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- Extending the reach of Adjudication into Collateral Warranties
First appeared in Informer: Real Estate Newsletter - Autumn 2013
Many will know that the Housing Grants, Construction and Regeneration Act 1996 (or the Construction Act as it is generally known) gives parties to construction contracts particular rights, including the right to refer disputes to adjudication. Adjudication was largely welcomed by the construction industry as a quick and relatively cheap way of getting a binding decision and is generally thought to have been a success. Most disputes referred to adjudication stop there, without being escalated further, which suggests something is going right.
However, in the fifteen years or so since the Construction Act became law there hasn't been a single case in the English courts considering whether a party benefiting from a collateral warranty can also benefit from the rights the Construction Act offers. Consider the vast number of collateral warranties that have been entered into in those fifteen years in an industry which is not averse to bringing claims and this seems surprising. In fact, there have been remarkably few cases on collateral warranties altogether.
That hiatus has now come to an end following the case of Parkwood vLaing O'Rourke. Laing (the contractor responsible for building the Cardiff International Pool) gave a collateral warranty to Parkwood (the pool operator). The operator found what it considered to be defects in the design and construction of the air handling units, which it says caused it considerable financial loss and so the operator asked the High Court to determine whether the collateral warranty was a 'construction contract' for the purpose of the Construction Act so that it could bring an adjudication relating to the defects instead of going through longer and more costly court proceedings.
The court agreed that this particular collateral warranty was in fact a construction contract, and that the operator could therefore commence an adjudication. The judged based the decision on the view that the warranty was a contract "arranging for the carrying out of construction operations" and so the Construction Act applied. The decision was qualified, stating that whilst this collateral warranty was a construction contract, others may not be and, as is often the case, it depends on the wording as well as whether the works were still ongoing when the warranty was entered into.
It seems therefore, that under the Parkwood decision many warranties drafted in customary terms will be considered to benefit from the rights under the Construction Act.
So, is it good news for the beneficiaries of warranties? Well potentially. Without going into the detailed decision in this short briefing, we are not entirely comfortable that the decision is a correct one and many other commentators seem to agree, not least as the beneficiary of a warranty has no control over the works, just a right to sue if they go wrong. Is that really "arranging" for construction works? We doubt it.
Assuming however the decision is not appealed, what does it mean in practice? First, it is likely that astute contractors and consultants will seek to avoid the effects of this decision by seeking wording in warranties to prevent beneficiaries from having a right to adjudicate based on the subtleties of the decision. Careful drafting will be needed.
Please do get in touch if you would like to know more.
Chris Farrell, Solicitor, Construction Group