Commercial & Contract · Best Practice · Pre-Construction

Collateral Warranty

A warranty given by the contractor directly to a third party providing them with a direct contractual right.

Last reviewed: 29 March 2026 — This guide reflects UK law as of this date. Contract Law remains current with no amendments enacted as of 29 March 2026. Next scheduled review: 29 March 2027.

Legal basis	Contract law (common law) — a collateral warranty is a separate contract between the warrantor and a third-party beneficiary, collateral to the underlying construction contract
Purpose	Gives third parties (funders, purchasers, tenants) direct contractual rights against the contractor, subcontractors, or consultants — bridging the privity of contract gap that would otherwise prevent them from suing for defective work
Abbey Healthcare	Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2024] UKSC 23 — the Supreme Court held that most collateral warranties are NOT construction contracts within the meaning of the Construction Act 1996 and therefore do not carry the statutory right to adjudicate, unless they contain express adjudication provisions
JCT standard forms	MCWa/F (collateral warranty for a funder), MCWa/P&T (collateral warranty for a purchaser or tenant) — standard forms published by JCT for use with the JCT suite of contracts
Alternative	Third party rights under the Contracts (Rights of Third Parties) Act 1999 provide an alternative mechanism — the beneficiary acquires rights under the original contract rather than through a separate collateral warranty

1. Collateral Warranty

A collateral warranty is a separate contract that gives a third party — typically a funder, purchaser, or tenant — direct contractual rights against a party to the underlying construction contract. Under the doctrine of privity of contract, only the parties to a contract can enforce its terms. This creates a gap: a purchaser who buys a completed building has no direct contractual relationship with the contractor who built it, the architect who designed it, or the structural engineer who designed the foundations. If defects emerge, the purchaser cannot sue any of those parties in contract — only in tort (negligence), which provides a narrower and less certain remedy, particularly for pure economic loss.

Collateral warranties bridge this privity gap by creating a direct contractual relationship between the warrantor (typically the contractor, a key subcontractor, or a consultant) and the beneficiary (the funder, purchaser, or tenant). The warrantor warrants that it has performed and will continue to perform its obligations under the underlying contract with reasonable skill and care (for consultants) or in accordance with the contract (for contractors). The beneficiary can then sue the warrantor directly in contract if defective work or defective design causes loss.

The Supreme Court decision in Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP [2024] UKSC 23 has significant implications for the enforcement of collateral warranties. The Court held that a collateral warranty is not, without more, a construction contract within the meaning of the Housing Grants, Construction and Regeneration Act 1996. This means that the statutory right to adjudicate disputes does not automatically apply to collateral warranties. A beneficiary who wishes to adjudicate a claim under a collateral warranty must ensure that the warranty contains express adjudication provisions. Without such provisions, the beneficiary's only remedies are litigation or arbitration (if the warranty contains an arbitration clause).

After Abbey Healthcare: include express adjudication provisions

Following the Supreme Court's decision in Abbey Healthcare [2024] UKSC 23, any collateral warranty that does not contain express adjudication provisions will not benefit from the statutory right to adjudicate under the Construction Act. Adjudication is the fastest and most cost-effective dispute resolution mechanism in construction — a decision is typically obtained within 28 days. Without an express adjudication clause, the beneficiary must pursue litigation or arbitration, which are significantly slower and more expensive. When drafting or reviewing collateral warranties, ensure that an express adjudication clause is included. The JCT standard forms MCWa/F and MCWa/P&T have been updated to include express adjudication provisions in light of the Abbey Healthcare decision.

2. Key Content

A collateral warranty must contain a number of key provisions to be effective. The following table sets out the typical content of a well-drafted collateral warranty, whether in JCT standard form or bespoke drafting.

