A collateral warranty is a contract that creates a direct contractual link between a construction party (such as a contractor, sub-contractor or consultant) and a third-party beneficiary who is not party to the underlying building contract or appointment. It lets funders, purchasers and tenants sue that party directly if the works prove defective, even though they never employed them. Without it, the rule of privity of contract would leave most beneficiaries with no contractual remedy at all.
In short: A collateral warranty is a contract that creates a direct legal link between a construction party (such as a contractor, consultant or sub-contractor) and a third party — typically a funder, purchaser or tenant — who would otherwise have no contractual right to sue. It gives that third party a remedy for defective work or loss and commonly includes step-in rights. Collateral warranties are often used together with performance bonds and rights under the Contracts (Rights of Third Parties) Act 1999.
Collateral warranties sit at the heart of how risk travels around a UK construction project. In 2024 the Supreme Court reshaped how disputes under them can be resolved, and the Building Safety Act 2022 has dramatically extended how long a beneficiary has to bring a claim. This guide explains what a warranty is, the clauses that matter, how warranties compare with third-party rights, and how the law stands in 2026.
- A collateral warranty bridges the gap left by privity of contract, giving a beneficiary a direct claim against the warrantor.
- The key terms to negotiate are reasonable skill and care, net contribution, step-in rights, assignment and the “no greater liability” cap.
- The 2024 Supreme Court decision in Abbey Healthcare v Augusta held that most collateral warranties are not “construction contracts”, so there is generally no statutory right to adjudicate under them.
- Warranties are often weighed against third-party rights under the Contracts (Rights of Third Parties) Act 1999 — see how they interact with performance bonds as part of a wider security package.
- Limitation runs 6 years (signed under hand) or 12 years (executed as a deed), but the Building Safety Act 2022 extends dwelling claims to 15 or 30 years.
- When defects emerge, a well-drafted warranty is the foundation of any defective works claim — and it should align with the underlying JCT contract.
What is a collateral warranty?
A collateral warranty is a separate, “collateral” agreement that runs alongside a primary construction contract or professional appointment. The primary contract is between two parties — typically the employer (developer) and the contractor or consultant. The warranty is given by that contractor or consultant (the warrantor) to a third party (the beneficiary) who has an interest in the completed building but no contract with the warrantor.
The core of the warranty is a promise that the warrantor has performed, and will continue to perform, its obligations under the underlying contract. In a design-and-build context this usually includes a warranty that the warrantor has exercised, and will exercise, reasonable skill and care in carrying out its duties. The effect is to give the beneficiary a direct contractual cause of action against the warrantor if the warrantor breaches those duties — for example, by producing defective design or workmanship.
Why is this necessary? Under the English law doctrine of privity of contract, only the parties to a contract can sue on it. A tenant who later occupies a building, or a bank that funded it, has no contract with the original sub-contractor whose faulty work caused a defect. Tort offers little help: the courts have long restricted recovery of pure economic loss (the cost of repairing a defective building, as opposed to personal injury or damage to other property) in negligence. The collateral warranty is the practical device that fills this gap, manufacturing a contractual relationship where one would not otherwise exist.
Why funders, purchasers and tenants need one
On a typical commercial development, three categories of beneficiary commonly require warranties, each with a slightly different motive:
- Funders (banks and lenders) finance the development and want recourse if the contractor’s defective work damages the value of their security. Crucially, they also want step-in rights so that, if the developer becomes insolvent, the funder can take over the building contract and see the project to completion rather than watch its loan collapse with a half-built asset.
- Purchasers who buy the completed (or partly completed) building want the benefit of the design and construction obligations. A defect that emerges after completion could cost them millions; a warranty gives them someone solvent to pursue.
- Tenants — particularly on long full-repairing leases — may be contractually responsible for repairs and want to pass the cost of remedying inherent defects back up the chain to those who caused them.
Because each contractor, sub-contractor and consultant on a project may be asked to provide warranties to several beneficiaries, a single development can generate dozens of warranty documents. Coordinating their terms — so that the warrantor’s exposure is consistent and the beneficiary’s protection is real — is a core part of construction transaction management.
