Collateral warranties require care and attention. Watch out for assignments, notice clauses, duration, entrenched rights in contract, tort and statute, and, of course, jurisdiction.
Collateral warranties contain a number of common provisions that can entirely change the conditions of the warranty. They are, however, often given little attention and can cause confusion and misunderstanding. In my final article on the subject of collateral warranties, I will attempt to cover some of the commonly overlooked provisions and their significance.

Most professional indemnity insurance policies permit only a limited number of assignments within a collateral warranty. The limit is usually two or three and this is expressly stated in the warranty. There is little point in the beneficiary of a warranty arguing for more assignments than the number permitted by insurers, as any assignee of the warranty after the number permitted will not be protected by the contractor's indemnity insurance.

It is also possible that an insurer could argue that by permitting more assignments in the warranty than the policy allows, the policy becomes invalid. It is unlikely that this would often be the case, but is a risk better avoided.

Jurisdiction and law clause
This specifies which legal system will apply to the warranty and which courts have jurisdiction in determining any disputes. It is crucial because overseas contractors and subcontractors are used more and more frequently in the UK.

In general, European Union companies have the right to be sued in the country where they are incorporated or have their primary business. In the absence of a jurisdiction and law clause, the beneficiary of a warranty relating to a UK construction project could become embroiled in foreign law or be forced to follow the case in foreign courts.

Warranties relating to UK projects should always specify the law of England and Wales, Scotland or Northern Ireland (as appropriate), and it is sensible to specify that the relevant court should have jurisdiction over any disputes.

Notice clauses
These clauses state how notice can be given by one party to the other and are usually only of importance where there are step-in rights (see 2 June, page 53), or where the effect of an assignment is conditional on notice being given to the contractor.

There are some traps for the unwary, however. Notice clauses commonly set out details for each party, such as the address to which notice should be sent. The clause usually permits each party to alter those details by giving notice to the other parties. However, this is often overlooked so that when a party moves, he fails to tell the other parties. In such a case, notices can still validly be sent to an old address, where they may never be received. On the other hand, where notice is given by one party of a change of address, the other parties often fail to make a proper note of the change and send notice to the old address. This means that the notice is not effective.

Other provisions
Other common provisions within collateral warranties include one which states that the warranty will continue to have effect notwithstanding the completion of the development. It seems most unlikely that a court would rule that a warranty with a 12-year limitation period should cease because the development has been completed.

Another frequently used provision is a statement that the rights given by the warranty to the beneficiary do not prejudice or affect the beneficiary's other rights in contract, tort or under statute. In the past, this has not been held up in court, but the latest rulings reveal that claims in contract and tort can be brought in relation to the same events.

Finally, a provision that has become almost standard is the clause excluding the effect of the Contracts (Rights of Third Parties) Act.