Element	Detail
Warrantor	The party giving the warranty — typically the main contractor, a key subcontractor (such as the cladding or M&E subcontractor), or a consultant (architect, structural engineer, M&E engineer). The warrantor warrants performance of its obligations under the underlying contract.
Beneficiary	The third party receiving the benefit of the warranty — typically a funder (bank or investor providing project finance), a purchaser (buying the completed development), or a tenant (taking a lease of the completed building or part of it).
Project	A clear description of the project, including the site address and the nature of the works, to identify the specific construction project to which the warranty relates.
Underlying contract	Identification of the underlying construction contract (or professional appointment) to which the warranty is collateral. The warranty warrants performance of obligations under this specific contract.
Warranty	The core obligation: the warrantor warrants that it has performed and will continue to perform its obligations under the underlying contract. For consultants, this is typically expressed as an obligation to exercise reasonable skill, care, and diligence. For contractors, it warrants compliance with the contract requirements.
Step-in rights	Rights allowing the beneficiary (typically a funder) to step into the underlying contract and take over the contractor's or consultant's engagement if the employer defaults or becomes insolvent. Step-in rights are critical for funders because they protect the funder's investment by allowing the project to continue.
Deleterious materials	A warranty that the warrantor has not used and will not use deleterious materials in the works. Typically defined by reference to a schedule of prohibited materials or to good building practice. Common deleterious materials include high alumina cement, calcium silicate bricks in external walls, wood wool slabs as permanent formwork, and asbestos.
Professional indemnity	An obligation on the warrantor (typically a consultant or design-and-build contractor) to maintain professional indemnity insurance at a specified level for a specified period. The beneficiary should have the right to request evidence of insurance.
Limitation	The limitation period within which the beneficiary must bring a claim under the warranty. If executed as a deed (under seal), the limitation period is 12 years from the date of the breach. If executed under hand (by signature), the limitation period is 6 years. The choice between deed and under hand is therefore critical.
Adjudication (express)	Following Abbey Healthcare [2024] UKSC 23, an express adjudication clause is essential if the beneficiary wishes to have the right to adjudicate disputes under the warranty. Without an express clause, the statutory right to adjudicate under the Construction Act does not apply to most collateral warranties.
Assignment	Whether the beneficiary can assign the benefit of the warranty to a successor (e.g. a subsequent purchaser or tenant). JCT standard forms typically allow two assignments without the warrantor's consent. Any restriction on assignment should be clearly stated.
Execution	Whether the warranty is executed as a deed (giving a 12-year limitation period) or under hand (giving a 6-year limitation period). Funders and purchasers typically require execution as a deed to maximise the limitation period.

3. Common Mistakes

Not executing the collateral warranty before practical completion

Collateral warranties should be executed before or at practical completion at the latest. Once practical completion has been achieved and the contractor has been paid, the contractor and its subcontractors and consultants have little commercial incentive to execute collateral warranties. Chasing warranties after practical completion is one of the most common and frustrating problems on construction projects. The employer's leverage disappears once the final payment has been made. Best practice is to make the provision of executed collateral warranties a condition precedent to the issue of the practical completion certificate, or at minimum to withhold a meaningful sum from interim payments until warranties are delivered.

No step-in rights for funders

A collateral warranty in favour of a funder that does not include step-in rights is of limited value to the funder. Step-in rights allow the funder to step into the underlying contract and take over the engagement of the contractor or consultant if the employer defaults on the loan or becomes insolvent. Without step-in rights, the funder has no mechanism to keep the project going if the employer fails — it can only sue for damages after the event. Most funders will require step-in rights as a condition of providing project finance, and the absence of step-in rights may constitute a breach of the funding agreement.

Executing under hand when a 12-year limitation period is needed

A collateral warranty executed under hand (by simple signature) has a limitation period of 6 years from the date of the breach. A warranty executed as a deed has a limitation period of 12 years. Defects in buildings frequently do not manifest until many years after completion — structural defects, waterproofing failures, cladding defects, and foundation settlement can all take years to become apparent. If a warranty is executed under hand and the defect does not manifest until year 7, the beneficiary has no remedy under the warranty because the limitation period has expired. Funders, purchasers, and tenants should always require collateral warranties to be executed as deeds to secure the 12-year limitation period.

4. Frequently Asked Questions

Can collateral warranties be replaced by third party rights?▾

Third party rights under the Contracts (Rights of Third Parties) Act 1999 provide an alternative to collateral warranties. Instead of creating a separate contract between the warrantor and the beneficiary, the underlying construction contract includes provisions that confer enforceable rights directly on identified third parties (funders, purchasers, tenants). The JCT 2024 suite includes optional third party rights schedules as an alternative to collateral warranties. The advantages of third party rights include: the rights arise automatically under the main contract without the need to execute a separate document, they cannot be “lost” through failure to execute, and they are clearly construction contracts for the purposes of the Construction Act (giving the beneficiary the statutory right to adjudicate). The disadvantages include: the beneficiary's rights are subject to any defences or set-offs that the warrantor has against the employer under the main contract, the terms are less flexible than a bespoke collateral warranty, and some funders and their legal advisers still prefer the certainty of a separate collateral warranty. In practice, many projects use a combination of both — third party rights as a backstop and collateral warranties as the primary mechanism.

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