A collateral warranty is a contract which gives a third party collateral, or running side by side, rights in an existing contract entered into by two separate parties. Collateral warranties are used to protect the interests of third parties or subsequent owners. Your obligations and liability may be extended by the use of a collateral warranty, for instance in a franchise project. You should check any collateral warranties with your professional indemnity insurer.
Background
The emergence of the use of collateral warranties began with two conflicting House of Lords decisions.
In Anns and other v Merton London Borough Council (1977) the House of Lords held that while the council was not obliged to inspect the footings of a multi-residential building, if it did so, the council had a duty of care to current and future owners to exercise reasonable skill and care.
In Murphy v Brentwood District Council (1990), however, the House of Lords decided that a council did not have a duty of care to future owners or occupiers of a building.
The effect of these two decisions, and the uncertainty that arose, was to encourage the use of collateral warranties to protect the interests of third parties or subsequent owners rather than rely solely on the laws relating to negligence.
Franchise example
An architect is engaged to design a fast-food outlet for a master franchiser, with the intent that the building will be on-sold when complete to the eventual franchisee. Due to privity of contract, under which a contract cannot impose rights or obligations on any party who is not a party to the contract, the franchisee would have no rights under the contract between the architect and the master franchiser. A collateral warranty provides rights to the franchisee and extends the obligations of the architect.
The client agreement, between the architect and the master franchiser, may require that a collateral warranty in favour of the eventual franchisee be provided, which would provide a contractual relationship between that franchisee and the architect in matters of liability.
Professional indemnity insurance
It is important that your professional indemnity insurer is advised of any collateral warranties and approves their wording, to ensure that full cover under such arrangements are maintained.
Disclaimer
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