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TCC decides that tenant collateral warranty is subject to statutory adjudication

In Parkwood Leisure Ltd v Laing O’Rourke Wales & West Ltd, Akenhead J was asked to determine whether a collateral warranty was a “construction contract” for the purposes of Part II of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) and therefore subject to statutory adjudication.

The collateral warranty did not refer to adjudication but the tenant beneficiary (Parkwood) alleged that the warranty’s wording made it a construction contract that entitled Parkwood to bring a defects claims direct against the contractor in adjudication.

The collateral warranty

The key part of the collateral warranty stated that the contractor:

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

The contractor’s argument

The contractor argued that this was not a contract “for … the carrying out of construction operations” as required by s104(1) of the Construction Act 1996. As a collateral warranty, the agreement was something secondary. It was a promise that the works were in accordance with the underlying design and build contract. The contractor observed that if the underlying building contract was rescinded then there could be no construction operations for the collateral warranty to attach to.

The contractor also argued that the purpose of the Construction Act 1996 was to address concerns of unfair payment practices in the construction industry. This was reflected in the terms of the Construction Act 1996. It noted that this was not relevant to a collateral warranty. In addition, the contractor raised the practical issue that, on an average construction project, a contractor or professional consultant entered into many collateral warranties with a whole host of people (such as funders, mortgagees, purchasers and tenants) and that it would be unlikely if all such collateral warranties were intended to be construction contracts within the meaning of the Act.

The tenant’s argument

Parkwood disagreed on the simple construction of the words, arguing it was a contract for the carrying out of construction operations. The collateral warranty had been executed before practical completion, which meant that in reality, as well as a matter of legal construction of the words, the warranty required actual construction work to be carried out.

In addition, Parkwood relied on the Construction Contracts (England and Wales) Exclusion Order 1998 (SI 1998/648) for guidance. It argued that because types of finance agreement, contracts of insurance and a wide variety of bonds had been excluded by the Exclusion Order, but that collateral warranties had not, then by analogy collateral warranties must have been intended to be subject to the Construction Act 1996.

The court’s decision

Akenhead J  was not persuaded by the argument on the Exclusion Order. He decided that the question was a matter of ordinary contractual interpretation. He found that this warranty’s wording gave rise to a contract for construction operations and gave guidance as to how to determine whether other collateral warranties are construction contracts under the Construction Act 1996. He said:

“One needs primarily to determine in the light of the wording and of the relevant factual background each such warranty to see whether, properly construed, it is such a construction contract for the carrying out of construction operations. A very strong pointer to that end will be whether or not the relevant Contractor is undertaking to the beneficiary of the warranty to carry out such operations. A pointer against may be that all the works are completed and that the Contractor is simply warranting a past state of affairs as reaching a certain level, quality or standard.”

What does this mean in practice?

Many collateral warranties in construction projects are given before the works are complete and provide promises in similar terms to those considered in this case. It may well be that the judge’s decision will lead to adjudication being used for collateral warranty disputes where it was previously considered that it was not available.

Although this may encourage speedy resolution of some disputes, it can also cause problems, as the inability to join defendants in statutory adjudication may give rise to multiple proceedings and the risk of inconsistent decisions.

Further, contractors (and sub-contractors) will have to review the terms on which they are prepared to give collateral warranties and, perhaps, try to further limit the number of warranties granted.

Pinsent Masons acted for the defendant, Laing O’Rourke Wales & West Ltd.

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