Ireland: Collateral Warranties And The Construction Contracts Act, 2013

Last Updated: 27 July 2017
Article by Hugh Cummins

The Construction Contracts Act, 2013 (the "Act") came into force on 25 July 2016. The Act constitutes a welcome effort to regulate payments and disputes resolution in certain contractual arrangements in the construction industry.

Where the Act applies to a construction contract (whether written or oral) it will confer certain rights on the parties to the contract whilst also imposing certain default provisions into the contract which can be summarised as follows:

  1. The contract shall provide for:
    • the amount of each interim payment;
    • the amount of the final payment (or an adequate mechanism for determining those amounts);
    • payment claim dates; and
    • the period between payment claim dates.
  1. Where the provisions of (1) above are not provided for then the default provisions contained in the Schedule to the Act shall apply;
  1. Prohibition on 'pay when paid' clauses;
  1. Right to suspend work for non-payment;
  1. Right to refer payment disputes to adjudication; and
  1. Right to suspend work for failure to comply with adjudicator's decision.

However, one must firstly determine whether or not the contract in question falls under the auspices of the Act. In other words, is the contract a "construction contract" for the carrying out of "construction operations" as both are defined in the Act?

Contracts that might be considered 'standard' construction contracts will be caught by the Act, for example, building contracts, sub-contracts and consultant appointments. In the case of a collateral warranty provided to a beneficiary by a warrantor under one of these contracts things are not so clear cut.

UK case law on collateral warranties as "Construction Contracts"

In the case of Parkwood Leisure v Laing O'Rourke Wales and West Limited1 the UK's Technology and Construction Court considered the issue of whether a collateral warranty amounted to a construction contract under the Housing Grants, Construction and Regeneration Act, 1996 (the "UK Act"). In that case the beneficiary of the warranty in question was a tenant that sought a declaration that the warranty was a construction contract so that it could institute adjudication proceedings against a contractor for defects that arose following completion of the works in question.

In giving his judgement Mr. Justice Akenhead noted:

"It does not follow.......that all collateral warranties given in connection with all construction developments will be construction contracts under [the UK Act]. 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 warrenty 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."

In that case the Judge examined the wording in the warranty which expressly 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 [main contract]".

He noted that "an undertaking often involves an obligation to do something" and that the contractor was "not merely warranting or guaranteeing a past state of affairs" but was "undertaking that the Works will be completed to a standard, quality and state of completeness called for by the [main contract]".

In that case the claimant successfully obtained its declaration that the collateral warranty was a construction contract for the purposes of the UK Act. Given that the Act in Ireland is worded almost identically to the UK Act when it comes to the definitions of "construction contracts" for "construction operations" the Parkwood Leisure case is therefore informative and an Irish Court examining this issue would likely be guided by its findings.

Can collateral warranties ever be "Construction Contracts"?

The findings in the Parkwood Leisure case are very much open to question as most collateral warranties are by their nature a 'one-way street' and do not impose payment obligations on the beneficiary. If one were to follow the logic applied in that case and take the view that a collateral warranty is in fact a "construction contract" that falls within the auspices of the Act then, as noted above, the warranty would have to provide for:

  • the amount of each interim payment;
  • the amount of the final payment, (or an adequate mechanism for determining those amounts);
  • payment claim dates; and
  • the period between payment claim dates.

Notwithstanding that for a warranty to be legally enforceable as a contract there needs to be some form of consideration (usually nominal) passing from the beneficiary to the warrantor, collateral warranties do not generally contain any periodic or ongoing payment provisions.

They may provide for a warranty in respect of completed construction operations or perhaps an undertaking to complete certain construction operations in the future. A typical beneficiary (such as a purchaser, tenant or other party having a proprietary interest in the construction operations in question) does not pay the warrantor to do so under the terms of the warranty.

It does not therefore seem appropriate that such statutory payment provisions must be incorporated into a collateral warranty in favour of a typical beneficiary unless it is somehow implied that the amounts of all interim payments and the final payment are zero. By that logic it would not appear that it was contemplated that collateral warranties would fall under the auspices of the Act when it was being drafted.

This contention is further supported by the fact that collateral warranties do not appear compatible with the right for a warrantor (if it were to be regarded as the "executing party" as defined under the Act) to suspend work under a construction contract where any amount due under the contract is not paid by its due date. Again, as no payment will typically pass under a collateral warranty this right being conferred by the Act does not appear to be appropriate in the context of such warranties.

Collateral warranties – step-in rights

There is however one exception to note in the context of collateral warranties. It is common practice for warranties being provided in favour of funders or investors in projects to contain rights of step-in. In these cases, the warranty may provide the funder with a mechanism to replace the warrantor's employer where the latter has defaulted under the underlying construction contract.

Before the warrantor's entitlement to terminate or treat the underlying contract as repudiated arises, it must firstly afford the funder the opportunity to effectively step into the employer's shoes and allow the contract to continue.

Where this happens the funder will assume both the obligations and benefits of the employer vis-à-vis the warrantor which will most likely include an obligation to pay outstanding and future sums due under the underlying construction contract.

Given that the collateral warranty is the contractual nexus between the funder and the warrantor, where such a right of step-in is exercised the warranty could then become a "construction contract" for the purposes of the Act given that it will now effectively incorporate the terms of the underlying contract.

It will be important to closely examine the wording of the step-in provision in each case to see how the relevant provisions of the underlying contract are captured by the warranty. Consideration must also be given to whether the terms of the warranty are to take precedence over the terms of the underlying contract in the case of any conflict or discrepancy between the documents.

In some instances, the step-in provision in the warranty may require the execution of a fresh contract between the beneficiary and warrantor on substantially the same terms as the underlying contract. In any case, the provisions of the Act will now apply to the relationship between the beneficiary and the warrantor whether through the warranty, the underlying construction contract or indeed any new contract.

Irish Act v UK Act – right to refer payment disputes to adjudication

Notwithstanding this, any potential implications of the Parkwood Leisure decision are lessened somewhat in the Irish context due to the key distinction between the Irish and UK Acts.

The UK Act provides for the referral of all disputes under a construction contract to adjudication, however, the Irish Act only confers this right for payment disputes. Therefore, there needs to be a payment dispute under the collateral warranty to allow a party to enforce this right under the Act.

Unlike the UK, in Ireland an aggrieved beneficiary seeking redress against a warrantor for defective work via its collateral warranty (assuming such warranty is now a "construction contract" under the Act) would not be automatically entitled to refer the matter to adjudication unless the warranty expressly allowed it.

In circumstances where the underlying contract and the warranty provide for differing means of dispute resolution for non-payment related disputes it will have to be ascertained under which instrument (i.e. the warranty or the contract) the beneficiary is entitled to make its claim as there is no statutory right in Ireland to refer those disputes to adjudication.

Conclusion

It cannot be concluded that collateral warranties given in favour of typical 'proprietary' beneficiaries are caught by the Act (or that they were ever intended to be). Regardless of the judgement in the Parkwood Leisure case they are not compatible with the Act and nor does it seem appropriate to impose the default payment provisions set out in the Act.

However, funder collateral warranties containing rights of step-in are worth considering in each case although any potential implications of Parkwood Leisure would be less significant in the Irish context as noted above. Each such warranty will still need to be considered on its own facts to ascertain its relationship with the underlying construction contract upon the occurrence of step-in to establish whether the warranty might in its own right be a construction contract under the Act.

Either way, upon the exercise of the right of step-in the provisions of the Act will apply to the relationship between the beneficiary and the warrantor from that point onwards.

Footnotes

1 [201] EHC 2665 (TCC)

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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