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20 September 2019

What is a Deed of Collateral Warranty?

In a construction context, a deed of collateral warranty is a deed signed by a subcontractor that contains warranties and other obligations in favour of the ultimate principal on the project.


What does a Collateral Warranty Deed look like?

Usually a collateral warranty deed is issued by the principal under the head contract, as an attachment to the head contract. They are almost always prepared in the form of a deed.

Sometimes they are given a different name, such as 'Subcontractor Warranty Deed' or 'Subcontractor Side Deed'.  Despite their different titles, the purpose of these documents is usually much the same. 

Why are Collateral Warranty Deeds used?

The purpose of a collateral warranty deed is to ensure the ultimate principal on the project can sue a subcontractor, should the need arise. Most of the time, the warranties contained in these deeds are intended to protect the principal against the risk of defects.

Without a collateral warranty deed, the principal may not be able to bring claims against subcontractors. Instead, the principal's sole right of recourse is likely to be against the head contractor (being the only party with whom the principal has a contract).

If the head contractor is unable to satisfy a claim brought by the principal - for example, if the head contractor is insolvent - this could leave the principal in a position where it has no effective right of recourse at all.

The purpose of a collateral warranty is to bridge the gap between subcontractor and principal, so that if the principal cannot pursue (or does not wish to pursue) the head contractor for some reason, it can bring its claim directly against the subcontractor.

Who can a Collateral Warranty Deed benefit?

The most common form of collateral warranty deed is the type issued by a principal, which is required to be signed by a subcontractor. The provision of Collateral Warranty Deeds is often expressed to be a condition precedent of achieving practical completion under the head contract. 

However collateral warranty deeds can be used, and often are used, for a variety of other purposes. They can be used in virtually any circumstance where a party wishes to create a right of action against someone with whom it would not otherwise have any contractual link. 

For example:

  • a head contractor may require a subcontractor to provide collateral warranty deeds signed by subcontractors further down the contracting chain;
  • a financier may require its client, the principal, to provide a collateral warranty deed signed by the head contractor;
  • a landlord may require its tenant, to provide a collateral warranty deed signed by the head contractor for work performed in the landlord's building.

When should a Collateral Warranty Deed be collected?

Where a contract requires a collateral warranty deed to be provided, it will normally be required:

  • around the time of contract award or subcontract award (and sometimes these deeds are referred to as 'Deeds of Covenant');
  • around the time of practical completion, and their provision is often expressed to be a condition to achieving practical completion; or
  • at both of the times mentioned above.

Where the purpose of the deed is to protect someone against the risk of defects, it is unlikely to make much practical difference if the deed is required to be provided at the start of the project or at the end, provided the deed is appropriately drafted.

Some collateral warranty deeds will contain warranties or obligations that relate to the manner in which the work is to be performed. Where that type of warranty is required, the deed should obviously be sought at the beginning of the project.  There would be little point in seeking that type of warranty after practical completion.

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What does a Collateral Warranty Deed contain?

Below are some common terms that you might find in a typical collateral warranty deed.

Performance Warranties

Most collateral warranty deeds contain:

  • a warranty that the warrantor has performed, or will perform, its obligations under the underlying contract; and
  • warranties in relation to the goods or services it has supplied, or will supply, for the project. These warranties are typically expressed to operate for a period of time, to give the beneficiary of the warranty comfort about the quality of the goods or services in question.

These warranties will be expressed to be in favour of the beneficiary named in the warranty deed, typically being the principal or other upstream party.

Indemnity

The warranties in a collateral warranty deed are often supported or supplemented by indemnities. (If you are a contractor, you can read more about indemnities in construction contracts here.)

Assignment

The rights contained in a collateral warranty deed are typically expressed to be assignable by the person having the benefit of the warranty.  This ensures that, where the relevant building or land is sold, the seller can pass on the benefit of the warranties to the new owner.

What to look for in a Collateral Warranty Deed

If you are a principal or other party seeking to put in place a collateral warranty deed, this is an area where legal advice should be sought.

Although most collateral warranty deeds share common features, there is no commonly accepted standard form. You will also need to ensure that your head contract contains provisions to ensure these deeds are collected and provided to you before the end of the project.

If you are a contractor reviewing a collateral warranty deed, the main thing to consider is whether the terms of the deed will increase your risk profile on the project. Two initial questions are:

  • Does the deed contain obligations or warranties that are more onerous than those contained in your main contract?
  • Will you be exposing yourself to greater liability by making promises, or giving indemnities, to the party(s) named in the warranty deed?

You may find the drafting of these deeds somewhat technical, and you may find it difficult to establish whether the terms pose any material risk. If you are unsure, or you find yourself guessing, that may be a sign that it's time to speak to a construction lawyer. (You can read more about working with construction lawyers here.)

About the Author

Morgan McIntosh | Associate

Morgan is a commercial lawyer whose practice is mainly focused on transactional matters in the construction space.


morgan.mcintosh@turtons.com | (02) 9229 2901

About Turtons

Turtons is a commercial law firm in Sydney with specialist expertise in privately owned construction and technology businesses.

Morgan McIntosh | Associate

Author

Morgan McIntosh | Associate

morgan.mcintosh@turtons.com

Morgan is a commercial lawyer whose practice is mainly focused on transactional matters in the construction space.


morgan.mcintosh@turtons.com | (02) 9229 2901

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