A collateral warranty agreement is a legal document that provides a contractual guarantee to a third-party beneficiary, typically a lender, that a contractor or supplier will fulfill their obligations under a construction contract. It ensures that the lender’s security interest in the property is protected, even if the original contract between the owner and the contractor or supplier is terminated or becomes unenforceable.
Essential Elements of a Collateral Warranty Agreement
1. Parties: Identify the parties involved in the agreement, including the lender, the owner, and the contractor or supplier.
2. Reference to the Main Contract: Clearly reference the underlying construction contract that the collateral warranty agreement supports.
3. Scope of Works: Define the specific scope of works covered by the collateral warranty agreement, ensuring that it aligns with the lender’s security interest in the property.
4. Warranties: Outline the specific warranties provided by the contractor or supplier, such as warranties of workmanship, materials, and performance.
5. Indemnity: Specify the contractor or supplier’s obligation to indemnify the lender for any losses or damages arising from breaches of the collateral warranty agreement.
6. Term and Termination: Establish the duration of the collateral warranty agreement and the conditions under which it can be terminated.
7. Governing Law and Jurisdiction: Specify the governing law and jurisdiction that will apply to any disputes arising from the collateral warranty agreement.
Key Considerations for Drafting a Collateral Warranty Agreement
Clarity and Precision: Ensure that the language of the agreement is clear, concise, and unambiguous to avoid misunderstandings.
Design Elements for a Professional Collateral Warranty Agreement Template
Layout and Formatting: Use a clean and professional layout with consistent margins, font sizes, and spacing.
Example of a Collateral Warranty Agreement Template
Collateral Warranty Agreement
This Collateral Warranty Agreement is made and entered into as of [Date] by and between [Lender], a [Type of Lender], with its principal place of business at [Address] (the “Lender”), and [Contractor or Supplier], a [Type of Entity], with its principal place of business at [Address] (the “Contractor or Supplier”).
Recitals
1. The Lender is providing a loan to [Owner] to finance the construction of a [Type of Project] at [Location] (the “Project”).
2. The Contractor or Supplier has entered into a Construction Contract with the Owner to perform the construction work for the Project.
3. The Lender requires a collateral warranty from the Contractor or Supplier to protect its security interest in the Project.
Whereas, in consideration of the mutual covenants and agreements contained herein, the parties agree as follows:
1. Definitions
[Define key terms used in the agreement]
2. Collateral Warranty
The Contractor or Supplier warrants to the Lender that it will perform all of its obligations under the Construction Contract in a good and workmanlike manner and in accordance with all applicable laws, regulations, and industry standards.
3. Indemnity
The Contractor or Supplier shall indemnify, defend, and hold harmless the Lender from and against any and all claims, losses, damages, liabilities, costs, and expenses (including reasonable attorneys’ fees) arising from or related to any breach of this Collateral Warranty Agreement.
4. Term and Termination
[Specify the term of the agreement and conditions for termination]
5. Governing Law and Jurisdiction
[Specify the governing law and jurisdiction]
IN WITNESS WHEREOF, the parties have executed this Collateral Warranty Agreement as of the date first written above.
[Signatures of the parties]
Note: This is a basic example and may not cover all necessary provisions. It is essential to consult with legal counsel to ensure that the collateral warranty agreement is tailored to the specific circumstances of the project.
