Collateral warranty: Overview, definition and example
What is a collateral warranty?
A collateral warranty is a separate agreement that provides a party with additional assurance about the performance or quality of something in a primary contract. It’s typically used to protect third parties by giving them the right to enforce certain obligations or claims in the event the primary party fails to meet their responsibilities. In simple terms, it extends the protections of the main contract to a third party, ensuring they can hold someone accountable.
Why is a collateral warranty important?
A collateral warranty is important because it allows third parties, who are not directly involved in the primary contract, to seek legal recourse if things go wrong. It ensures that the obligations in the original agreement are enforceable by others who are affected by the performance of those obligations. This can be particularly important in industries like construction, where contractors or suppliers may need to ensure that their work meets the standards promised to property owners or tenants.
Understanding a collateral warranty through an example
Imagine a property developer hires a construction company to build a commercial building. The property developer may not be the main party in the contract between the construction company and the subcontractor who installs the electrical systems. However, to protect the building owner, the construction company might provide a collateral warranty. This ensures that if the electrical work is substandard, the building owner can directly hold the construction company responsible for fixing it.
In another example, a supplier of raw materials might provide a collateral warranty to a customer, assuring them that the materials will meet certain quality standards. If the materials don’t meet these standards, the customer can seek compensation directly from the supplier under the collateral warranty, even if they’re not a party to the original agreement.
Example of a collateral warranty clause
Here’s how a collateral warranty might be included in a contract:
“The Contractor shall provide a collateral warranty to the Purchaser ensuring that the materials supplied under this contract meet the specified quality standards. This warranty is enforceable by the Purchaser even if the Purchaser is not a direct party to the main agreement between the Contractor and Supplier.”
Conclusion
A collateral warranty is a valuable tool for extending protections to third parties involved in or impacted by a contract. By ensuring that third parties can enforce certain obligations, collateral warranties help mitigate risks and promote accountability, particularly in industries where multiple parties may be indirectly affected by the performance of a contract.
This article contains general legal information and does not contain legal advice. Cobrief is not a law firm or a substitute for an attorney or law firm. The law is complex and changes often. For legal advice, please ask a lawyer.