Be careful what you sign... Collateral Warranties Adjudication

Contractors and Sub-Contractors are asked to sign more warranties than there are confetti petals at a wedding. Each time a warranty is executed, the beneficiary of that warranty is provided with a contractual right to bring a claim for damages for breach by a Contractor or a Sub-Contractor of the obligations set out in the warranty.
More often than not the warranty will require the Contractor or Sub-Contractor to comply fully with the obligations set out in the primary building or sub-contract. The Contractor or Sub-Contractor gets nothing in return for this duplication in liability and I suspect many an innocent Contractor and/or Sub-Contractor never really believes that it will have to face any future action from a belligerent beneficiary of a warranty. I have some sympathy with this rather naive approach. After all, the time and cost of a beneficiary pursuing an action in the courts for breach of a warranty might put off even the most determined beneficiary from bothering to sue. Things have, however, now changed and as usual, from a Contractor’s and/or Sub-Contractor’s perspective, the change is not for the better!
What I am alluding to is not really a change but more of a clarification of the legal position concerning the right of a beneficiary to adjudicate in order to recover damages for breach of a warranty.
In the case of Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd, a case heard in the Technology and Construction Court in August 2013, the Court confirmed that an aggrieved beneficiary to a collateral warranty may well be able to adjudicate to recover its damages because the warranty may well be treated as a "construction contract" as defined by the Housing Grants, Construction and Regeneration Act 1996 (the Construction Act).
Under the Construction Act, only parties to a construction contract have the right to refer disputes to adjudication. Even if there is no express right to adjudicate, the judgement confirms that collateral warranties can be construction contracts in their own right, leaving the door wide open for disgruntled Employers, Funders, Tenants and any other beneficiary to adjudicate against a Contractor or Sub-Contractor.
The case in question concerns a JCT design and build contract under which Laing O'Rourke Wales and West Ltd (“Laing”) contracted with Orion Land and Leisure (Cardiff) Ltd (“Orion”) to complete the design and build of a new swimming pool and leisure facility. The facility was to be owned by Cardiff City who sub-let the site to Orion. As part of the contractual arrangements, Laing executed a collateral warranty in favour of Parkwood Leisure Ltd (“Parkwood”) which was a sub-tenant of Orion and was to manage the facility.
During the operation of the facility Parkwood raised several issues regarding defects and commissioning problems. Parkwood raised its complaint directly with Laing in the form of a pre-action protocol letter of claim. Following negotiations involving Parkwood, Orion and Laing a settlement agreement was concluded under which Laing agreed to rectify the identified problems and Parkwood agreed not to raise any further complaints or commence any legal action against Laing under the warranty.
Approximately one year later Parkwood wrote a further pre-action protocol letter of claim alleging that Laing had failed to correct the defects encompassed by the original settlement agreement and raising new complaints. Laing argued that all complaints concerning defects were covered by the settlement agreement and that Parkwood was barred from bringing any further action.
In an action brought by Parkwood under Part 8 of the Civil Procedure Rules, Parkwood sought a declaration from the court that the warranty was a construction contract for the purposes of Part II of the Housing Grants Construction and Regeneration Act 1996 so that it could commence an adjudication in respect of the dispute. Parkwood argued that the collateral warranty was a construction contract on the basis that it contained an express agreement for Laing to carry out construction work and that section 104(1)(a) of the Construction Act was engaged as a result.
Mr Justice Akenhead recognised that no legal authority exists on the proposition as to the extent to which, if at all, contracts such as collateral warranties could be construction contracts and that there was no guidance in the Construction Act itself.
The judge said that a construction contract primarily had to be a contract under English law, however formed (in writing, oral, simple or under deed), and that it was necessary by reference to the contract itself to determine whether the contract was one for the carrying out of construction operations, the arranging of carrying out of construction operations by others or the provision of labour or the labour of others for the carrying out of construction operations.
In the current case this particular collateral warranty was, and was to be treated, as a construction contract "for... the carrying out of construction operations".
The recital in the underlying design and build contract set out that it was "for the design, carrying out and completion of the construction of a pool development." There could be no dispute that the underlying contract was a construction contract pursuant to the Construction Act. This wording was replicated in clause 1 of the warranty which related expressly to carrying out and completing the works.
Clause 1 also included express wording under which Laing  "warrants, acknowledges and undertakes." These three verbs, while intended to be mutually complementary, have different meanings. They relate to past work and future work which had yet to be carried out and in relation to which Laing gave Parkwood an undertaking that it would carry out and complete the works in compliance with the underlying contract. The warranty was "clearly one 'for the carrying out of construction operations by others', namely by Laing”.
The collateral warranty was not one which was "simply limited to the quality of work, design and materials".
Summary
In deciding whether or not a warranty is one which is a contract for construction operations and can be adjudicated upon, it will be necessary to look carefully at the warranty wording and the relevant factual background.
However, looking at the many warranties I am regularly called upon to advise on, it is apparent that the vast majority will fall into the category under which a Contractor or Sub-Contractor could face an adjudication from a beneficiary. Given that these same warranties offer absolutely no benefits to Contractors or Sub-Contractors, perhaps now they will begin to think about what they are signing up to. 
Whilst all this may mean an increase in the number of adjudications, and might therefore be good for Adjudicators, it also represents yet another important area of risk that will have to be managed by Contractors and Sub-Contractors going forward.
Peter Vinden is Managing Director of Vinden. He can be contacted by email at pvinden@vinden.co.uk. For similar articles on construction, corporate protection and dispute resolution generally, visit www.vinden.co.uk
Peter Vinden

Peter is an experienced professional in the construction industry with particular expertise in quantity surveying and the commercial management of contracting organisations. 

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