Claims under collateral warranties

It is now 15 years since the construction part of the Housing Grants, Construction and Regeneration Act 1996 came into force. It is the provisions for adjudication that radically affected the construction industry.

The act applies to any “construction contract”, which is an agreement for the carrying out of construction operations, or arranging for construction operations to be carried out or providing labour for that purpose. “Construction operations” are widely defined though a few operations are specifically excluded. The act also applies to architectural, design or surveying work or providing advice on building, engineering and other matters in relation to construction operations.

A question that has been the subject of some uncertainty since the act came into force is whether a collateral warranty is a “construction contract” and whether a claim under a collateral warranty can be referred to adjudication under the act. This has now been considered in Parkwood Leisure Ltd vs Laing O’Rourke Wales & West Ltd.

The case concerned the design and construction of a swimming and leisure facility owned by Cardiff council. The facility was let to a property developer in the Orion group, which engaged the contractor under a standard JCT design-and-build contract. Before the works were completed, the contractor gave a warranty to Parkwood, a subsidiary of the developer, which was to operate the facility.

After the facility had opened to the public, a number of problems arose and Parkwood complained about alleged construction and commissioning defects. As Parkwood had not engaged the contractor, its only contractual redress against the contractor was under the warranty. Parkwood maintained that the warranty was a “construction contract” and sought a declaration that its claim could be referred to adjudication.

The judge stressed the point that, under the warranty, the contractor was undertaking to carry out at least some work that had not yet been completed

In clause 1 of the warranty, the contractor warranted, acknowledged and undertook that “it has carried out and shall carry out and complete the works in accordance with the contract”. There was nothing unusual in the rest of the warranty, although it was not in one of the standard forms. The judge, paying particular attention to the opening words, had no doubt that this particular collateral warranty was a “construction contract”. He particularly stressed the point that, under the warranty, the contractor was undertaking to carry out at least some work that had not yet been completed.

For warranties that relate to the carrying out of work still to be done, the position seems reasonably clear, unless and until the matter is reconsidered by a higher court. Consultants’ warranties that contain (probably exceptionally) an obligation to continue to give advice during the construction process or undertake any duties that qualify as “design” within the act would therefore be “construction contracts”.

However, the judge said that it does not follow that all collateral warranties given in connection with construction developments will be “construction contracts”. For example, this may not be the case where all the works are completed and the contractor (or whoever) is simply warrantying a past state of affairs as reaching a certain level, quality or standard.

This is a potentially important reservation, as collateral warranties are often and sometimes only able to be given after work is completed; for example, contractors and consultants may agree in their contracts of engagement to give warranties to tenants whose identities may not be known until after completion.

A warranty may provide for adjudication of disputes, in which case any question over the right to refer a dispute to adjudication may be settled by the terms of the warranty itself. Disputes arising out of collateral warranties can be highly technical and the quick provisional decision given by an adjudicator may not be suitable for resolving these. For consultants, these issues could concern the extent of the duty of care and whether there has been a breach of that duty or other obligation under the original appointment and the calculation of the damages, so adjudication may not be appropriate. This seems to be a view held by much of the industry, as consultants’ warranties rarely contain adjudication provisions.

This is my last article for Building and it seems fitting that I should finish with a piece on collateral warranties when my first article just over 15 years ago ended with a remark that consultants might be better off not signing agreements after the work had been completed, as collateral warranties might not then have to be given at all. A view I still hold! I send my best wishes to Building and its readers.

To read Rachel’s first column from 1997 click here.

Rachel Barnes is a consultant at solicitor Beale & Company