UK: Collateral Warranties And Adjudication

Last Updated: 17 January 2014
Article by Jane Miles and Alastair Young

The recent case of Parkwood Leisure Ltd v. Laing O'Rourke Wales and West Ltd looked at whether adjudication proceedings can be instituted in respect of claims arising under a collateral warranty. The issue that had to be decided was whether a collateral warranty could amount to a construction contract for the carrying out of construction operations within the meaning of the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act). This case will be of interest and possibly potential concern to those entering into collateral warranties.

The facts of the case were that a dispute arose in relation to a swimming and leisure facility in Cardiff. Parkwood provided facilities management for the pool and, before the works were completed, a collateral warranty was executed between Parkwood and Laing. There were a number of alleged construction and commissioning defects and, although a settlement agreement was entered into, Parkwood sought to enforce its rights under the collateral warranty in respect of claims which Parkwood argued were outside of the scope of the settlement agreement.

Parkwood issued the proceedings and asked the court to determine whether the collateral warranty was a construction contract for the purposes of the Construction Act. Akenhead J stated that whether or not a contract is a construction contract must be determined by reference to the contract itself. Section 104 of the Construction Act deals with what is a "construction contract" and Akenhead J stated that "it is clear that Parliament intended a wide definition".

In this case it was decided that the collateral warranty in question was a construction contract based on the wording used by the parties. It is important to note that the decision stated that not all collateral warranties given in construction contracts can automatically be regarded as construction contracts for the purposes of the Construction Act. The wording and factual background of each warranty will need to be reviewed to determine whether it is a contract for the carrying out of construction operations. However, a strong indication will be if the relevant professional "is undertaking to the beneficiary of the warranty to carry out construction operations". It was also stated that if a professional is simply warranting that a past state of affairs has reached a certain level, quality or standard then this may be a pointer against the warranty being a construction contract for the purposes of the Construction Act.

Whether or not a collateral warranty is a construction contract and therefore adjudication is available to those who are party to the document will depend on a number of factors. The wording of the warranty and the factual background need to be carefully considered to determine whether the contractor is agreeing to carry out construction operations, whether retrospectively or prospectively.

The implications of this case are potentially wide ranging. Those who provide warranties may face new adjudication claims by beneficiaries. This may be good news for beneficiaries who are looking for a fast and effective method to resolve their disputes, but professionals may well be concerned that the scope for adjudication claims against them is potentially much wider than they ever anticipated.

Bearing this in mind, is there any benefit to collateral warranties being amended so they expressly entitle a party to adjudicate? The short answer is no. This case found that a right to adjudicate under a collateral warranty is implied at law and if a party wishes to adjudicate it can rely on its statutory right to do so. Furthermore, we have not seen any recent push in the market for collateral warranties to include the right to adjudicate as a means of circumventing the uncertainty this case has caused. This is unsurprising as the type of disputes that arise under collateral warranties are generally not suitable for adjudication. Usually disputes under collateral warranties occur years after practical completion and relate to professional negligence and/or defective design. Most beneficiaries of collateral warranties therefore wish to engage with a professional's PI insurers. Litigation is the most appropriate way to do this and we therefore doubt there will be a rush to redraft collateral warranties to specifically refer to the right to adjudicate.

As this case was a first instance decision and changes the way the industry approaches collateral warranties, there is a fair chance that it will be overturned at some point in the future. This possibility is enhanced by the fact that the judge's reasoning runs contrary to both the understanding in the industry about what constitutes a "construction contract" for the purposes of the Construction Act and the current industry understanding about the purpose of a collateral warranty. It is difficult to understand how a warranty can be classed as a construction contract where the beneficiary has no ability to exert any control over the conduct of the works.

Until this issue is resolved by a higher court, however, you will need to carefully consider both the drafting of the collateral warranty and the time when the warranty is given if you do not wish the warranty to be subject to statutory adjudication. The best chance of avoiding statutory adjudication (although it is by no means guaranteed) will be to:

  • draft the warranty so that it does not contain an undertaking to carry out work/services, but instead warrants that the works/services will comply with the requirements of the underlying contract from practical completion; and
  • avoid executing a collateral warranty until after practical completion as you will then only be warranting a state of affairs in respect of works/services which have already been carried out.

The reality is, however, that this will be hard to achieve, particularly in circumstances where a beneficiary acquires an interest in the works prior to practical completion and needs both the existing and future works/services warranted.

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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