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Collateral damage (again) – Parkwood and Toppan

Doesn’t time fly. I can’t believe it is almost eight years since Practical Law published my blog on Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd. As readers may recall, in that case Akenhead J decided that a collateral warranty (CW) given by Laing in favour of Parkwood was a construction contract for the purposes of the Construction Act 1996, and that accordingly Parkwood could pursue a defects claim under it by way of adjudication. I suggested that the decision was “simply wrong” and could have “highly undesirable ramifications” for the negotiation of CWs going forward.  (After an initial flurry, it seems that I may have been wrong on the second count, but let’s draw a veil over that for now.)

Fast forward to August 2021 and the recent case of Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP. This has prompted my good friend Jonathan Cope (in his blog) to call for all CWs to include an express right to adjudicate. He suggests that this is “long overdue” and doubts whether such a provision should be controversial. But is he right? Has anything changed since 2013, and does Toppan affect the position?

What does “carrying out of construction operations” mean?

Anyone who knows me will not be surprised to hear that I haven’t changed my view. Moreover, I suspect that most contractors, consultants and commercial construction lawyers will disagree with Jonathan. Contractors and consultants in particular are very unlikely to wish to hand to third parties, on a plate, a “fast track” means of redress for defective work, when the Construction Act 1996 was never designed for this. (As a reminder, its original purpose was to tackle payment abuse by main contractors.)

I won’t repeat my reasoning in detail, but suffice to say that I think it is stretching a point to describe a CW as a contract “for the carrying out of” construction operations. Clearly it relates to such operations, but to my mind the words “for the carrying out of” imply much more than that. They suggest a primary, bilateral contract under which one party commissions (instructs and pays for) works and the other carries them out. A CW, on the contrary, is simply a collateral promise given to a third party. A breach of that promise may give rise to a claim for damages, but it does not of itself put the third party in the shoes of the employer. And, as I pointed out, the payment elements of the Construction Act 1996 cannot sensibly apply to a CW, so why should the adjudication provisions be any different?

In support of his argument, Jonathan quotes Coulson on Construction Adjudication, which takes the opposite view. It makes the (unsupported) assertion that, if the underlying contract is a “construction contract”, it makes “commercial common sense” for any “parasitic” warranties to be treated in the same way. But, with great respect to Coulson LJ, I don’t see how that follows at all. May I respectfully remind him of the wise advice given by Neuberger LJ (as he then was) in Skanska v Somerfield that “judges are not always the most commercially-minded” of people and should avoid arrogating to themselves the role of arbiter of what constitutes “commercial reasonableness or likelihood”.

The timing issue – Toppan

Readers will recall that Akenhead J placed much store by the fact that the CW was executed prior to practical completion (PC). As a result and on its words, it operated prospectively (as an undertaking to carry out future work) as well as retrospectively (as a warranty in respect of work already carried out). This reinforced his view that the specific CW before him should be treated as a “construction contract”, whereas a CW executed after PC may not be.

I pointed out that there was no logic behind this distinction, since the timing of the CW was purely a matter of chance. It could equally have been entered into before or after PC, and in either case it would have been in identical terms. It didn’t make sense (to me) that this should determine whether or not the Construction Act 1996 would apply.

Which brings us to Toppan. In reaching his decision Martin Bowdery QC didn’t need to consider whether Akenhead J was right, because he had an easy way out. The CW in favour of Abbey wasn’t executed until four years after PC, so there were no “construction operations” left for the contractor to perform. That being the case, he concluded that it didn’t make commercial sense to treat it as a “construction contract”. But – at the risk of labouring the point – the lease could just as well have been granted, and the CW entered into, before PC. The words of the CW, and its commercial purpose, would have been exactly the same. So why should it be treated any differently?

As an aside, Bowdery QC also compared a CW with a parent company guarantee (PCG). He described both as being “parasitic on” the primary contract and suggested that “no-one would construe a PCG as a construction contract”. Of course they wouldn’t, not least because the Exclusion Order makes clear that it isn’t. But it is interesting to contrast his analysis with Coulson LJ’s approach to “parasitic” contracts as mentioned above.

Analogy with third party rights (TPRs)

I’d venture to suggest that my view is supported by Ramsey J’s (as he then was) 2014 decision in Hurley Palmer Flatt Ltd v Barclays Bank plc. In that case the facts were similar, but instead of a CW from HPF, Barclays had the benefit of TPRs granted pursuant to the Contracts (Rights of Third Parties) Act 1999.

Even though the TPRs took effect prior to PC, Ramsey J (interestingly, without citing Parkwood) had no difficulty in holding that the Construction Act 1996 did not apply as between Barclays and HPF. He noted that, far from making Barclays a party to a “construction contract”, the TPRs merely conferred on it a collateral benefit, which did not bring it within the ambit of the Construction Act 1996.

In my more fanciful moments, I like to imagine that Sir Vivian may have read – and, perhaps, even been influenced by – my earlier blog.  But we now have a situation where the beneficiary of a CW entered into before PC can (probably) take its claim to adjudication, whereas a beneficiary of TPRs cannot. That doesn’t add up to me as a (former) commercial practitioner, since – at least in my eyes – they are only two ways of skinning the same cat.

Where does all this leave us?

I’d suggest that Toppan is obviously right on its facts. But, by upholding and perpetuating the distinction based on timing, it reinforces the flawed reasoning underlying Parkwood. As things now stand:

  • At least some CWs are subject to adjudication, when that was never the purpose behind the Construction Act 1996;
  • Whether the Construction Act applies to a CW will depend heavily on the chance factor of when it is executed; and
  • Different rules apply to CWs and TPRs.

None of this makes logical sense, and it is going to need the Court of Appeal to sort out the mess.

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