Key terms explained: what to negotiate
Not all warranties are equal. The commercial value of a warranty turns on a handful of clauses. Getting them right is the difference between robust protection and a document that looks reassuring but delivers little.
| Clause | What it does | Beneficiary’s position |
|---|---|---|
| Reasonable skill and care | Warrants the warrantor exercised the care of a reasonably competent member of its profession. A “fitness for purpose” obligation is stricter but often resisted (and may be uninsured). | Match the standard to the underlying contract; press for fitness for purpose only where insurance allows. |
| Net contribution clause | Limits the warrantor’s liability to the proportion of loss it is responsible for, rather than the full loss, assuming other parties pay their share. | Resist or narrow it. It shifts the risk of an insolvent or untraceable co-defaulter onto the beneficiary, who must then chase each party separately. |
| Step-in rights | Allow a funder (or sometimes a purchaser) to “step in” to the warrantor’s underlying contract and take over the employer’s role — for example, on developer insolvency. | Essential for funders. Ensure the order of precedence between competing beneficiaries is clear. |
| Assignment | Permits the beneficiary to transfer the benefit of the warranty to a future owner or lender, usually limited to a fixed number of assignments. | Two assignments without consent is the market-standard compromise — enough flexibility for resale and refinance. |
| No greater liability | Provides the warrantor owes the beneficiary no greater duty, and has no greater liability, than it owes the employer under the underlying contract. | Standard and reasonable — but means the beneficiary inherits any caps, exclusions and net-contribution limits in that contract too. |
Two further points deserve emphasis. First, the “no greater liability” wording is double-edged: it protects the warrantor from facing wider duties to a beneficiary than it agreed with the employer, but it also imports the underlying contract’s limitations into the warranty. A beneficiary should therefore read the building contract, not just the warranty. Second, net contribution clauses are routinely slipped into consultant warranties; their practical effect is to convert a single, simple claim against the warrantor into a multi-party hunt for every party that touched the defect.
Collateral warranties vs third-party rights
Since the Contracts (Rights of Third Parties) Act 1999, there has been an alternative to the collateral warranty. The Act lets a person who is not a party to a contract enforce a term of it where the contract expressly provides that they may, or where the term purports to confer a benefit on them and the parties did not intend otherwise. In construction this is delivered through a third-party rights schedule built into the building contract or appointment, naming the beneficiaries and the rights they enjoy.
The attraction of third-party rights (TPRs) is administrative. Instead of executing dozens of separate warranty deeds, the parties grant rights in a single schedule and notify beneficiaries by a simple notice. That saves time and cost on large projects. The trade-offs are real, however:
| Feature | Collateral warranty | Third-party rights (1999 Act) |
|---|---|---|
| Document required | A separate executed deed for each beneficiary | A schedule in the underlying contract plus a notice |
| Administrative burden | Higher — chasing signatures from multiple parties | Lower — rights vest by notice |
| Body of precedent | Extensive and well understood | Thinner — less litigated |
| Step-in rights | Long-established and routinely accepted | Workable but some funders remain cautious |
| Risk of variation | Independent contract — less exposed to changes in the underlying deal | Can be affected by variations to the main contract unless ring-fenced |
| Funder acceptance | Generally the funder’s preferred form | Increasingly accepted but case-by-case |
In practice many projects use a hybrid: TPRs for purchasers and tenants where the administrative saving is greatest, and traditional collateral warranties for funders, who still tend to prefer the tried-and-tested document with its richer body of case law. You can read the Act in full at legislation.gov.uk.
The 2024 Abbey Healthcare ruling: a turning point
The most important development in this area for a decade is the Supreme Court’s judgment in Abbey Healthcare (Mill Hill) Ltd v Augusta 2008 LLP (formerly Simply Construct (UK) LLP) [2024] UKSC 23, handed down on 9 July 2024. It overruled the long-standing approach in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC).
The facts are instructive. Simply Construct built a care home in north London. The building contract was later novated to Toppan Holdings, which granted a 21-year lease to Abbey Healthcare, the operator. Fire-safety defects were discovered. In 2020, several years after practical completion, Simply executed a collateral warranty in favour of Abbey. Abbey then commenced adjudication against Simply to recover the cost of remedial works. Simply objected that the adjudicator had no jurisdiction, because the warranty was not a “construction contract” under section 104(1) of the Housing Grants, Construction and Regeneration Act 1996 (the “Construction Act”). Only construction contracts carry the statutory right to adjudicate at any time.
The Supreme Court agreed with Simply, unanimously. It held that a collateral warranty under which the contractor merely warrants its performance of obligations already owed under the building contract is not an agreement “for … the carrying out of construction operations” within section 104(1). Such a warranty is, in essence, derivative and retrospective — it promises that work has been or will be done to a standard, rather than being the agreement under which the work is actually procured. The Court was explicit that this should be the position for the great majority of collateral warranties, restoring commercial certainty after the uncertainty that Parkwood had introduced. You can read the definition the Court applied at section 104 on legislation.gov.uk.
Can you still adjudicate under a collateral warranty?
This is the practical question that flows from Abbey. The answer in 2026 is: generally no — not as of right. Because most warranties are not “construction contracts”, the Construction Act’s statutory right to refer a dispute to adjudication “at any time” does not apply to them.
