Construction law update

We all vaguely remember the string of cases which meant that occupiers of buildings couldn’t safely rely on being able to sue the building’s designers and builders in tort and certainly couldn’t give their successors in title the right to do so. Those practising in the fields of property and construction law also know that, as a result of those cases, the collateral warranty was born.

This is a short, assignable contract between a designer or builder or manager of a construction project (the “warrantor”) and a funder, purchaser or tenant of it (the “beneficiary”), in which the warrantor warrants that he has complied and will continue to comply with his obligations under the underlying building contract, sub-contract or professional appointment.

A beneficiary is thus protected and can fund, buy or take a lease of the building with confidence, knowing that, should defects appear, he will be able to sue the person responsible for the defects. The beneficiary also knows that he can get full value for the building because he can pass these rights on to his successor by assigning the collateral warranty.

Adjudication implied

The Housing Grants, Construction and Regeneration Act 1996 (known in the industry as “the Construction Act”) introduced a variety of requirements for “construction contracts”, with wording in an accompanying statutory instrument being implied into any construction contract which does not contain provisions compliant with the requirements of the Act. One of its provisions allows any party to a construction contract to refer any dispute relating to that construction contract to adjudication at any time. Adjudication is a fast-track dispute resolution mechanism, under which a professionally qualified adjudicator can be required to produce a decision within 28 days which then binds the parties, and will be enforced by the courts. It can be overturned by taking the dispute to court, but until the court has given its final judgment on the dispute (possibly many months later), the court will in the meantime enforce the adjudicator’s decision summarily.

A “construction contract” is defined as a contract “for the carrying out of construction operations” or (to cover professional consultants’ appointments) ?a contract “to do” building related design or “to provide advice on” building-related matters. The general view among construction lawyers was that a collateral warranty was not a “construction contract” but was instead, as its name suggests, ?a contract collateral to a construction contract, ?and that therefore adjudication was not available. ?A judgment of Akenhead J in the Technology ?and Construction Court has just overturned ?that understanding.

With adjudication being a faster and cheaper means of dispute resolution, this is a decision which is likely to have many knock-on effects. Claims under warranties will be much faster and easier if adjudication is an option and that is likely to mean more claims, and claims for amounts which it would not previously have been economic to claim for. This is possibly good news for beneficiaries of collateral warranties and bad news for warrantors. However, joinder of related disputes is not provided for in the statutory adjudication arrangements and one adjudicator is not bound to follow the decision of another adjudication involving different parties. That could mean multiple proceedings arising from the same facts, which is not good news for anyone – for example, if a building fails in some way then the purchaser and five tenants might all have to bring separate adjudications, before different adjudicators, who could all reach different and possibly conflicting decisions on the same facts.

Unclear consequences

Moreover, the judgment has in fact left the position very unclear, because Akenhead J took the view that some collateral warranties will be construction contracts and so subject to adjudication, but some won’t be. Worse still, he said that what decides the issue is the precise wording of the individual warranty (no definite guidelines were given, so it is a matter of individual interpretation) and probably also the stage which the design or construction work had reached at the date on which the warranty was signed and dated.

This will very likely mean cases where a fund, purchaser and several tenants can all be given the same warranty wording but some of them will be able to adjudicate on it and some won’t. It won’t be clear to any of them whether they can adjudicate or not, so satellite litigation to establish this is likely. ?A little information about the case will help to explain how this messy situation has been created.

Not in standard form

The case is Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC). In the case, a building contract included the construction of a swimming pool and the contractor, Laing O’Rourke, had given a collateral warranty to the tenant pool operator, Parkwood. Parkwood alleged that it had lost over £300,000 due to defective design and/or installation of air handling units by Laing O’Rourke. Parkwood applied to the Technology and Construction Court for a declaration that the collateral warranty was a “construction contract” and that it could therefore adjudicate under the Construction Act.

Akenhead J considered this novel request and noted that in the collateral warranty it was stated that the contractor “warrants, acknowledges and undertakes” that it: would carry out the works in accordance with the building contract; owed a duty of care to the beneficiary; would exercise reasonable skill and care in the design of the works; and would regularly and diligently carry out its obligations under the building contract. This is pretty standard stuff in lawyer-drafted collateral warranties but the judge said that it was not a warranty “in standard form” (whatever that might mean and however that might be relevant). He said that the wording implied future obligations to complete the works and that this suggested to him a construction contract.

He also noted that the collateral warranty ?was given before practical completion of the works (the works were commenced in April 2006 and were originally due for practical completion in December 2007, when the collateral warranty was in fact dated, but in fact the works ran on and practical completion did not occur until 2008).

In addition, he commented that a “construction contract” did not have to be “wholly or partly prospective”, i.e. even if a contract was signed after all works were complete it could still, in his view, ?be a “construction contract” for the purposes?of the Act.

Prospective wording

We are thus left with a situation where any collateral warranty which contains “prospective” wording, and (possibly regardless of wording) any warranty given before work is finished (unclear whether that means practical completion or the end of the defects rectification period), could be a “construction contract” and so have adjudication as an option for claims. But it might be different if the warranty is “in standard form” (meaning not clear).

To add a further layer of uncertainty, the court noted that in the case of building contractors and sub-contractors, section 104(1) of the Act defined ?a “construction contract” as a contract “for the carrying out of construction operations”, whereas in the case of professional consultants, section 104(2) of the Act defined a professional appointment as a “construction contract” if it was ?a contract “to do” building design or “to provide advice on” building related matters. The word “for” was in the court’s view wider than “to” and that might create a distinction. In other words, the same collateral warranty wording might create a “construction contract” subject to adjudication if given by a contractor but not create a construction contract if given by a professional consultant.

The last time we had this sort of confusion in the sphere of construction law was when the Blyth v Blyth decision made something of a mess of the law relating to novation. In that case, every contractor, consultant, law firm and, more to the point, professional indemnity insurer - had their own pet way of dealing with the decision (a decision which pretty much everyone viewed as wrong in either reasoning or result or both). Negotiations over novation agreements became protracted and difficult for several years before the market settled down. We may be about to have the same difficulties over negotiating collateral warranties.

Lost opportunity

This would be in addition to the likelihood of satellite litigation at the other end of the process to try to establish whether a claim on a particular warranty can be adjudicated or has to be litigated. Indeed it may not be just that way round - my own firm is now handling a case where a warrantor who is being sued on a warranty is quoting the Parkwood case and is trying to launch a satellite adjudication in order to get information and declarations to use against the beneficiary during the ongoing litigation.

Most construction lawyers who have so far gone into print seem to be of the view that the decision is wrong, at least in the sense that had Parliament considered the issue, collateral warranties would have been specifically excluded from the Act as they were not part of the “mischief” at which the Act was aimed. Most seem to be of the view that the opportunity to resolve the issue in a pragmatic and commercial way, which made sense for the construction and property development industries, has been lost.

The only advice which can be given at the moment is to be aware of the issue, and to pay attention to the way that the professional indemnity insurers writing cover for the construction industry react to it when they have had time to consider the case. It is their reaction which is likely to determine how collateral warranties will be worded in the future. SJ

 

---

 

 Chris Holwell is a partner at ?Freeth Cartwright LLP

 

 

 

 

---