We previously gave a primer on what collateral warranties are and some key features to look out for.
In this instalment of our deep dive mini-series, we will examine the judgment in Parkwood Leisure Ltd v Laing O’Rourke Wales and West Ltd [2013] EWHC 2665 (TCC). In Parkwood v Laing O’Rourke the court considered whether collateral warranties – as a “secondary” contract – can be “construction contracts” for the purpose of the Housing Grants, Construction and Regeneration Act 1996 (as amended) (the “HGCRA”). If so, the payment and adjudication provisions in the HGCRA apply to the collateral warranty and this may be an outcome the parties not did anticipate.
Facts
Parkwood Leisure Ltd (“Parkwood”) provided facilities management services for PFI projects, one of which was the Cardiff International Pool, a swimming and leisure facility (the “Facility”). The Facility was leased to Orion Land and Leisure (Cardiff) Ltd (“Orion”).
In April 2006, Orion engaged Laing O’Rourke Wales and West Ltd (“LOR”) to design and build a swimming pool (the “Works”) at the Facility. Under the contract (the “Contract”), LOR was obliged to “carry out and complete […] the Works”.
In December 2007 – before the Works were complete – Parkwood and LOR entered into a collateral warranty. The collateral warranty included the following key provisions:
- That LOR “warrants, acknowledges and undertakes that […] it has carried out and shall carry out and complete the Works in accordance with the Contract”; and
- That LOR “has complied and will continue to comply with the terms of regularly and diligently carry out its obligations under the Contract”.
Following completion of the Works, Parkwood sent LOR two letters of claim, in 2011 and 2013 respectively. The second letter cited various defects in the Works and claimed damages of some £337,000.
Parkwood then filed a claim, seeking (among other things) a declaration that the collateral warranty was a construction contract for the purpose of the HGCRA.
Decision
Akenhead J began his analysis by noting that there was no direct authority for the proposition that a collateral warranty was a construction contract for the purpose of the HGCRA. He said that for a contract to be a construction contract for the purpose of the HGCRA, it must 1) be a contract under English law, and 2) be entered into by the parties for the “carrying out of construction operations”. (Mirroring the wording of section 104 of the HGCRA.)
The judge said that he had “no doubt” the collateral warranty was a construction contract. His reasons included:
- That the collateral warranty both referred to the contract and expressly repeated the “carry out and complete” wording;
- That the collateral warranty included the words “warrants, acknowledges and undertakes”. This made reference to both a past and present state of affairs and obliged LOR to do something, i.e. carry out the remainder of the Works; and
- That the collateral warranty clearly recognised that the Works were still ongoing.
Despite his clear decision, the judge noted that not all collateral warranties would be construction contracts. A clear indicator in favour would be the beneficiary – here, LOR – warranty to do something (i.e. to carry out the Works). The judge stated that the works being completed at the time of executing the warranty would indicate that it was not a construction contract.
Commentary
In summary, parties should be mindful of both the wording of a collateral warranty and the timing of its execution in relation to the progress of the works under the primary contract. The parties may or may not see the payment and adjudication provisions of the HGCRA as desirable. If they do not wish them to apply, it would be best to execute the warranty following completion of the works (although ensuring the beneficiary contractor is contractually obliged to do so) and amend the wording to say that the contractor “warrants that the works have been carried out in accordance with the contract” or similar.
However, the parties may consider that the HGCRA’s provisions – particularly the right to refer a dispute to adjudication – are useful. In his leading textbook, Peter Coulson notes that “[f]rom a broader perspective, if the underlying contract was a construction contract, it makes commercial common sense for any parasitic warranties to be treated in the same way.” This was perhaps Parkwood’s position in the case above, and we agree that a £337,000 claim for defective work is ideal for referral to adjudication
