For the first time, the Court of Appeal has considered whether a collateral warranty can ever be a ‘construction contract’ as defined by s.104(1) of the Construction Act? The answer, by 2 to 1, was Yes.
Lord Justice Coulson said that the short answer was that that it will always depend on the wording of the warranty in question. To determine the nature of any contract, the express words and the substantive rights conferred must be construed in their proper context. A warranty providing a simple fixed promise or guarantee in respect of a past state of affairs may not be a contract for the carrying out of ‘construction operations’ under s.104(1). A warranty that the contractor was carrying out and would continue to carry out construction operations (to a specified standard) may, however, be a contract for the carrying out of ‘construction operations’ under s.104(1) because, unlike a product guarantee, it is a promise which regulates (at least in part) the ongoing carrying out of construction operations.
In summarising the longer route to the answer Coulson LJ said that:
- the s.104(1) wording (“an agreement…for…the carrying out of construction operations”) is a broad expression;
- traditional views about what comprises a building contract or a collateral warranty are of limited value but the importance of collateral warranties to the ultimate owners/occupiers is a relevant background factor;
- the broad approach to s.104(1) is supported by s.104(5) and by one of the 1996 Act’s purposes, to provide an effective dispute resolution system; the same factual disputes about the carrying out of the same construction operations can be dealt with by the same adjudicator, even where there are two different contracts;
- there is no reason to limit the words of s.104(1) to refer only to the primary building contract and, provided the contract or warranty in question (which does not need to have detailed payment provisions) complies with the s.109 payment provisions, it can be a construction contract for the purposes of s.104(1);
- a collateral warranty may, therefore, be capable of being a construction contract for the purposes of s.104(1). What may be critical is whether the warranty is in respect of the ongoing carrying out of construction operations or is in respect of a past and static state of affairs;
- the reasoning of Mr Justice Akenhead, at paragraph 27 in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd  EWHC 2665 (TCC), in also deciding whether a collateral warranty could be a ‘construction contract’, remains good law.
Coulson LJ then considered the other two issues on the appeal, whether the terms of the collateral warranty in question made it a ‘construction contract’ under s.104(1) and, if it did, whether the date on which it was executed made any difference. It was a warranty of both past and future performance of the construction operations and, as an ongoing promise for the future (which differentiated it from a product guarantee), he considered it “an agreement for the carrying out of construction operations” and, therefore, a ‘construction contract’. He noted that it did not include the verbs ‘acknowledges’ or ‘undertakes’, which were present in the Parkwood warranty, but considered that their absence made no material difference.
And because the warranty contained future-facing obligations, as to future performance, and was retrospective in effect, the date of execution was ultimately irrelevant and, if it did matter, there would be considerable uncertainty and it would encourage contractors not to sign collateral warranties until after they had finished as many construction operations as they could, so that, whatever the warranty wording, they could avoid being the subject of a claim in adjudication.