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Collateral warranties can be 'construction contracts' for the purposes of the Construction Act, High Court says

A collateral warranty can be a 'construction contract' for the purposes of the Construction Act, meaning that a beneficiary of a warranty, such as a tenant can bring a direct claim against a contractor through adjudication, the High Court has ruled.02 Sep 2013

Mr Justice Akenhead said that whether or not a warranty could be considered as "a construction contract for the carrying out of construction operations" would depend on the wording and "relevant factual background" of the warranty.

He agreed with the tenant, Parkwood Leisure, that it was entitled to statutory adjudication of its defects claim against main contractor Laing O'Rourke in relation to its work on the Cardiff International Pool. It was able to do so under the Housing Grants, Construction and Regeneration Act 1996 (Construction Act), which implies certain adjudication provisions into "construction contracts", even though the warranty itself contained no adjudication provisions.

Construction disputes expert James Ladner of Pinsent Masons, the law firm behind Out-Law.com, which acted for Laing O'Rourke in the case, said that the decision could lead to the use of adjudication in warranty disputes where it was previously considered unavailable.

"Although this may encourage speedy resolution of some disputes, it can also cause problems, as the inability to join defendants in statutory adjudication may give rise to multiple proceedings and the risk of inconsistent decisions," he said.

"Further, contractors and sub-contractors will have to review the terms on which they are prepared to give warranties and, perhaps, try to further limit the number of warranties granted," he said.

The warranty was provided to the tenant by Laing O'Rourke before the work was complete and stated that the firm would "carry out and complete the Works in accordance with the [design and build] Contract". Ladner said that this type of warranty was given by contractors in many construction projects.

Any 'construction contract' that does not make adequate provision for adjudication, which is a less formal form of dispute resolution, now has the Scheme for Construction Contracts inserted as implied terms.The Act defines a construction contract as "an agreement for ... the carrying out of construction operations" and does not consider whether a warranty can be a construction contract.

A warranty is an additional contract between the contractor and a third party with an interest in a particular construction project, such as a funder or tenant; giving that party the right to bring claims against the contractor despite having no rights under the relevant construction contract. Laing O'Rourke argued that the warranty was not a construction contract as defined by the Act, but was instead a secondary promise that the project would be delivered in accordance with the underlying contract. The tenant disagreed, arguing that the warranty contained the contractor's "express agreement to carry out construction work" and was therefore caught by the legislation.

In his ruling, Mr Justice Akenhead said that whether a contract was a 'construction contract' to which the Act applied was a question of "ordinary contractual interpretation". He said that there could be "no doubt" that legislation referred to "a contract under English law, however it is formed" and that it was "by reference to that contract that one must determine whether or not it is a construction contract under the [Construction Act]".

In this case, there could be "little or no dispute that the Contract was a construction contract", he said. The relevant clause was not "merely warranting or guaranteeing a past state of affairs" but was "providing an undertaking that [Laing O'Rourke] will actually carry out and complete the works", he said.

However, it did not "follow from the above that all collateral warranties given in connection with all construction developments [would] be construction contracts under the Act," he said.

"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," he said. "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."

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