Are collateral warranties covered by the Construction Act* (the "Act") as construction contracts? There has been no previous case law on this topic but, in the case of Parkwood v Laing O'Rourke decided on 29 August 2013, the TCC addressed the issue for the first time. Its decision indicates that not every collateral warranty will be a construction contract but the particular warranty in the case was covered by the Act. We briefly consider below what this means.

The basis of the Court's decision was that the wording of the warranty indicated that the warrantor was taking on an obligation to carry out works rather than giving a guarantee of past performance or quality. The contactor had "undertaken" to perform work under the warranty and it therefore amounted to a contract for the carrying out of construction operations. This was further supported by the warranty having been provided to the beneficiary before the works were complete. The court said that not all warranties will fall into the same category. So, it seems that a warranty which only comprises a guarantee of past performance or quality is unlikely to be a construction contract under the Act.

This might be regarded as a surprising decision, at least in some quarters. For example, one of the main purposes of the Act was to preserve cashflow for the supply chain. Perhaps more importantly, apart from the exercise of step-in rights, such as those typically found in warranties given to project lenders, the commercial purpose of a warranty is to provide a third party who has a direct interest in a project with contractual remedies for defects. It does not require the contractor or consultant to do anything it has not already agreed to do under its construction contract or appointment.

However, what are the implications of this decision? If a collateral warranty is covered by the Act, then either party will have the right to refer disputes under it to adjudication. If one party commences Court proceedings, they may be stayed if the other party exercises its right to go to adjudication.

As adjudication is a speedy method to resolve disputes (a maximum of 49 days from notice to refer) parties will need to be ready to put forward or contest claims once a dispute has arisen between them, so as to comply with the necessarily short timetable.

Any party dissatisfied with an adjudicator's decision can have the matter considered afresh by a court or arbitrator, although in practice this is not common. However, the adjudicator's decision will be binding on the parties unless or until revised by a court or arbitrator. This may have important cash-flow implications.

A quicker and cheaper method of bringing a claim under a warranty through adjudication might mean that third parties are willing to bring claims which they might have been reluctant to pursue if faced with more expensive and lengthier proceedings in the courts.

Where there are numerous collateral warranties in respect of a project each of which need to be enforced by a third party beneficiary (such as a tenant or a purchaser), separate adjudication proceedings under each warranty will be necessary since adjudication proceedings on a multi-party basis are not available unless all parties agree. This may present difficulties where, say, a tenant or purchaser of a new building wishes to proceed against an architect, engineer and contractor in respect of defects, since joining in of all the relevant parties into one set of proceedings will usually only be possible in later court proceedings.

The existence of net contribution provisions in collateral warranties is likely to increase the need for multi-party claims (as full recovery may only be possible where all contributors to the cause of a defect are pursued for damages). However, if there are separate adjudication proceedings the risk of inconsistent findings or differing apportionment of liability in each adjudication award cannot be ruled out, possibly resulting in the damages recovered by a third party beneficiary either over or under shooting its actual loss.

Contractors or consultants giving warranties to tenants of a large multi-tenanted building may face separate adjudications instigated by each individual tenant in respect of the same defect leading to duplication of resources, additional expense and the risk of inconsistent findings.

A building contract or a professional appointment may also confer rights on third parties through The Contracts (Rights of Third Parties) Act 1999. Whilst it is not free from doubt, it is thought likely that adjudication does not apply to third party rights, and the Parkwood case does not alter the position. As the third party would usually be the one instigating disputes, this means that the courts will determine claims, as an express power to adjudicate is uncommon in the provisions which regulate the vesting of third party rights.

It remains to be seen whether the Parkwood decision will be appealed.

*Housing Grants, Construction and Regeneration Act 1996, Part II