29 August saw a change in the way collateral warranties are viewed.  Previously collateral warranties were not generally thought of by most people as construction contracts under the Housing Grants, Construction and Regeneration Act 1996 ("the Act"). Following the publication of the recent decision, Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited, some collateral warranties can now be considered construction contracts if the warranties constitute contracts for the carrying out of construction operations.

Parkwood Leisure v O’Rourke: The Facts

Laing O’Rourke (the Contractor) entered into a standard JCT Design and Build contract (the Contract) with Orion Land and Leisure (Cardiff) Ltd (the Employer) to design and build a swimming and leisure facility (the Works). It included a collateral warranty under which the Contractor undertook to “carry out and complete the Works in accordance with the Contract” (Article 10). In 2008 the Employer entered into a ten year lease agreement with Parkwood Leisure Ltd (the Tenant).  The Contractor granted a collateral warranty to the Tenant.

The Court was asked to determine whether a collateral warranty was a construction contract for the purposes of Part II of the Act and therefore subject to statutory adjudication.

The Contractor argued that the collateral warranty was not a contract for the “carrying out of construction operations” and as the Contractor had entered into collateral warranties with a number of parties, it would be unlikely that they would be intended to be construction contracts within the meaning of the Act.

The Tenant disagreed and argued that the collateral warranty had been executed as a construction contract on the basis that it contained the Defendant’s express agreement to carry out construction work.

The Court decided the question was a matter of ordinary contractual interpretation and found that the warranty in question was a contract for construction operations within the meaning of section 104 and therefore open to adjudication.

Parkwood Leisure v O’Rourke: The Effect

Now that the door has been opened to collateral warranties being treated as construction contracts in terms of the Act, there is likely to be an increase in the number of collateral warranty disputes that are referred to an adjudicator.

Good news for beneficiaries of collateral warranties, but not so good for the granter who is more likely to be on the receiving end of a Notice of Adjudication.

We may see a variation in the wording of collateral warranties depending on when the warranty is to be delivered to the beneficiary. We may also see an increase in attempts to introduce adjudication clauses into warranties.

Contractors and construction professionals will need to carefully review the terms on which they are prepared to give collateral warranties, particularly in cases where they are involved in large projects where there are multiple tenants and greater levels of exposure.

While the full impact of the decision remains to be seen, it provides a useful reminder of the importance to be clear and unambiguous in the language used in all agreements.