Collateral warranties as construction contracts

The case of Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC); [2013] CILL 3413 concerned Part 8 proceedings raising the question of whether, and in what circumstances, a collateral warranty can amount to a 'construction contract' within the meaning of section 104 of the Housing Grants, Construction and Regeneration Act 1996.

The court held that it is a question of interpretation in each case, but that the particular warranty in this case was to be treated as a construction contract. The underlying contract was for the carrying out of construction operations, and the warranty provided an undertaking that the works would be carried out and completed. Importantly, the warranty included a prospective element.

However, the judgment made clear that not all collateral warranties given in connection with all construction developments will be 'construction contracts' under the Act.

This judgment will no doubt be of great interest to those who regularly provide collateral warranties and would not suspect that, as a result, they could find themselves in adjudication proceedings. For a full analysis of the implications of this case, see Justin Mort's article, Collateral Warranties as 'Construction Contracts', at Page 12.

Timing of Referral

In the case of KNN Coburn LLP v GD City Holdings Limited [2013] EWHC 2879 (TCC), the court considered whether the requirement to refer the dispute to the adjudicator within seven days of the date of the notice of adjudication (paragraph 7(1) of the Scheme) was satisfied in circumstances where the Referral Notice was received by the adjudicator within seven days but the appendices (in hard copy) were received on the eighth day.

The court held that the referral notice is to be distinguished from the supporting documentation.

In this case, it was wrong to suggest that the nature of the dispute could not be identified without reference to the supporting documents. The referral notice identified the material facts upon which the claim was based.

Thus, the dispute was referred in time. This reflects a common sense approach, but of course the question of whether the referral notice is, on its own, sufficient to identify the dispute will be a question of fact in each case.

It is worth noting also that the defendant did not raise an objection on these grounds during the course of the adjudication, and then contended that the decision was issued too late.

The judge held that it was not open to the defendant to do nothing and then "spring a procedural trap without any prior warning". This highlights the importance of making any jurisdictional objections clear at the time.

In a decision on a similar topic, Willmott Dixon Housing Ltd (Formerly Inspace Partnerships Ltd) v Newlon Housing Trust [2013] EWHC 798; [2013] BLR 325, the question arose whether a failure to serve the referral notice on the responding party within seven days, in circumstances where that document had been served on the adjudicator in time, meant that the adjudicator lacked jurisdiction.

It was held that it is the service of the referral notice on the adjudicator which is the foundation of his jurisdiction and not service of that document on the responding party. However, a delay in serving on the responding party might give rise to a breach of natural justice.

Parties considering opposing enforcement would be well advised to bear in mind the comments of the court that "it is undesirable that every breach of the terms of the Scheme, no matter how trivial, should be seized upon to impeach the process of adjudication".

Decision in excess of jurisdiction

In the case of ABB Ltd v BAM Nuttall Ltd [2013] EWHC 1983 (TCC); [2013] CILL 3401, the court was concerned with the objection, often raised, that the adjudicator had reached a decision on a basis not relied upon by either party.

In particular, the adjudicator had regard to a specific clause of the contract that had not been expressly referred to, or relied upon, by either party and found that there was no agreement as to the scope of certain works. Furthermore, the adjudicator did not raise this clause with the parties prior to his decision.

The court held that this was a failure in the adjudication process, and went on to consider how much a part this played in the decision and decision-making process.

The court held the clause that had not been referred to by either party formed an important basis for the adjudicator's decision that there was no agreement.

Accordingly, there had been a serious breach of the rules of natural justice and this had a material effect on the outcome.

This was, therefore, "one of those relatively rare cases" in which the breach of the rules of natural justice was not simply "peripheral or irrelevant", with the result that the decision should not be enforced.

These are comments which, again, are worth bearing in mind when considering whether to raise an objection to enforcement on such grounds.

It is worth comparing this to the decision of the Scottish Outer House in SW Global Resourcing Ltd v Morris & Spottiswood Ltd [2012] CSOH 200 last year, in which the court held that an adjudicator's decision based on a position not advanced by either party was not a breach of natural justice, but instead an example of an adjudicator using "his knowledge and experience in assessing the parties' contentions and reach[ing] a conclusion some way between their respective positions".

Final and binding decisions

The case of (1) Westshield Civil Engineering Ltd (2) Westshield Ltd v Buckingham Group Contracting Ltd [2013] EWHC 1825 (TCC); [2013] CILL 3395 concerned an application to enforce the adjudicator's decision and for a declaration that the parties were bound by that decision.

The contract between the parties provided that any challenge to a decision of an adjudicator had to be 'commenced' within 28 days, otherwise that decision would be final and binding.

Proceedings had been issued by the defendant, but not served on the claimant, within 28 days of the date of the adjudicator's decision.

The question arose whether the contract required proceedings to be issued within 28 days, or issued and served in that time.

The court held that the word 'commenced' did not mean 'served'.

It was held that 'commenced' is a simple English word which, in English law, required the issue of proceedings rather than their service. Clear and express words would be needed to require service in addition.

Furthermore, it was not unfair or noncommercial for a party to be able to issue proceedings but then to 'conceal' the fact that the adjudicator's decision had thereby been prevented from becoming binding by not serving those proceedings for another three to four months.

Accordingly the decision was enforced but the declaration sought was refused. This – perhaps unsurprising – decision makes clear that a party with the benefit of an adjudicator's decision cannot be certain that it will be finally binding pursuant to such a clause until the expiry of four months following the last date on which the claim form could have been issued.