A recent case is of great interest to those that work within the UK construction industry. It is the first time that the court has considered whether a collateral warranty is a construction contract for the purposes of adjudication within the meaning the Housing Grants, Construction and Regeneration Act 1996.

In short, it was decided that a collateral warranty entered into between a third party and contractor amounted to a construction contract for the purposes of the Act. As a result, the beneficiary of the warranty (in this case a tenant of the building) had the statutory right to refer a dispute under the warranty to adjudication, avoiding the need for it to go down the more time-consuming litigation or arbitration route. This decision is likely to send shockwaves through the industry and cause the parties’ advisers to revisit their collateral warranties to see whether adjudication is now an option or indeed a risk. This decision is therefore likely to be seen as good news for the procurers of collateral warranties (banks, funders, purchasers, tenants, etc) but bad news for the givers of such warranties (contractors, specialist subcontractors and consultants).

The Act created a new type of contract called a “construction contract” and introduced statutory rights and remedies for parties to such contracts. A party to a construction contract has the right to refer a dispute arising under the contract to adjudication at any time.

On the facts of this case, the judge had “no doubt” that the particular collateral warranty was a construction contract. However, the judge also pointed out that not all warranties given in connection with construction developments will amount to construction contracts under the Act. It would all depend on the specific wording used within the warranty itself