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Adjudication: Collateral warranties now caught

The Technology and Construction Court has potentially opened the floodgates for an increase in adjudications by deciding that certain collateral warranties would be caught by the Construction Act.

Collateral warranties are commonly used where an agreement needs to be put in place with a third party such as a funder, tenant or purchaser of the property.

The contractor and/or subcontractor warrants to the third party that it has fulfilled or will fulfil its obligations under a construction contract. Usually, the collateral warranty specifies that disputes are to be resolved by the courts.

The scope of the Construction Act

In a judgment last week in the case of Parkwood Leisure Limited v Laing O’Rourke Wales and West Limited, Mr Justice Akenhead was asked to consider whether a collateral warranty fell within the scope of the Construction Act. If it did, either party could refer any disputes under it to adjudication.

“Unless a collateral warranty is entirely retrospective then it is most likely caught by the Construction Act”

Having considered the wording of the legislation and the collateral warranty itself, the judge held that the particular collateral warranty should be treated as a construction contract for “the carrying out of construction operations” – a phrase he said should be interpreted broadly without “straitjacketed judicial interpretation”.

However, he was keen to stress that did not mean all collateral warranties given in connection with all construction developments will be caught by the Construction Act.

Consider the wording and the warranty

The judge said it was necessary to consider both the wording of the warranty and the relevant factual background to determine whether, properly construed, the warranty is a construction contract for the carrying out of construction operations.

“The effect of this judgment is that for certain types of collateral warranties, the parties will be free to resolve their disputes either by adjudications or by the procedure specified in the warranty itself”

In giving some general guidance, he stated: “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.”

In other words, unless a collateral warranty is entirely retrospective (and simply warrants construction works that have already been completed) then it is most likely caught by the Construction Act and will have the right to refer a dispute to adjudication implied into it.

Consequences of the decision

The effect of this judgment is that for certain types of collateral warranties, the parties will be free to resolve their disputes either by adjudications or by the procedure specified in the warranty itself.

The likelihood is that many parties will prefer the (generally) quicker and cheaper option of adjudication.

Adrian Bell is a partner and solicitor-advocate specialising in construction disputes at CMS Cameron McKenna

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