Can a collateral warranty be a construction contract?
In a majority judgment, the Court of Appeal reversed the first instance decision and held that the collateral warranty in question was a construction contract within the meaning of s.104(1) of the Housing Grants, Construction & Regeneration Act 1996 (the Construction Act). The decision confirms the wide scope of the right to adjudicate to resolve disputes arising under construction contracts.
Collateral warranties and adjudication
Under s.108 of the Construction Act, parties to a construction contract have a right to refer disputes arising under those contracts to adjudication. Construction contracts are defined in s.104 and include ‘the carrying out of construction operations’. In Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd  the court considered whether a collateral warranty could be a construction contract and held that this would depend on the wording of the particular warranty. Akenhead J stated: “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 warranty 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”.
The story so far …
In this case, Abbey was the beneficiary of a collateral warranty with Simply Construct and commenced an adjudication to resolve a dispute arising out of fire safety defects. Abbey was awarded £908,495.98 in the adjudication which Simply Construct failed to pay. In the adjudication and the enforcement proceedings, Simply Construct argued that the adjudicator lacked jurisdiction as the collateral warranty was not a construction contract within the meaning of s.104 of the Construction Act.
At enforcement the judge agreed. Key to that decision was that whilst the collateral warranty in question referred to both past state of affairs and future performance, it was executed four years after PC and months after the disputed remedial works had been completed by another contractor. The judge stated, “… where the works have already been completed, and as in this case even latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate”. Consequently, the judge at first instance held that whether a collateral warranty is a construction contract that is subject to adjudication will largely depend on when the collateral warranty was entered into. You can read our analysis of that decision here.
On appeal, Coulson LJ, giving the leading judgment, considered a number of issues:
Issue 1 - Can a collateral warranty ever be a construction contract?
Coulson LJ held that a collateral warranty could be a construction contract as defined by s.104(1) of the Construction Act but, as with any contract, it will depend on the wording. A promise about the quality of completed work that does not “recognise or regulate the ongoing carrying out of any future work” may not be a contract for the carrying out of construction operations within the meaning of the Construction Act and “is more akin to a product guarantee”. Therefore, a collateral warranty may be capable of being a construction contract: “What may be critical is whether the warranty is in respect of the ongoing carrying out of construction operations, on the one hand, or is in respect of a past and static state of affairs, on the other”.
Issue 2 - What was the effect of the warranty wording?
In this case, Simply Construct warranted to Abbey that it "has performed and will continue to perform diligently its obligations under the Contract". Coulson LJ held that the promise in relation to future performance differentiates the collateral warranty from a mere produce guarantee. In addition, the absence of the word ‘undertakes’ from the warranty wording did not make any ‘material difference’ to this conclusion. Coulson LJ recognised that ‘undertakes’ can involve an undertaking to ‘do something’ and this is what Simply Construct had warranted to do namely “continue to perform diligently its obligations under the contract". Consequently, he regarded any difference between "warrant" and "undertakes", in this context as “hair-splitting”.
Issue 3 - Did it matter when the warranty was entered into?
In this case the warranty was executed some time after the works were practically complete. Coulson LJ also held that the fact the works were complete at the time the collateral warranty was executed was of “little relevance” when deciding whether it was a construction contract under the Construction Act. The warranty made a promise as to the standard of work carried out in the future and these “future-facing” obligations had retrospective effect.
An increase in adjudications?
Collateral warranties remain an important way of creating a contractual link between, for example, future owners, occupiers or funders who are not party to a building contract but who have an interest in a project, and those responsible for constructing the building. Despite the availability of third party rights, the use of collateral warranties remains commonplace. In addition, collateral warranties are frequently executed after the work to which they relate has been completed. This decision confirms that even where a collateral warranty is executed some time after the works have been completed, this is irrelevant. What matters is the wording of the collateral warranty and specifically whether this includes future performance. This decision is a reminder to beneficiaries that adjudication may be available to resolve disputes arising under collateral warranties. This may offer beneficiaries a quicker and cheaper alternative to litigation.
The decision also illustrates a continuing judicial support for the adjudication process. Coulson LJ recognises in the decision that one of the purposes of the Construction Act is to provide an effective dispute resolution system and having the same disputes relating to the carrying out of the same construction operations dealt with by the same adjudicator aligns with that purpose, even where, as in this case, there are two different contracts. Coulson LJ said this results in “consistency of approach and outcome, and a reduction in duplicated costs”.
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