Adjudication of Collateral Warranty Claims

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Parkwood Leisure v Laing O’Rourke Wales and West [2013] CILL, TCC

Facts

In April 2006 Laing O’Rourke Wales and West (LORWW) contracted to design and construct a swimming pool in Cardiff for Orion Land and Leisure (Cardiff) Ltd.  In December 2007 LORWW gave a collateral warranty to Parkwood warranting and undertaking that it had carried out and would continue to carry out and complete works in accordance within its building contract.  In January 2008 Orion granted a 10 year lease to Parkwood Leisure under which Parkwood undertook to operate the facility.  There were major problems with the air handling units, and Parkwood asked the Court to confirm the Warranty agreement was a “Contract for Construction Operations” and therefore subject to adjudication?

Held

  1. The Housing Grants Construction and Regeneration Act applies to all “contracts for the carrying out of construction operations or arranging for the carrying out of construction operations by others”, etc.  The Judge considered this was a contract for the carrying out of construction operations.
  2. The key issue was that LORWW had said that it “warrants acknowledges and undertakes that it has carried out and shall carry out and complete the works in accordance with the contract”.
  3. A collateral warranty which merely warrants that the works have been carried out in a certain way in the past is probably not a qualifying contract “for the carrying out of construction operations” etc.
  4. In contrast, a warranty in which the promisor promises or undertakes to do future works properly is, on the Judge’s analysis, a contract for construction operations.

Comment

Akenhead J. stressed that it did not follow that all collateral warranties in connection with all construction developments would be construction contracts within the meaning of the Act.  “A very strong point would be whether or not the relevant Contractor is undertaking to the beneficiary of the warranty to carry out such operations.  A point against that 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.”

It is also worth noting that the Judge did not consider that the timing of the warranty (in terms of whether the work has been done or is being done or would be carried out in the future) had any bearing upon its validity or interpretation.

The implication of this important decision is that a “mere” warranty in which the promisor simply warrants that the works have been done or will be done appropriately is probably not adjudicable.  On the other hand any collateral agreement which contains an express promise to carry out the work is very likely, on Akenhead’s test, to be capable of being referred to adjudication.  This represents a whole new area of risk and costs exposure for architects, engineers, contractors and sub-contractors which may well result in an increasing number of defects and negligence claims being pursued through adjudication.

A further significant point is that Parkwood used the “question answering” process afforded by Rule 8 of the Civil Procedure Rules to clarify this issue relatively inexpensively through the courts rather than going to adjudication and then trying to enforce in the courts subsequently.

We would suggest that the learned judge is wrong in this decision.  The Act surely defined construction contracts as being “contracts for carrying out construction operations” to distinguish such contracts from agreements which are simply about construction operations.  A contract between a client and an architect for a design is a contract for construction operations.  The contract between an architect and a tenant or purchaser of the building which has been subsequently designed is a contract about such an operation.  Indeed Akenhead expressly rejected the Claimant’s ingenious argument that the word “for” in section 104 of the Act meant “in relation to“.  We may be looking at a future in which we have a 2-speed warranty system, some warranties capable of referral to adjudication for fast dispute resolution, and other warranties that have to be taken to the courts.

For more information, help or advice please contact Rob Langley on 0191 211 7975.