Collateral warranties and adjudication

17 September, 2013

Imagine a construction project which might take many months or years in which to complete.  Whilst all parties to the contract would want for the project to be completed on time and without any problems, like love the true course of a construction contract does not always run smoothly.

 

If problems arose in the midst of a construction project then the risk would be that the project stagnates, resulting in massive cost increases whilst the site is mothballed and which would jeopardise the project itself.

 

For this reason the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act) created a statutory mechanism for resolving disputes in construction contracts called adjudication. 

 

The aim of adjudication is to provide a mechanism for dispute resolution in construction contracts that is swift and cost effective, which will minimise the risk of projects stagnating.  The maximum time between adjudication commencing and an adjudicator issuing his decision is 49 days.

 

To be able to rely upon the remedy of adjudication you must have a construction contract within the meaning of the Construction Act.

 

A question recently considered by the Court in Parkwood Leisure Limited v Laing O’Rourke Wales & West Limited (2013) is whether a collateral warranty can be a construction contract within the meaning of the Construction Act 1996.

 

Collateral warranties

The purpose of a collateral warranty is to provide a third party, often an incoming purchaser or tenant of newly constructed property, with direct rights of action against the contractor if defects are identified.

 

The facts of the case

Parkwood were the tenants and operators of a leisure centre in Cardiff.  The leisure centre was constructed under a JCT design and build contract (the Contract).  Parkwood’s landlord (Orion) was the employer under the Contract.  Laing O’Rourke was the contractor engaged to design and build the centre and it issued a collateral warranty (the Warranty) to Parkwood as the incoming tenant and operator of the facility.

 

Unfortunately the leisure centre suffered from a number of problems over an extended period of time which ultimately led to the commencement of court proceedings.

 

Under the Warranty the contractor warranted, acknowledged and undertook that it has carried out and shall continue to carry out the works under the Contract with Orion in accordance with the terms of that Contract, that it has exercised and will continue to exercise reasonable skill and care in carrying out works of design under the Contract and that it has at all stages complied with (and will continue to comply with) its contractual obligations owing to Orion.

 

The definition of a construction contract within the meaning of the Construction Act is a lengthy one but in all circumstances it has to be a contract for the carrying out of construction operations or to do architectural or design work.  On behalf of Laing O’Rourke it was contended that the Contract was without question a construction contract but the Warranty was merely a promise that the Contract had been complied with.  Therefore the Warranty was not a contract for the carrying out of construction operations or the provision of design services: it was a contract promising that such a contract had been complied with.  In other words it was one step removed.

 

The decision

Akenhead J, sitting in the Technology and Construction Court disagreed.  He determined that the reference in the Warranty to Laing O’Rourke ‘undertaking’ that it has and will continue to carry out work under the Contract and that it has and will continue to provide design services under the Contract was a clear obligation, given by Laing O’Rourke directly to Parkwood not only that it has (past tense) but also that it would continue to (in the future) provide construction services (being the services in the Contract).  He furthermore concluded that the purpose of the warranty was to provide the beneficiary (in this case Parkwood) with rights as though it were a party to the Contract.  Under the warranty Parkwood had a right to expect that the construction and design services would continue to be provided in accordance with the Contract and it had direct remedies in the event that they were not.

 

The above being established and returning to the definition of a construction contract within the Construction Act, he determined that the Warranty in this case was a construction contract: it was a contract for the carrying out of construction operations and design services by others.

 

Conclusions

The decision does not mean that all collateral warranties will be construction contracts.  Warranties where the works have been carried out and completed (so that the warranty merely warrants that works have been carried out in accordance with a construction contract) may fall outside the scope of the Construction Act.  Ultimately it will be a question of fact for determination in individual cases.  The importance of the decision however is that for the first time it has been determined that a collateral warranty could be a construction contract within the meaning of the Construction Act.  That being so the decision is an important one for both parties to a collateral warranty.  For contractors who wish to avoid the possibility of adjudication under a collateral warranty it places more emphasis on careful drafting to ensure the warranty cannot be construed in the way that the Warranty in Parkwood was.  It may also mean holding off entering into collateral warranties until after all works are completed.  For the beneficiaries under a collateral warranty the case opens up the possibility that they can benefit from the cost effective remedy of adjudication, as an alternative to instigating court proceedings for a breach of warranty claim.

 

 

Reviewed in 2015