The Technology and Construction Court has taken another look at whether collateral warranties are “Construction Contracts” for the purposes of the Construction Act (the Housing Grants Construction and Regeneration Act 1996).

Back in 2013, Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC) caused a stir when Akenhead J held that the parties’ collateral warranty was a construction contract. The tenant beneficiary therefore had a statutory right to refer its dispute with the contractor to adjudication.

Key to that decision was the wording in the collateral warranty stating that the contractor "warrants, acknowledges and undertakes" various matters (e.g. that it would carry out the works in accordance with the building contract.) The Court analysed the wording used in the collateral warranty and concluded that it was not just a warranty or guarantee of a past state of affairs – the contractor had undertaken to carry out and complete the works to the standard in the underlying building contract.

Cue collateral warranties everywhere being considered in a new light – could the obligations be tweaked in order to capitalise on the Parkwood case?

We now have further guidance from the TCC on when collateral warranties will be “construction contracts”. Earlier this month, the TCC heard the case of Toppan Holdings Ltd and another v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC). In that case, Martin Bowdery QC held that the parties' collateral warranty was not a construction contract. There was therefore no right to adjudicate the dispute.

In Toppan, the relevant wording was narrower than Parkwood (likely in an effort to avoid being caught by the Construction Act). However, crucially, the timing of when the collateral warranty was executed was substantially different.

In Toppan, this was around four years after practical completion, and several months after defects rectification by another contractor. This indicated that the warranty was “a warranty of a state of affairs past or future akin to a manufacturer's product warranty” - a pointer against it being a construction contract. In contrast, in Parkwood, the works were still ongoing and had not reached practical completion.

The Judge usefully summarised that, going forward:

“- where a contractor agrees to carry out uncompleted works in the future that will be a very strong pointer that the collateral warranty is a construction contract and the parties will have a right to adjudicate.

- where the works have already been completed, and as in this case even latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate.”

It follows that collateral warranty beneficiaries wanting to benefit from the right to adjudicate shouldn’t be resting on their laurels when it comes to getting warranties executed – get this done as early as possible in order to maximise the chances of the warranty constituting a “construction contract”.

On the facts of this case I cannot see how applying commercial common sense a collateral warranty executed four years after practical completion and months after the disputed remedial works had been remedied by another contractor can be construed as an agreement for carrying out of construction operations.

https://www.bailii.org/ew/cases/EWHC/TCC/2021/2110.html