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Can you Adjudicate under a Collateral Warranty?
In the recent case of Parkwood Leisure Limited v Laing O’Rouke Wales and West Limited, the Technology and Construction Court had to consider whether a collateral warranty could constitute a ‘construction contract’ for the purpose of section 104 of the Housing Grants Construction and Regeneration Act 1996 (‘the Act’), giving the tenant the right to refer disputes arising under the contract (the collateral warranty) to adjudication.
Parkwood Leisure Limited (‘Parkwood’) provides facilities management services for, amongst others, the Cardiff International Pool. Cardiff Council owns the Cardiff International Pool who let the facility to Orion Land and Leisure (Cardiff) Ltd (‘Orion’), who in turn sub-let it to Parkwood.
Orion entered into a standard JCT design and build contract (‘the Contract’) with Laing O’Rourke Wales & West Ltd (‘LORWW’) on 7 April 2006 for LORWW to complete the design for the facility and carry out and complete the construction. On 6 December 2007, LORWW executed a collateral warranty in favour of Parkwood. In clause 1(1) of the collateral warranty, LORWW ‘warrants, acknowledges and undertakes’ that it has carried out and shall carry out and complete the Works in accordance with the Contract.
Practical completion was reached in 2008. However, over the following 30 months, a number of problems arose and Parkwood made a numerous complaints about alleged construction and commissioning defects. Parkwood issued a letter of claim on 17 February 2011 detailing the defects, which included problems with the Air Handling Units (‘AHU’).On 19 March 2012, Parkwood, its holding company, Orion and LORWW entered into a settlement agreement in respect of this claim.
However, on 5 February 2013 Parkwood wrote to LORWW giving notification of its claim against LORWW under the collateral warranty in respect of the defective design and/or installation of the AHUs and LORWW’s failure to undertake any remedial works to the AHUs.
Parkwood issued Part 8 Proceedings seeking determination of various questions including whether the collateral warranty executed between Parkwood and LORWW on 6 December 2007 is a construction contract under section 104 of the Act.
Is the Collateral Warranty a Construction Contract?
It first must be ascertained whether the collateral warranty is a ‘construction contract’ as only parties to such a contract have the statutory right under section 108 the Act to refer disputes to adjudication.
Section 104 of the Act defines a ‘construction contract’ as an agreement with a person for any of the following:
1. the carrying out of construction operations;
2. arranging for the carrying out of construction operations by others, whether under sub contract to him or otherwise;
3. providing his own labour, or the labour of others, for the carrying out of construction operations.
Section 104 also provides that a ‘construction contract’ includes an agreement “to do architectural, design or surveying work, or provide advice on building, engineering, interior or exterior decoration or on the laying-out of landscape, in relation to construction operations…”
There is no authority directly on the issue as to the extent to which collateral warranties are to be considered as construction contracts for the purposes of the Act.
The Court held that the reference to a ‘contract’ must mean a contract under English Law. In determining whether that contract is one ‘for the carrying out of construction operations, the arranging of the carrying out of construction operations by others or the provision of labour or the labour of others for the carrying out of constructions operations,’ the ordinary contractual interpretation principles must be applied.
The Judge noted the following:
- The fact that the construction contract (if it is one) is retrospective in effect is not a bar to it being a construction contract;
- An agreement ‘for…the carrying out of construction operations’ is a broad expression and it is to be determined from the contract in question whether it fits within those words;
- Usually where one party to a contract agrees to carry out and complete construction operations, it will be an agreement ‘for the carrying out of construction operations’.
The Court’s Decision
The Court held that this particular collateral warranty was and is to be treated as a construction contract ‘for…the carrying out of construction operations’ and Parkwood has the statutory right to refer the dispute to adjudication under section 108 of the Act. The Judge gave numerous reasons for his decision, including:
1. The Recital sets out that the underlying construction contract was ‘for the design, carrying out and completion of the construction of a pool development’. There can be little or no dispute that this underlying contract was a construction contract for the purpose of the Act. This is again replicated in Clause 1 which relates expressly to carrying out and completing the Works;
2. Clause 1 contains express wording whereby LORWW ‘warrants, acknowledges and undertakes’. These words have different meanings and the Judge held that it is difficult to conclude that the parties meant for these words to be one and the same.
3. This is view is further reflected by the wording used in Clause 1 which refers to both past and future events. LORWW gave an undertaking that it will comply with the contract in completing the Works and gave a warranty to the work and design both already provided and yet to be carried out. There is a further prospective element in sub-clause 3 whereby LORWW ‘will continue to exercise’ care and skill;
4. This is not a contract limited to the quality of work, design and materials, as Clause 10 expressly excludes liability for delay in progress and completion but does not exclude liability otherwise for non-completion.
As such, the Judge stated that ‘this Collateral Warranty is clearly one ‘for the carrying out of construction operations by others’, namely LORWW’.
Importantly however, the Judge stated that not all collateral warranties given in connection with all construction developments will be construction contracts under the Act, and as such not all collateral warranties will carry with them the statutory right to refer a dispute arising under the contract to adjudication. To determine whether a collateral warranty is a construction contract for the carrying out of construction operations, it must be considered in light of both the wording and the relevant factual background of such a contract.
A key factor, the Judge highlighted, is the timing of the collateral warranty. The Judge stated that ‘a very strong pointer to that end will be whether or not the 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.’
This decision may result in adjudication being used for collateral warranty disputes where it was previously considered unavailable. It is important to remember that this decision is not a ‘one size fits all’ scenario – whether a collateral warranty affords the beneficiary the statutory right of adjudication will depend upon the facts of each particular case.
This article contains information of general interest about current legal issues, but does not provide legal advice. It is prepared for the general information of our clients and other interested parties. This article should not be relied upon in any specific situation without appropriate legal advice. If you require legal advice on any of the issues raised in this article, please contact one of our specialist construction lawyers.