There are two important caveats. First, parties remain free to include an express adjudication clause in a collateral warranty as a matter of contract. If they do, adjudication is available because the parties have agreed it — not because the statute imposes it. Beneficiaries who value the speed and lower cost of adjudication should now insist on such a clause when the warranty is drafted. Second, the Abbey principle is not absolute: a warranty drafted so that it genuinely governs the carrying out of future construction operations (rather than merely warranting past or contemporaneous performance) could in principle still fall within the Act. In the vast majority of cases, however, beneficiaries must now pursue defects through ordinary litigation or any contractually agreed dispute process, not statutory adjudication.
Limitation periods and the Building Safety Act 2022
Limitation governs how long a beneficiary has to bring a claim before it becomes time-barred. For collateral warranties, the starting point under the Limitation Act 1980 depends on how the warranty was executed:
- A warranty signed under hand (a simple contract) carries a 6-year limitation period from the date the cause of action accrues.
- A warranty executed as a deed (a specialty) carries a 12-year period.
For this reason, collateral warranties are almost always executed as deeds — the longer 12-year window is a major reason beneficiaries insist on it. Time generally runs from the date of the breach (for contract) rather than the date of the contract itself.
The picture changes dramatically for claims relating to dwellings. Section 135 of the Building Safety Act 2022, in force from 28 June 2022, inserted a new section 4B into the Limitation Act 1980. For claims under section 1 of the Defective Premises Act 1972 (which requires dwellings to be built fit for habitation), it created:
- A 15-year limitation period for causes of action accruing after commencement (prospective claims); and
- A 30-year limitation period for causes of action that accrued before commencement (retrospective claims).
Critically, section 135(3) provides that the retrospective extension is “to be treated as always having been in force” — reviving claims that were previously time-barred, subject only to narrow exceptions for settled or determined claims and a defendant’s Convention rights. You can read the provision in full at section 135 on legislation.gov.uk.
| Basis of claim | Limitation period | When it runs from |
|---|---|---|
| Warranty under hand (simple contract) | 6 years | Date breach accrues |
| Warranty executed as a deed | 12 years | Date breach accrues |
| Negligence (tort) | 6 years (plus latent-damage rules) | Date damage occurs / knowledge |
| DPA 1972 s.1 — prospective (post-28 June 2022) | 15 years | Completion of the dwelling |
| DPA 1972 s.1 — retrospective (pre-28 June 2022) | 30 years | Completion of the dwelling |
The combined effect is that a warranty beneficiary on a residential scheme may now have rights stretching back decades — a profound shift in favour of those affected by historic building-safety defects.
Worked example: a tenant and defective cladding
Scenario. Meridian Care Operators Ltd takes a 25-year lease of a six-storey residential care building completed in 2017. The lease is full-repairing. In 2025, an external wall survey reveals that the rainscreen cladding system was installed with combustible insulation and inadequate fire barriers, requiring £2.4 million of remedial work. Meridian holds a collateral warranty, executed as a deed in 2017, from the design-and-build contractor, BowerLane Construction Ltd.
The contractual route. Because privity bars Meridian from suing BowerLane on the original building contract, the warranty is its only direct contractual remedy. The warranty promises BowerLane exercised reasonable skill and care. The defective fire barriers are a clear breach.
Limitation. As a deed, the warranty gives a 12-year contractual window from the 2017 breach — so a contract claim is in time until around 2029. Separately, because the building contains dwellings, Meridian (or the building owner) may also rely on the Defective Premises Act 1972, where the Building Safety Act 2022 provides a 30-year retrospective window — comfortably in time.
Dispute resolution. Following Abbey Healthcare (2024), Meridian cannot adjudicate as of right, because the warranty is not a “construction contract”. Unless the 2017 warranty happens to contain an express adjudication clause, Meridian must pursue BowerLane through the courts (Technology and Construction Court) or any agreed ADR process.
The net-contribution trap. The warranty contains a net contribution clause. BowerLane argues the cladding sub-contractor and the fire-safety consultant share responsibility, so it should pay only its proportion. Meridian now faces the burden of joining or separately pursuing those other parties — one of whom has since been dissolved. The lesson: the clause Meridian’s advisers should have resisted in 2017 directly limits its recovery in 2025.
Common mistakes to avoid
- Accepting a warranty under hand. Insisting on execution as a deed doubles the limitation window from 6 to 12 years.
- Ignoring the net contribution clause. It quietly transfers the risk of an insolvent co-defaulter onto you.
- Assuming you can adjudicate. After Abbey (2024), you generally cannot, unless the warranty expressly says so.
- Overlooking assignment limits. A warranty allowing too few assignments can frustrate a future sale or refinance.
- Not chasing warranties until completion. Sub-contractors lose interest once paid; collect executed warranties before final accounts are settled.
- Failing to align the warranty with the underlying contract. A “no greater liability” clause means any gaps or caps in the main contract flow straight through to you.
