Why collateral warranties aren’t construction contracts

It’s fair to say that Akenhead J’s recent decision in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Limited that a collateral warranty was caught by the Construction Act – so that Parkwood (the warranty beneficiary) was able to commence adjudication proceedings against Laing O’Rourke – has caught the attention of construction lawyers.

Many – and I am one of them – think that the decision is wrong. Central to the judge’s finding were the facts that the warranty:

• was granted before completion of the relevant works (a swimming pool in Cardiff) and; 
• contained wording (“warrants, acknowledges and undertakes that…”) that the judge (especially relying on the word “undertakes”) took to mean that the warranty was an obligation to complete pool and therefore a contract for the “carrying out of construction operations” within the ambit of the Act.

And, although the judge was quick to emphasise that his decision rested on the particular facts of the case, it is still open to criticism.

A collateral warranty is not a contract for the carrying out of construction operations. It is an agreement that is collateral to such a contract (in this case between Laing O’Rourke and its employer). Parkwood had none of the rights that you would expect the employer under a building contract to enjoy. For example, it could not vary the work or issue instructions.

Nor did Parkwood have any obligation to pay Laing O’Rourke. This highlights the fact that adjudication is only one limb of the Construction Act. The Act’s aim is to avoid payment abuse in construction contracts – particularly between main contractors and their subbies. Adjudication is the speedy dispute resolution procedure created to ensure that any payment dispute is resolved quickly. But it is the solution to a problem that does not arise under a collateral warranty, because there is rarely (if ever) an obligation on the beneficiary to pay the warranty provider; and there wasn’t in this case.

This argument remains valid even if the warranty contains step-in rights (and the judgement does not say anything about these) because, if Parkwood had to step in, any payment obligation would likely have been expressed as a condition precedent to the right to step in and not an obligation to pay Laing O’Rourke for its monthly invoices.

The judge has also probably credited the lawyer who drafted the warranty with too much creativity when it came to using three separate verbs to describe Laing O’Rourke’s obligations. Most lawyers (including yours truly) gain comfort from using more words than are strictly necessary and “warrants, acknowledges and undertakes” should be read as synonyms and not separate and distinct obligations.

This last point can be further emphasised when you ask what the judge would have found if, as a matter of fact, the warranty had been granted after practical completion or making good defects. In that scenario, the wording of the warranty would not have changed, but there would not have been any ongoing work for Laing O’Rourke to “undertake”. The judge’s decision places too much importance on the time when the warranty was provided.