02 October 2013 #Construction
In a rare case involving collateral warranties, in Parkwood Leisure Ltd v Laing O`Rourke Wales and West Ltd earlier this year the High Court considered whether a collateral warranty was a construction contract and, therefore subject to the right to adjudicate.
This involved the court considering the meaning of "construction contract" and "construction operations" in sections 104 and 105 of the Housing Grants, Construction and Regeneration Act 1996.
The general rule of thumb is that a collateral warranty is not a construction contract. The Court has reminded us however that it can be a question of interpretation reviewing the actual words used.
In this case Akenhead J held that the collateral warranty was a construction contract. His view was that it should be possible to look at the contract and decide if it is "for ... the carrying out of construction operations" within the meaning of section 105 using ordinary principles of interpretation.
Looking at the warranty in question the court had "no doubt" that it was a contract "for... the carrying out of construction operations".
Clause 1 of the collateral warranty stated the main contract was for the design, carrying out and completion of the construction of a pool development. The collateral warranty recognised that the pool works were incomplete. The contractor undertook in the warranty to complete the remaining pool works in accordance with the main contract. That undertaking related to the quality and completeness of the works and involved a prospective element and an express obligation to take action going forward.
The deed entitled the tenant to claim damages for breach of contract, or if the contractor failed to complete the works.
The contractor was undertaking in the deed that the pool works would be completed to a standard, quality and state of completeness as set out in the main contract.
For these reasons the court held that this particular collateral warranty was clearly a contract "for the carrying out of construction operations by others", namely the contractor. The rest of the deed was consistent with this, stating for example that the warrantor "will continue to exercise all reasonable skill and care".
Not every collateral warranty will be a construction contract. In each case it will be a question of looking at the wording and the relevant factual background. A clear prospective element with express undertakings could now indicate the collateral warranty being a construction contract.
While based on the particular facts and the actual words used in the warranty, the decision could mean more claims under collateral warranties being referred to adjudication on the basis that they are eligible construction contracts.
Warrantors in particular may revisit the use of certain terms and phrases in an attempt to ensure that their warranties cannot be interpreted as construction contracts.