REUTERS | Brian Snyder

So, a collateral warranty is a construction contract after all

I’m not sure I was expecting to give a blog post that title but, following Akenhead J’s judgment at the end of August in Parkwood v Laing O’Rourke, it seems that is now the case. At least, that is the case for a collateral warranty worded in the way the parties’ warranty was worded.

Parkwood v Laing O’Rourke

In case you were off sunning yourself and missed this judgment, in a nutshell, it involved Laing O’Rourke providing a collateral warranty to Parkwood, the tenant of a new swimming pool and leisure complex that Laing built for Cardiff City Council. James Ladner discussed the judgment last week, highlighting that the key part of the warranty was the wording:

“warrants, acknowledges and undertakes that… it has carried out and shall carry out and complete the Works in accordance with the Contract”

Much seemed to hang on the fact that the collateral warranty was given when the works at the leisure complex were incomplete, meaning that the contractor (Laing O’Rourke) was:

  • Acknowledging that some work had been completed
  • Undertaking to complete the remainder of the work.
  • Warranting the work and design already done, as well as that still to be carried out.

Akenhead J held that this all pointed to a contract for construction operations, which meant the collateral warranty was a construction contract. Interestingly, he went on to say that not every collateral warranty will be a construction contract, that it will all depend on the wording and the facts of each given situation. A big factor in this will be whether the warranty is simply looking back, “warranting a past state of affairs as reaching a certain level, quality or standard”, or also involves future works.

Parallels with settlement agreements

My initial thoughts on reading the judgment related to an analogy with settlement agreements. Settlement agreements are supplemental agreements, made after the original construction contract, sometimes long after the relevant construction works have been completed. I could say the same about some but not all collateral warranties that are entered into.

Generally, settlement agreements have been held not to be construction contracts. Whether that is the current position, or whether it is irrelevant on the basis that a settlement agreement may be adjudicable by virtue of it being “in connection with” a construction contract I’m not sure. I’m thinking here that the application of the Fiona Trust principles to adjudication may make it so. The last time a settlement agreement came before the court was before Akenhead J’s judgment in Air Design (Kent) Ltd v Deerglen (Jersey) Ltd.

But back to collateral warranties

I’m sure there will be more than a few people thinking that, if a collateral warranty is a construction contract, that means there will be an explosion of work for adjudicators. That may be the case and it got me thinking about the issues that may be involved and what I may be asked to deal with.

Do I have jurisdiction?

The obvious starting point must be a jurisdictional challenge focused on whether a particular collateral warranty is a construction contract. On the basis of Akenhead J’s pointers about the stage the works had reached when the warranty was entered into, this could prove costly and time consuming to determine. Certainly, it may prove to be a challenge in the short time permitted to an adjudicator to decide whether to accept an appointment or not. If the appointment is accepted and then the issue is raised, if a more considered answer to the question is required, how are the parties going to provide the “relevant factual background” of the warranty to the adjudicator in a way that can allow him to make the decision that is, hopefully, the right one? When it comes to his jurisdiction, it is one thing to ask an adjudicator to consider the actual wording of the warranty, quite another to ask him to start probing into the facts at such an early stage of the adjudication process.

Another issue must surely be whether the adjudicator is actually the right person to be making this type of judgment call. While I don’t want to appear like a turkey voting for Christmas, unless the parties agree to be bound by the adjudicator’s decision on the meaning of the warranty, they will have a non-binding decision which is, arguably, not worth the paper it is written on simply because it is non-binding. That means one party (presumably the responding party) could refuse to accept the decision or even refuse to participate in the adjudication. Even if it does participate, it is likely to reserve its position for future enforcement purposes. That will not be a cost-effective way for the parties to proceed.

While the majority of situations where there are collateral warranties will be commercial in nature, the residential occupier exclusion is bound to rear its head at some point. How does the statutory exclusion in section 106 of the Construction Act 1996 sit with a collateral warranty that is held to be a construction contract? I assume the statutory exclusion would prevail, otherwise there could be a potential nightmare, even if it is possible to see why the purchaser/tenant in that situation may want to adjudicate.

It’s not just jurisdiction, logistics need to be considered too

Even if we get past the jurisdictional hurdles, there are, potentially, a number of logistical issues that may be raised. As adjudication does not provide for a multi-party situation (unless all the parties agree to it), I can envisage situations where we have multiple adjudications arising out of the same facts etc, with different parties simply because of the inability to have a multi-party action. While that may benefit some, it is unlikely to be popular with the contractor/professional who gave the warranties. Also, what happens when one adjudicator makes a decision on X, which is different to another adjudicator’s decision on the same point? There is no binding precedent rule in adjudication so, unless the same adjudicator is appointed each time (and there is no guarantee of that), inconsistent decisions could be the outcome.

So…

I have no doubt that if all the parties agreed to a multi-party action, adjudication could be used beneficially to resolve issues arising under a collateral warranty. After all, they are going to be the sort of  issues that arise under a building contract or professional’s appointment, something adjudicators deal with regularly. There is no reason that I can think of why an adjudicator could not case manage a multi-party action in adjudication, although he may need more time than the statute allows for.

However, I’m not sure the construction industry needed this judgment. I’m not sure we needed another area where there are “shades of grey” over the meaning of a contract.

2 thoughts on “So, a collateral warranty is a construction contract after all

  1. To date I’ve adopted the position that (in the absence of step-in rights) a collateral warranty is a unilateral undertaking, which does not need to be executed by the Beneficiary. Perhaps it’s time to reflect on whether the Beneficairy should now execute the warranty and thereby take control of the timing for its completion.

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