A recent decision of the Technology and Construction Court has confirmed that, in the right circumstances, a collateral warranty can be a ‘construction contract’ for the purposes of the Housing Grants, Construction and Regeneration Act 1996 (“HGCRA”) and be subject to the mandatory adjudication regime. Much depends on the wording of individual warranties and parties should now give careful thought to whether warranty rights are intended to be adjudicable.

In April 2006, the defendant, Laing O’Rourke Wales & West Ltd (“LOR”), was engaged by Orion Land and Leisure (Cardiff) Ltd (“Orion”) under a standard form JCT design and build contract to design and construct a swimming and leisure facility in Cardiff (the “Main Contract” and the “Works”). The Works were due to be completed by 21 December 2007.

The claimant, Parkwood Leisure Ltd (“Parkwood”), leased the facility from Orion in January 2008 and provided facility management services for Orion and the Cardiff City Council (the ultimate owner of the facility). On 6 December 2007, before the Works were completed, LOR executed a collateral warranty in favour of Parkwood (the “Warranty”). Clause 1 of the Warranty stated that:

The Contractor (LOR) 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 (Parkwood) in the carrying out of its duties and responsibilities in respect of the Works;
  3. in the design of Works or any part of the Works, in so far as the Contractor is responsible for such design under the Contract, it has exercised and will continue to exercise all reasonable skill and care to be expected of an architect or, as the case may be, other appropriate professional designer…”

The Works were completed in 2008 and the facility was opened to the public. Defects arose and, in July 2013, Parkwood issued Part 8 proceedings seeking a declaration that the Warranty was a construction contract for the purposes of Part II of the HGCRA “on the basis that it contains the Defendant’s express agreement to carry out construction work”.

In making the declaration sought by the claimant, Akenhead J noted that Parliament intended the term “construction contract” to be of broad application. The relevant test was whether the contract was one “for the carrying out of construction operations” (as per section 104(1) of the HGCRA) and the fact that a contract or warranty was concluded after the works began or even completed was not determinative. Construction contracts are often executed after the commencement of work.

Mr Justice Akenhead laid particular emphasis on the wording of the Warranty. The Warranty did not merely warrant that work had been carried out in accordance with the Main Contract but contained positive undertakings on the part of LOR to carry out work in accordance with the Main Contract. The Warranty replicated the Main Contract in requiring LOR to “carry out and complete the Works in accordance with the Contract”. Furthermore, it was clear from the use of the future tense that LOR’s obligations were ongoing and that a breach of those obligations would give rise to the usual contractual remedies including, in certain circumstances, injunctive relief to secure actual performance of the Works.

Mr Justice Akenhead was, however, careful to point out that not all collateral warranties will be construction contracts for the purposes of the HGCRA. The question would turn on the individual wording of specific warranties and their factual background. Mr Justice Akenhead commented in particular that:

A very strong pointer to that end will be whether the relevant contractor is undertaking to the beneficiary of the warranty to carry out such operations. A pointer against may be that all the works are completed and that the contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard.”

Parties using standard forms of warranty should consider carefully whether the statutory adjudication scheme will apply. For example, the JCT Collateral Warranty for Purchasers or Tenants (2011 version) specifically provides that the warranty is given “as at and with effect from practical completion” and would seem unlikely to be considered a construction contract based on Akenhead J’s reasoning. By contrast, the JCT Collateral Warranty for Funders (2011 version) states that “The Contractor warrants that he has complied and will continue to comply with the Building Contract”, providing the type of ongoing obligation that would point towards the application of the Act.

One issue that did not arise before the Court on this occasion was whether, in the appropriate circumstances and with an appropriately worded warranty, it might be possible to argue that works completed and/or issues arising prior to the execution of the warranty should be excluded from the scope of the “construction contract” while other works, yet to be completed, should be included. Although there may be practical difficulties in applying two separate regimes to different elements of the same project, on the basis of Akenhead J’s reasoning, it seems that the door for such an argument has been left open. For example, the wording of the JCT Collateral Warranty for Funders mentioned above might be said to be a construction contract only insofar as it imposes an obligation to “continue to comply with the Building Contract” and not in respect of past performance of the Building Contract.

Finally, it is worth noting that whilst the Warranty was governed by the pre-October 2011 provisions of the HGCRA, the same position is likely to apply under the amended Act.

Reference: Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC)