Q:

What is a collateral warranty?

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Quick Answer

A collateral warranty is an ancillary document that supports a primary construction contract involving an agreement with a third party. At times, a contractor or architect needs to warrant that he has taken care of the duties outlined in the contract that established the work order.

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Many times collateral warranties come with obligations that have an influence on the contractor or consultant, such as setting requirements for materials or for the quality level of a finished job, expecting it to be finished at a particular level of quality. A collateral warranty can invoke third-party contractual rights that allow for claims regarding losses that, without the warranty, would not be recoverable. Third-party rights permit people or entities, not parties to a contract, to enforce that contract.

Some types of collateral warranty are somewhat weaker in their construction, referring to a fairly ambiguous "duty of care" or other obligation under the building contract or subcontract. Collateral warranties exist for three reasons: they continue providing security for the construction, tort claims have only mixed results in court and privity of contracts keeps third parties from having to depend on the contracts of other people. Without collateral warranties, entering into construction contracts represents a significant risk on the part of the client.

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