Collateral Warranties vs NHBC

30 October, 2014

There is a common misconception that if a client holds an NHBC warranty, they do not require collateral warranties to be provided in relation to a building project. The warranties, however, offer very different protection.

Collateral Warranties

Often in a construction project there are third parties that have an interest in the project but do not have a contractual relationship with the parties that are designing and carrying out the work. This means that if one of these third parties suffers loss as a result of the contractor’s poor workmanship or the architect’s negligent design, they are unable to make a contractual claim against them.

They may seek to recover their losses in negligence, but as the losses are usually pure economic loss, they are difficult to recover in a negligence claim.

By entering into a collateral warranty, the designer/contractor is warranting to the third party that it has performed their element of the works in accordance with the main contract. This creates a contractual relationship between the parties, and therefore if the third party suffers loss as a result of the designer/contractor breaching the terms of its main contract it will be able to claim a contractual remedy. The remedy in general terms covers not only the cost of putting right the breach but also compensating the wronged party for losses which are consequential to the breach.

NHBC

The NHBC warranty is essentially an insurance backed consumer protection warranty. It guarantees that the building has been built to the NHBC standard (which is often not as high as the standard that would be required under a building contract).

The protection the NHBC offers is that if a defect occurs the builder will rectify this defect. If the builder refuses or otherwise fails to do so, the NHBC insurance policy will kick in and will either pay out the necessary amount or arrange for the rectification works to be carried out. The NHBC warranty does not cover any other losses that may flow from the defect.

Overall, it is useful to have both NHBC and collateral warranties in place, and clients should be steered away from the notion that they don’t need collateral warranties in place because they have an NHBC warranty. It should be made clear that although the NHBC does offer substantial protection in relation to rectifying defects, it does not cover them against any consequential losses.