral Warranties in Construction Contracts

May 28, 2026

Collateral warranties play a fundamental role in the construction industry, providing a direct contractual link between those responsible for designing and constructing the works and a beneficiary. This article considers how collateral warranties work, their importance, case law developments, and alternatives that parties may wish to consider.

What are collateral warranties?

Collateral warranties are essentially contracts which create a direct contractual relationship between a third party and a contractor, subcontractor, or consultant involved in a construction project. These warranties ensure that the third party (which was not a party to the original contract) can claim directly against the person employed under the primary contract (such as a contractor, subcontractor, or consultant) if for example defects or issues arise. This typically occurs where, for example, a funder or developer need rights against a consultant or subcontractor that they would not otherwise have.

However, collateral warranties are not without their limitations. Although the main purpose of them is to create a contract between the beneficiary and the warrantor, it is very common for them to include ‘no greater duty’ clauses which ensures that the person providing the collateral warranty does not have greater obligations under the warranty than those under the main contract. On this point, it’s very common for collateral warranties to replicate obligations found in the main contract, ensuring consistency in duties and performance standards.

They can potentially also cause insurance issues for the person providing the collateral warranty since they essentially broaden who can make a claim against the party.

Recent case law update

A recent case has shed light on the enforceability and limitations of collateral warranties, reaffirming their value in protecting the interests of third parties. In Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23, the Court was asked to consider whether the collateral warranty in question qualified as a “construction contract” under the Construction Act.

By way of a background, Simply Construct (UK) LLP was engaged by Sapphire Building Services Ltd to design and build a care home. Abbey Healthcare (who ran the care home) had a collateral warranty from Simply Construct, Later, as defects appeared, Abbey Healthcare wanted to use the collateral warranty to claim payment for fixing them. However, they also tried to use the Construction Act to get the issue settled by adjudication (a dispute resolution method specifically for construction contracts).

The Supreme Court here overruled both the Technology & Construction Court and the Court of Appeal and ruled that a collateral warranty is not automatically a construction contract under the Act. For it to be one, it must include an active commitment to carry out construction work, not just a promise about the quality of past work. In this case, the collateral warranty was more about giving assurances about completed work rather than involving any ongoing obligations to perform work. So, it didn’t qualify as a construction contract for adjudication purposes.

In short, this ruling means that collateral warranties will not usually be treated as a construction contract under the Construction Act, so adjudication will only be available as a remedy if adjudication provisions are specifically drafted into the collateral warranty in question (which wasn’t the case here.

Can a collateral warranty still be a construction contract?


A collateral warranty may, in principle, constitute a “construction contract” under section 104(1) of the Housing Grants, Construction and Regeneration Act 1996, but this will depend on its substance rather than its label. As clarified by the Supreme Court, the key dividing line is whether the warranty contains separate or distinct undertakings to carry out construction operations, as opposed to merely mirroring obligations already contained in the underlying building contract. Where a collateral warranty does this, it may fall within the statutory definition of a construction contract.

Significance of a collateral warranty being a construction contract


If a collateral warranty is classified as a construction contract, the statutory regime under the Construction Act applies to it. This includes the right to refer disputes to adjudication at any time and, where applicable, compliance with the Act’s payment provisions. In practice, while a beneficiary under a typical collateral warranty will not usually have payment obligations unless it exercises step‑in rights, if the warranty constitutes a construction contract and does not contain payment provisions which comply with the Act, the payment provisions of the Scheme for Construction Contracts 1998 will be implied to the extent necessary.

This can have significant procedural and commercial consequences, particularly in relation to payment and dispute resolution rights.

Alternatives to Collateral Warranties

While collateral warranties are widely used, there are alternatives that can provide similar protections without some of the complexities associated with warranties. These alternatives include:

  1. Third Party Rights (Contracts (Rights of Third Parties) Act 1999)
    • Under this Act, parties can, within the main construction contract, expressly grant rights to third parties without the need for separate warranties.
    • This alternative is increasingly being used (albeit still not to the extent anticipated when the Third Party Rights Act was introduced), particularly on larger high value projects with large numbers of professional consultants.
    • This approach can simplify the contractual structure and reduce the administrative burden as you will not need to obtain signatures on multiple documents as is typically required with collateral warranties.
  2. Letters of Reliance
    • Letters of reliance allow third parties to rely on reports, certificates, or other documents produced by contractors or consultants.
    • These letters can provide limited rights without the need for a full warranty, although they may not offer the same level of protection.
  3. Direct Agreements
    • Direct agreements between the contractor and the third party can provide specific rights, such as step-in rights for funders.
    • These agreements are tailored to the needs of the project and can offer more flexibility than standard collateral warranties.
Conclusion

Collateral warranties play a crucial role in construction contracts, offering third parties the protections and rights they may need throughout a project. However, these warranties need to be carefully drafted to clearly define each party’s obligations and maintain a fair balance of interests. Exploring alternatives such as third-party rights, letters of reliance, or direct agreements can also provide customised solutions that better fit the unique demands of a project.

As the legal landscape surrounding collateral warranties continues to develop, it is important to stay up to date and seek professional advice when drafting or negotiating these documents. If you are looking for expert advice on collateral warranties, please get in touch with our construction team for quality guidance and support.

Cesare McArdle
Partner, Commercial & Construction
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This reflects the law and market position at the date of publication and is written as a general guide. It does not contain definitive legal advice, which should be sought in relation to a specific matter.

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