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are collateral warranties subject to adjudication?

15 January 2014
In what circumstances can the beneficiary of a collateral warranty adjudicate for an alleged breach?

Parkwood Leisure Limited v Laing O’Rourke Wales & West Limited (2013) EWHC 2665 (TCC)
Construction professionals regularly provide collateral warranties to beneficiaries to warrant that their services (architecture, engineering and contract administration and the like) have been performed in accordance with their professional appointment. Until recently, it would have been a surprise to those construction professionals to learn that a beneficiary could adjudicate for alleged breaches of the warranty (such as claims for professional negligence).

At the end of August 2013, the Technology and Construction Court confirmed (Parkwood Leisure Limited v Laing O’Rourke Wales & West Limited (2013) EWHC 2665 (TCC)) that in some circumstances a collateral warranty can amount to a construction contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) – allowing a claimant to bring adjudication proceedings under the collateral warranty. The case is significant because it is the first reported case considering this question and it is likely to have some effect in the market.

The court’s decision
The relevant wording in the collateral warranty stated that Laing: “warrants, acknowledges and undertakes that … it has carried out and shall carry out and complete the Works in accordance with the Contract”. This is a common form of words found in many forms of collateral warranty.

The court found that the collateral warranty was one for the carrying out of construction operations and was therefore subject to the Construction Act.

How can I tell if the collateral warranty will be subject to the Construction Act?
The court was clear that not “all collateral warranties … will be construction contracts under the [Construction] Act”. The question is whether, looking at the words used (and in light of the relevant factual background) the document is a construction contract for the carrying out of construction operations.

Case comment and preventative steps
Professional consultants may wish to:

  1. alter their standard forms (be aware that this is likely to lead to greater negotiation of the document); and/or
  2. limit the number of warranties they provide; and/or
  3. alter when they are provided (at the completion of the services, rather than during the performance of the services); and/or
  4. consider using third party rights clauses instead of collateral warranties.

Beneficiaries (such as employers, landlords, tenants and funders) are likely to be attracted by the speedy resolution adjudication can offer against contractors and professional consultants. As a consequence, whilst the probability of a claim under a collateral warranty has not changed there is a risk that we will see a rise in parties attempting adjudication under collateral warranties.

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The content on this page is provided for the purposes of general interest and information. It contains only brief summaries of aspects of the subject matter and does not provide comprehensive statements of the law. It does not constitute legal advice and does not provide a substitute for it.

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