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FAQs

The following FAQs have been addressed:

- Should I ask for collateral warranties or use the provisions of the Contracts (Rights
of Third Parties) Act 1999?
- Does the collateral warranty give the offeror additional benefits?
- Why should I offer collateral warranties?
- Should the offeror have the same rights against the beneficiary to a collateral
warranty as he or she has against the employer in the building contract?
- Why do collateral warranties contain a net contribution clause?

Should I ask for collateral warranties or use the provisions of the Contracts (Rights of Third
Parties) Act 1999?

Many more beneficiaries are now accepting on the provisions of the Contracts (Rights of Third
Parties) Act 1999 . One of the principal advantages for the employer and the contractor is the
reduction in the opportunity to re-negotiate terms. Whether the provisions of the Contracts
(Rights of Third Parties) are used or more traditional warranties are used, the relevant
provisions should be carefully drafted by a lawyer. The Contracts (Rights of Third Parties) Act
can introduce some dramatic unintended consequences if the provisions are drafted too
widely.

Does the collateral warranty give the offeror additional benefits?

Sometimes collateral warranties are drafted to give the offeror some additional benefits but
usually they are only intended to offer benefits to the beneficiary. Some collateral warranties
with funders will offer step-in rights in the event that the employer defaults and that can bring
significant benefits to the contractor.

Why should I offer collateral warranties?

As an offeror (usually consultant or contractor or subcontractor) collateral warranties (or rights

afforded pursuant to the Contracts (Rights of Third Parties) Act 1999) expand your potential
liabilities to third parties. You should therefore not offer these rights to third parties willingly.
Often however the provision of third party rights is a pre-condition to being awarded a contract.
Therefore the third party rights should be assessed as part of the overall risk when preparing
the tender or deciding whether or not to accept the contract.

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Should the offeror have the same rights against the beneficiary to a collateral warranty as he
or she has against the employer in the building contract?

Ideally the collateral warranty should do no more than expand the number of parties who may
have a right of action against the offeror. However there are legitimate reasons for third parties
wanting to limit the defences available to the offeror. For example a tenant who has a
grievance about a defect will not want to become embroiled in a dispute over fees between the
offeror and the developer. However sometimes third party rights are abused to dramatically
increase the potential liability of the offeror above that arising from the principal contract. For
example collateral warranties sometimes contain a fitness for purpose obligation which is not
present in the principal contract.

Why do collateral warranties contain a net contribution clause?

Beneficiaries to collateral warranties have historically been more willing to accept net
contribution clauses than have parties to the principal contract.

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