Is your company a party to a construction contract or to a collateral warranty? You might think this is obvious, after all, your company's contract manager is familiar with both types of document and knows the difference. However, what would happen if a collateral warranty was suddenly interpreted as a construction contract? How would it impact your company which is in the business of designing, manufacturing and installing pumps where the pumps form an integral part of a building or plant?

What happened in a recent case?

In Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd (2013), the judge held that the parties' collateral warranty was actually a construction contract within the meaning of the Housing Grants, Construction and Regeneration Act 1996 ('the Construction Act').

Prior to the completion of the works and the commencement of Parkwood's sub-lease, Laing O'Rourke executed a collateral warranty for the benefit of Parkwood stating, among other things, that "the Contractor warrants, acknowledges and undertakes that it has carried out and shall carry out and complete the Works in accordance with the Contract." Parkwood then took possession of the centre and opened it to the public.

A number of defects were discovered and the dispute was resolved and a settlement agreement was concluded. Parkwood then complained about the air-handling units and applied to the court for a declaration that this dispute was not covered in the previous agreement. They successfully argued that, if the collateral warranty was a construction contract under the Construction Act, Parkwood could refer the dispute with Laing O'Rourke to adjudication, as an alternative to litigation.

How could this affect your business?

Parties to collateral warranties are now exposed to a risk of adjudication proceedings over breaches from a variety of people with whom they never contracted and in relation to services which were provided years previously.

Don't Panic!

Pump manufacturers should note that there a number of contracts which are excluded from the provisions of the Construction Act, so the collateral warranty may fall outside the ambit of the statutory regime.

These include; (i) construction operations for drilling or extraction of oil, natural gas and minerals; (ii) the assembly installation or demolition of plant or machinery where the primary activity on site is nuclear processing, power generation, or water or effluent treatment; and (iii) the manufacture or delivery to site of components for systems of air-conditioning, ventilation, drainage, sanitation and water supply.

It is also worth bearing in mind that the court, in the Parkwood case, acknowledged that not every collateral warranty will be read as a construction contract. It would be premature to speculate how influential this judgment might be because in each case the courts would need to look at the individual collateral warranty wording and the relevant facts.

What are the benefits?

This case is primarily of benefit to those companies with appropriately worded collateral warranties which will be able to enforce any breaches through adjudication.

Adjudication is an out-of-court dispute resolution procedure where a dispute between parties to a construction contract can be resolved by a neutral third party. There are advantages: speed; cost-effectiveness; flexibility and privacy of the decision.

And the downside?

The speed of the adjudication procedure has been subject to criticism. Some parties have felt that adjudicators can be rushed into making a quick decision on complex factual or legal issues. Despite perceived injustices, challenges to the adjudicator's decision in enforcement proceedings are rarely upheld in the Technology and Construction Court.

Adjudication does not allow for multi-party litigation and each party has to bear its own costs regardless of the outcome.

What can your company do?

You might need to check the wording of existing collateral warranties to see if they could be interpreted in this way. Given that the collateral warranty in this case was non-standard, be careful when drafting and entering into collateral warranties in the future. Collateral warranties which simply warrant a past state of affairs, as opposed to providing an on-going obligation to carry out construction operations, are less likely to be considered construction contracts.