A Collateral Warranty refers specifically to a contract between a professional consultant, building contractor or sub-contractor and a third party (for example, a funder, tenant or buyer) which would otherwise not have been existent. It is an agreement under which a professional consultant, building contractor or sub-contractor generally warrants to a third party for the quality of the product of his appointment and remains directly liable for it.
In the diagram below you can see the creation of a contractual relationship through a collateral warranty between parties that would otherwise not have been directly linked contractually, for example the end user (homeowner) and the consultant (the architect). In this scenario, if anything ever happens to the delivered house and is a major defect, the client or house owner can make a claim that would potentially directly involve the architect as well as the developer.