It’s time to check the wording on your collateral warranties
A recent decision in the Technology & Construction Court has made it crucial that architects consider the precise wording of their collateral warranties – beneficiaries may now be able to adjudicate disputes in certain circumstances which arise under the warranty.
In Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd, Laing had entered into a standard JCT Design and Build contract with Orion Land and Leisure (Cardiff) to design and build a swimming and leisure facility in Cardiff. Under the contract it was required to enter into a ‘deed of warranty’ with Parkwood, which was to operate the facility. It did so before the works were finished. But once it was complete, a number of defects arose.
Adjudication right
As Parkwood did not directly engage Laing, its only course of action was to bring a claim under the collateral warranty. Parkwood considered that the collateral warranty was a ‘construction contract’ as defined by the Housing Grants, Construction & Regeneration Act 1996 (HGCRA, see panel, right) and that it therefore could refer the dispute to adjudication. It sought a declaration from the Court that it could do so (before this the law was uncertain as to whether a collateral warranty was a construction contract).
One should assume that the parties understood that these three verbs, while intended to be mutually complementary, have different meanings
The judge held that Laing’s warranty was to be treated as construction contract. This allowed Parkwood to refer any dispute under the collateral warranty to adjudication.
The wording of the warranty was such that Laing ‘warrants, acknowledges and undertakes’ that ‘it has carried out and shall carry out and complete the works in accordance with the contract’. The judge focused on the opening words: ‘One should assume that the parties understood that these three verbs, while intended to be mutually complementary, have different meanings. A warranty often relates to a state of affairs (past or future); a warranty relating to a motor car will often be to the effect that it is fit for purpose. An acknowledgement usually seeks to confirm something. An undertaking often involves an obligation to do something. It is difficult to say that the parties simply meant that these three words were absolutely synonymous.’
Continuing obligation
Other wording in the collateral warranty clearly set out that both the underlying contract and the warranty itself were for the design, carrying out and completion of works.
Accordingly, the warranty was not merely warranting or guaranteeing a past state of affairs, it also undertook that future works would be carried out and completed to the standard, quality and state of completeness called for by the contract. The judge recognised that the works under the contract remained to be completed, albeit that Laing had already carried out a significant part of the works and the design. As such, the collateral warranty did therefore constitute a continuing and future obligation to carry out construction obligations within the meaning of the HGCRA.
This may seem unexpected; however, the judgment will not apply to every warranty. For those relating to works still to be carried out, the position is that they are ‘construction contracts’ to which the HGCRA, and therefore adjudication, applies. Consultants must keep this in mind as it is likely to include any warranties which contain obligations to provide advice and/or design during construction. However, if the warranty relates simply to past events, then it would not qualify as a ‘construction contract’. As ever, it will all depend on the circumstances and precise wording.
Stacy Sinclair is with Fenwick Elliott
Contract amendments
The HGCRA introduced various amendments and additions to those contracts which are defined as ‘construction contracts’ under the Act. A ‘construction contract’ is any agreement for the carrying out of construction operations (albeit specifically excluding some operations) or arranging for construction operations to be carried out or providing labour for that purpose. This includes contracts for architectural and/or design services.
The HGCRA gives the parties the right to resolve their disputes on a temporary basis by way of adjudication, and also imposes a stage payment regime – in the event that a construction contract does not expressly do so. In addition, the Act regulates the right of set-off in the absence of written notice which must be given not later than the prescribed period before the final date for payment. It has now been amended by the Local Democracy, Economic Development and Construction Act (LDEDCA).