Practical Law

The TCC’s decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd surprised many construction lawyers in concluding that collateral warranties can be construction contracts for the purposes of the Construction Act 1996. The court held that Parkwood Leisure (the beneficiary of a collateral warranty from Laing O’Rourke) could commence an adjudication against Laing O’Rourke in respect of alleged defects in their works.

The decision has been the subject of much comment and criticism from many quarters, one leading lawyer labelling it as “simply wrong”.

But what about third party rights granted to beneficiaries pursuant to the Contracts (Rights of Third Parties) Act 1999? Can they bring adjudication proceedings in the event of a dispute in respect of the rights granted to them?

Adjudication unlikely

The general consensus is that a third party to a construction contract is unlikely to be able to adjudicate on the basis of the Contracts (Rights of Third Parties) Act, unless the construction contract to which they are a third party includes an express provision granting this right to them.

This is because, under section 108(1) of the Construction Act 1996, only:

“[a] party to a construction contract has the right to refer a dispute arising under the contract for adjudication…”

Section 7(4) of the Contracts (Rights of Third Parties) Act 1999 provides that:

“[a] third party shall not… be treated as a party to the contract for the purposes of any other Act…”

Whilst not absolutely certain, it is therefore unlikely that Parkwood will alter this position because it would be unusual to see an express power to adjudicate included in the provisions granted to third parties under construction contracts. However, if such an express provision were to be included in a construction contract then it would operate to grant, via the Contracts (Rights of Third Parties) Act 1999, the right to use the statutory adjudication provisions of the Construction Act 1996.

A third party’s right to a remedy

However, there is some ongoing debate about whether section 1(5) of the Contracts (Rights of Third Parties) Act 1999 already grants adjudication rights to third parties to construction contracts. This section states that:

“for the purpose of exercising his right to enforce a term of the contract, there shall be available to the third party any remedy that would have been available to him… if he had been a party to the contract…”

Adjudication is not a “remedy” in itself but a means by which to seek a remedy. However, the parties cannot seek an adjudicator’s decision (which could provide a remedy) without using adjudication, and so it might be possible to argue that section 1(5) implicitly grants to third parties the right to refer a dispute to adjudication in order to seek an adjudicator’s decision.

Can a third party use adjudication?

So, the long and short of it is: probably not, but who knows. That is probably where most of us were with regard to adjudication under collateral warranties prior to Parkwood.