This article was produced by Olswang LLP, which joined with CMS on 1 May 2017.
In the 2013 case of Parkwood Leisure v Laing O’Rourke Wales and West Housing Grants, Construction and Regeneration Act 1996it was held a collateral warranty was a “construction contract” for the purposes of the . Not only did this make it subject to the Act’s payment and suspension provisions but to those relating to adjudication.
Collateral warranties grant purchasers, tenants, funders and other third parties duties of care from construction parties for works or services performed. They were not traditionally regarded as construction contracts. However, the Technology and Construction Court noted that, in addition to warranting works already completed, the collateral warranty included an undertaking from Laings to perform those yet to begin. These fell within Act’s ambit of “construction operations” making it straightforward to establish a construction contract.
What makes contractors and professionals apprehensive is that the undertaking encountered in Parkwood Leisure is typical of many collateral warranties. This is due to many beneficiaries, particularly those contributing project funding, requiring collateral warranties prior to the works or services concerned being completed.
Hurley Palmer Flatt v Barclays Bank confirmed the situation to be different under third party rights. But despite their many advantages, embracing this alternative to collateral warranties may not be the quick fix that warrantors crave. With some beneficiaries already reluctant to accept third party rights, the absence of statutory adjudication may deter them further.
What’s left? Collateral warranties could be drafted to avoid incorporating undertakings relating to undischarged obligations. They would then become effective once the warrantor’s obligations have been discharged. It’s doubtful that funders would appreciate such changes though, which undermines their probable efficacy.
Hence, the problematic wording will continue to be included in collateral warranties in the short-term. How beneficiaries will use adjudication is another matter.
For complex or high value disputes, adjudication could provide beneficiaries with leverage. These claims tend to be less suited to adjudication’s compressed timeframe and the unavailability of court processes such as disclosure, joinder or consolidating claims. A threat of adjudication proceedings may dissuade a defendant or its insurers from dragging matters out.
In other circumstances, the beneficiary may be prepared to accept the chance of an adjudicator delivering a rough and ready award. Perhaps the claim value or prospects of success are low enough that a gamble is worthwhile, especially given that adjudication costs are lower. Even if the warrantor disputes the award, it has to weigh up the risk of further losses from an unsuccessful challenge.
Adjudication is binding on an interim basis so a dissatisfied warrantor could issue proceedings for the dispute to be finally determined in the courts or by arbitration. If it opts not to, the warrantor must comply with the adjudication award.
Nonetheless, adjudication under collateral warranties presents a dilemma for warrantors that cannot easily be rectified. While some commentators have criticised the Parkwood Leisure decision, the intentionally broad drafting of the Act may make it less likely that Justice Akenhead’s interpretation can be distinguished or overturned.
There is another prospect and it is mentioned in a different context in the case. Surety and insurance contracts, like collateral warranties, form part of a body of construction security, but are exempted from the Act by virtue of an exclusion order. The industry could lobby the Government to make a similar exception for collateral warranties to restore the former status quo.
