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Collateral warranties can be subject to statutory adjudication

10 September 2013

At the end of August, the Technology and Construction Court confirmed, (Parkwood Leisure Limited v Laing ORourke 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 Construction Act(1) - 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. It is a rare example of the court considering the meaning of the term construction contract.

The court's decision

Parkwood Leisure Limited (Parkwood) received a collateral warranty from Laing ORourke Wales & West Limited (Laing). Parkwood sought a declaration that the wording of the collateral warranty amounted to the carrying out of construction operations, making the collateral warranty a construction contract for the purposes of the Construction Act and entitling Parkwood to bring adjudication proceedings against Laing.

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".

The court said that the issue should be resolved by applying the principles of ordinary contractual interpretation. It found that the collateral contract was one for the carrying out of construction operations and was therefore subject to the Construction Act.

How can I tell if my 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.

The court gave some guidance regarding whether or not a collateral warranty would fall within the Construction Act. A "very strong pointer" is whether or not the contractor "is undertaking to the beneficiary of the warranty to carry out [construction] operations." If so, it is likely that the document will be subject to the Construction Act. A "pointer against may be that all the works are completed and that the contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard." However, the simple fact that a document is retrospective in effect is not alone a bar to it being a construction contract.

Comment

If you give or receive collateral warranties you should, in light of the courts guidance set out above, review both your standard form and any collateral warranties provided in relation to existing projects.

Contractors 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; and/or

4 consider using third party rights clauses.

Employers are likely to be attracted by the speedy resolution adjudication can offer. However, contractors will be conscious that statutory adjudication does not allow the joining of defendants, which could easily cause problems given the risk of multiple adjudications and inconsistent decisions. (With regard to joinder in contractual adjudication, parties will need to consider the courts obiter comments in Yuanda (UK) Co Ltd v WW Gear Construction Ltd [2010] EWHC 720 (TCC).)

The decision leaves some questions outstanding. For example, what happens to payment and suspension rights that are also implied into construction contracts by the Construction Act? In the meantime, it seems likely that we will see a rise in parties attempting adjudication under collateral warranties.

(1) Part II of the Housing Grants, Construction and Regeneration Act 1996

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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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