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Mon August 15 2022

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Court ruling changes nature of collateral warranties

1 Oct 13 Under a new legal ruling, collateral warranties are now considered to be construction contracts, reports Kim Teichmann.

Kim Teichmann is a senior associate at Thomas Eggar LLP
Kim Teichmann is a senior associate at Thomas Eggar LLP

It is almost certain that if you are employed on a construction project you will be asked to sign collateral warranties in favour of others; this has become common place.

However, you can imagine Laing O’Rourke’s surprise when they were told by the court that their innocuous warranty was in fact a construction contract governed by the Construction Act and therefore subject to adjudication.

The recent decision of Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC) has changed the way warranties are treated. In April 2006 Laing O’Rourke entered into a standard JCT Design and Build contract to design and build the £300m Cardiff International Sports Village. About the same time, Parkwood entered into a 10-year agreement for lease in January 2008 with the developer, Orion Land & Leisure (Cardiff) Ltd. Practical completion was one year late. A year before practical completion, in December 2007, a deed of warranty was executed with Parkwood named as the beneficiary.

A dispute arose as to defective air handling units and Parkwood relied on the terms of the warranty. Parkwood issued proceedings seeking a declaration that a warranty is a construction contract under the Housing Grants, Construction and Regeneration Act 1996. If it was a construction contract it would give the parties the statutory right to adjudicate any claim under the warranty. This would provide a quick and easy dispute resolution procedure for Parkwood.

Parkwood had suffered damages, which Laing O’Rourke may not have had in mind when signing the collateral warranty, including the increased costs of running the leisure centre as a result of the poor performing air handling unit. The court decided that Parkwood could recover these damages by adjudicating. Again, this must have come as a surprise to Laing O’Rourke.

Although this case is not good news for providers of warranties, the silver lining is that not every collateral warranty will be a construction contract and whether it is depends on whether it is a contract for the carrying out of construction operations. 

The words in the warranty matter. Here the contractor warranted, acknowledged and undertook that it had carried out and shall carry out and complete the works in accordance with the contract. The use of the word “undertakes” was interpreted as a prospective obligation to execute and complete the remaining works.

The warranty was also provided before the works were completed. The court said that a strong pointer that a warranty is a construction contract would be an undertaking to carry out the works. On the other hand the court noted that a pointer against a warranty being a construction contract would be a simple warranty warranting a past state of affairs.

So the lesson from this case is to be careful when providing a warranty, words really do matter and the difference between the words “warrant” and “undertake” may translate into thousands of pounds of liability.

Kim Teichmann is a senior associate at Thomas Eggar LLP

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