A collateral warranty can be a construction contract and therefore subject to the right to refer disputes to adjudication, according to a recent decision by the Technology and Construction Court in Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited [2013] EWHC 2665.

Though an English case, the Housing Grants, Construction and Regeneration Act 1996 (usually referred to as the Construction Act) is common across our jurisdictions, and this case is the first to really consider the status of collateral warranties in relation to the Construction Act.

This decision could have implications on the drafting of collateral warranties, and employers, beneficiaries, contractors and consultants should take note. 

Familiar warranty wording

Laing O’Rourke, the contractor, was building a swimming and leisure facility for the employer. The building contract was signed in April 2006 and the works were completed in 2008.

In December 2007, before the works were complete, Laing O’Rourke entered into a collateral warranty with Parkwood Leisure, who were to be the operator of the leisure complex. This tenant collateral warranty contained standard wording which will be familiar to -everyone in the construction industry:

“ The Contractor warrants, acknowledges and undertakes that:-

  1.  it has carried out and shall carry out and complete the Works in accordance with the Contract;
  2. subject to this Deed, it owes a duty of care to the Beneficiary in the carrying out of its duties and responsibilities in respect of the Works;”

A number of disputes arose, some partially settled, but Parkwood’s reliance on the adjudication dispute resolution process contained within the Construction Act (and only applying to construction contracts) resulted in the action being brought to clarify the status of this collateral warranty.

Was it a construction contract?

According to the judge, it was a simple matter of interpretation as to whether the collateral warranty fell within the remit of the Construction Act.

He noted that the first undertaking contained both the backward looking “has carried out” and the forward looking “shall carry out and complete”. Recognising that the warranty was given before completion of the project, the meaning of these express words was to guarantee the future performance of the contractor. This guarantee of future performance therefore provided Parkwood with ordinary contractual remedies, should there be a breach of contract. It followed from that entitlement that this was not just a retrospective guarantee of past quality of work, but a prospective guarantee of future performance, therefore making it a construction contract.

Not all collateral warranties would be construction contracts – the wording of the warranty would be important to determine whether it was a construction contract for the carrying out of construction operations.

If there is an undertaking to the beneficiaries to carry out such construction operations it is likely to be a construction contract. If the works are complete and the contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard, it is not likely to be a construction contract. However the fact that the warranty was issued after practical completion does not mean the warranty couldn’t be a construction contract, if there was still an undertaking in relation to the carrying out of the works.

The question of whether a consultant’s warranty would be a construction contract was not addressed. This could fall under “an agreement to do architectural, design or surveying work or to provide advice on building, engineering… in relation to construction operations” and therefore there seems to be no reason why this would not also be deemed to be a construction contract.

More options for beneficiaries?

On the face of it, beneficiaries may feel that this case will enhance their options and add adjudication into their dispute armoury. In reality, adjudication was designed to be used as a quick remedy during ongoing projects and does not give beneficiaries the certainty that other mechanisms like litigation orarbitration provide.

Both contractors and consultants need to be aware that warranties that have future undertakings and which are executed during the construction work are likely to be construction contracts.

The main impact will be that, depending upon the wording of the warranty, beneficiaries will usually be able to rely on adjudication procedures to enforce a collateral warranty. They may prefer not to, given the temporary nature of an adjudication decision.

However, given that adjudication is, in the majority of cases, effectively a final decision and is usually substantially cheaper (not to mention quicker) than litigation or arbitration, it may be used for fairly simple actions on defects, or as a tactical weapon in more complex disputes to get a resolution on items where the beneficiary considers they have a strong case.