Collateral warranties are a familiar concept in international construction, but their use in the Middle East — especially across the UAE and
Saudi Arabia — is rapidly evolving. While these agreements have traditionally linked consultants and main contractors to funders or end-users, their current application is far more nuanced.
Increasingly, Owners and Employers are demanding collateral warranties from specialist subcontractors and suppliers, particularly where critical, high-value systems or proprietary components are involved.
What on Earth is a Collateral Warranty?
In essence, a collateral warranty is a direct agreement between a party involved in the project and a third-party beneficiary, giving that beneficiary direct contractual rights of recourse that would not exist under the main contract structure.
It extends the duties owed by the warrantor (often a subcontractor or supplier) beyond the main contractor or consultant — and directly to the Owner, Employer, funder, or asset operator.
Why the Fuss? Why Owners Want Direct Hooks
In modern GCC projects — especially complex infrastructure or high-specification commercial developments — the main risks often lie in bespoke, high-value systems delivered by specialist firms. These may include:
– Curtain wall and façade designers / fabricators
– Specialist cladding and envelope system providers
– Travelator or escalator system designers / OEMs
– BMS and smart building system integrators
– Mass transit or airport baggage handling suppliers
– Fire protection and suppression system providers
These packages are technically and commercially critical. If something goes wrong, rectification costs can be massive, and the system provider may be the only party with the necessary expertise to address it.
Yet in a typical FIDIC structure, the Employer has no direct contractual link with these firms. If the main contractor becomes insolvent, or the project changes hands, the Employer may be left exposed. This is where collateral warranties step in.
Direct Lines to the Right People
By securing a direct warranty, the Employer can:
– Claim directly against the system designer or OEM for defects, failures, or underperformance
– Ensure continuity of design obligations or warranties post-handover
– Preserve value in the project for future sale, leasing, or finance
– Step into the main contractor’s shoes if needed (e.g., on insolvency or default)
Watch the Fine Print: What These Warranties Say
Collateral warranties in the region often follow UK-style precedent, but are adapted for local law and project structures. A clause might read:
“The Warrantor warrants to the Beneficiary that the Design Works shall be carried out with all reasonable skill, care, and diligence, and in accordance with the Specification. The Warrantor shall remain liable for any breach of this warranty notwithstanding completion or termination of the Main Contract.”
Some include step-in rights, or a duty to maintain design responsibility post-completion. Others attempt to impose extended liability periods, or “back-to-back” terms with the main contract — often without appreciating the insurance or legal implications.
What Could Possibly Go Wrong? (Plenty)
While often negotiated and signed late in the project procurement process — these warranties should never be treated as boilerplate. Key risks include:
- Extended Liability Beyond the Subcontract
The warranty may impose obligations that exceed those under the subcontract — especially in terms of duration, scope, or standards of care. - Insurance Misalignment
Terms such as fitness for purpose or unlimited liability may not be covered under standard PI or product liability insurance, leaving warrantors dangerously exposed. - Jurisdiction and Governing Law
Collateral warranties may apply a different governing law or dispute resolution clause than the main subcontract, creating uncertainty and conflict in the event of a claim. - Duplicated or Conflicting Obligations
Uncoordinated drafting may result in double liability — to both the contractor and the Employer — or introduce ambiguous obligations that are difficult to discharge. - Post-Completion Access and Obligations
Some warranties include ongoing obligations post-handover — such as providing access for inspection or cooperating with future operators — that were never costed or scoped.
KSA Giga Projects: A New Breed of Warranty
Across giga projects in Saudi Arabia— we’re seeing a new generation of collateral warranties:
– Multiple tiers of Beneficiaries, including government entities, funders, operators, and future SPVs
– Longer tail liability for digital systems, IP, and smart infrastructure
– Deeds of Novation and Warranties bundled into early procurement contracts
– More aggressive step-in and direct access clauses — often pushing subcontractors beyond their comfort zone
These developments are creating tension — particularly for global OEMs unfamiliar with the regional legal context or with rigid group insurance programs.
Final Thoughts: Don’t Sleep on This
Collateral warranties from specialist subcontractors and suppliers are no longer rare — they’re now a standard feature of high-risk packages across the Middle East. Employers rely on them for risk management, financeability, and long-term asset value.
For subcontractors and OEMs, however, these warranties carry real legal and commercial risks. It is essential to review each warranty on its own terms, assess insurance compatibility, and ensure obligations are aligned with the subcontract.
At DisputeIQ, we specialize in claims, risk analysis, and dispute resolution — particularly where collateral warranties are involved in post-completion issues or multi-party conflicts. When things go wrong, and enforcement becomes an issue, we’re trusted by some of the region’s most prominent developers, contractors, and asset owners to help set things right.
davidbrodiestedman@dispute-iq.com
