Those within the construction industry will be familiar with collateral warranties. It’s not unusual for numerous collateral warranties to be entered into in relation to construction projects. Traditionally, there has been a widely held assumption that collateral warranties are not construction contracts for purposes of the Construction Act, so that the statutory right to adjudicate would not apply.
It’s all change
A relatively recent decision in the Technology and Construction Court (TCC) decided that a collateral warranty can amount to a construction contract. Where it does, the right to adjudicate will apply and either party to the collateral warranty will be able to refer any dispute arising (under the collateral warranty) to adjudication at any time.
It opens up an additional (and speedy) route of recovery through adjudication, in addition to the (more lengthy and potentially more costly) court or arbitration processes.
The key factor as to whether the collateral warranty is a construction contract is whether it is an agreement for:
- the carrying out of construction operations (as defined in the Construction Act);
- the arranging of others to carry out construction operations; or
- the provision of labour for carrying out construction operations.
A strong indicator that a warranty is a construction contract will be an undertaking to carry out construction operations. A pointer against may be that all the works are complete and the warranty just relates to the completed works, confirming that they comply with the main contract requirements.
So, what does this mean in practice?
Adjudication may now be an option for collateral warranty claims. For those who benefit from the warranties, this is likely to be a welcome opportunity to obtain a speedy and more cost efficient means of recovery for defects. For those who give warranties, they will need to be aware of the possibility of being drawn into an adjudication with its tight timescales.
What should you do?
Construction businesses who give warranties will want to revisit and (if needs be) adjust the wording of the collateral warranties that they use, such that the wording is more retrospective (with a view to avoiding adjudication). Developers and others who benefit from the warranties may well wish to retain undertaking type wording with a view to the statutory adjudication process applying.
In order to avoid the potential for adjudication occurring, there could be an increase in the use of the Contracts (Rights of Third Parties) Act in place of collateral warranties.
Time will tell.
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