Who gives warranties, and when in the project?
Warranties are given by the parties who carry design or construction risk: the main contractor, key specialist sub-contractors (cladding, mechanical and electrical, structural), and the professional consultants (architect, structural engineer, services engineer). The obligation to provide them is set out in the building contract or appointment, which lists the named beneficiaries and appends the agreed warranty form as a schedule.
Timing matters. The right to call for warranties is usually triggered on practical completion or at specified milestones, but in practice beneficiaries and their advisers should track collection actively. Once a sub-contractor has been paid and demobilised, securing a signature becomes far harder — and a missing warranty in a deal package can delay or derail a sale, letting or refinance. On building-safety-critical elements such as cladding, a complete warranty trail is now indispensable evidence in any future claim.
How Hayhills can help
Hayhills Legal Advisory provides direct, non-reserved construction advisory on the full collateral warranty lifecycle. We draft and negotiate warranty and third-party rights packages for developers, funders, purchasers and tenants; review warranties you are being asked to give or accept; and pressure-test the clauses that decide their real value — reasonable skill and care, net contribution, step-in, assignment and the “no greater liability” cap. We advise on structuring warranties alongside performance bonds and ensuring they dovetail with your JCT contract.
Where a defect has emerged, we help you build the strategy for a defective works claim and, post-Abbey, advise on the correct dispute route. Court enforcement and any insolvency steps are coordinated with a regulated solicitor.
Need a collateral warranty drafted, reviewed or enforced? Speak to our construction advisory team on 0203 581 5789 or visit our contact page to arrange a consultation.
Frequently asked questions
What is the difference between a collateral warranty and a guarantee?
A collateral warranty creates a direct duty owed by a construction party (such as a contractor or consultant) to a beneficiary, mirroring its obligations under the main contract. A guarantee, by contrast, is a secondary promise to answer for another party’s default, usually given by a parent company or surety, and only bites if the primary obligor fails.
Does a collateral warranty need to be a deed?
It does not have to be, but it almost always should be. A warranty executed as a deed carries a 12-year limitation period under the Limitation Act 1980, compared with just 6 years for one signed under hand. The longer window is a key reason beneficiaries insist on execution as a deed.
Can I adjudicate a dispute under a collateral warranty?
Generally no, not as of right. In Abbey Healthcare v Augusta [2024] UKSC 23 the Supreme Court held that most collateral warranties are not “construction contracts”, so the statutory right to adjudicate does not apply. You can only adjudicate if the warranty contains an express adjudication clause that the parties agreed.
What is a net contribution clause and should I accept one?
A net contribution clause limits the warrantor’s liability to its own fair share of a loss, assuming other responsible parties pay theirs. Beneficiaries should resist or narrow it, because it shifts the risk of insolvent or untraceable co-defaulters onto the beneficiary, who must then pursue each party separately.
What are step-in rights?
Step-in rights allow a funder (and sometimes a purchaser) to take over the employer’s role under the underlying building contract or appointment — for example, if the developer becomes insolvent. They let the funder keep the project alive and protect its security rather than be left with an unfinished building.
How many times can a collateral warranty be assigned?
Most warranties permit assignment on two occasions without the warrantor’s consent. This market-standard compromise gives the beneficiary enough flexibility to assign on a sale and again on a refinance, while protecting the warrantor from facing claims from an unlimited number of future parties.
What does “no greater liability” mean?
A “no greater liability” clause provides that the warrantor owes the beneficiary no wider duty, and no greater liability, than it owes the employer under the underlying contract. It protects the warrantor — but also means the beneficiary inherits any caps, exclusions and net-contribution limits in that contract.
Are third-party rights a substitute for collateral warranties?
They can be. Third-party rights under the Contracts (Rights of Third Parties) Act 1999 confer enforceable benefits via a schedule and notice, avoiding separate deeds. They are administratively lighter, but have a thinner body of precedent and some funders still prefer traditional warranties, so many projects use a hybrid.
How long do I have to bring a claim under a warranty?
For a warranty executed as a deed, 12 years from the breach; 6 years if signed under hand. For defects in dwellings, the Building Safety Act 2022 extends Defective Premises Act 1972 claims to 15 years prospectively and 30 years retrospectively from 28 June 2022.
Who is responsible for providing collateral warranties?
The contractor, key sub-contractors and the design consultants give warranties, as required by the building contract or appointment. Beneficiaries should collect executed warranties actively — ideally before final accounts are settled — because securing signatures becomes much harder once a party has been paid and left site.
This article is for general information only and does not constitute legal or accountancy advice. Hayhills Limited, trading as Hayhills Legal Advisory, provides non-reserved legal advisory services. Always check current requirements at GOV.UK.