As discussed in our previous blog (Collateral warranties can amount to a ‘construction contract’), collateral warranties can, in certain circumstances, amount to a ‘construction contract’. This means that disputes under warranties may be referred to adjudication where, previously, only court litigation was thought to be available. So why might this be an issue?
It’s all in the ‘construction’ of the contract
The drafting of a collateral warranty is key in determining whether or not it is a construction contract. When the court looked at this issue in a recent case, it decided that the main factors in determining whether a warranty was a construction contract were:
(a) the specific wording of the warranty; and
(b) the timing of when the warranty was given.
The case involved a claim by a tenant against the contractor for defective works. The contractor had entered into a collateral warranty with the tenant before practical completion. The court held that, by the wording of the warranty, the contractor was promising to carry out future or uncompleted works which fitted with the statutory description of a ‘construction contract’ i.e. where a party “agrees to carry out and complete construction operations”. The fact that the contractor executed the warranty before the works were complete was also significant in arguing that the warranty was for future works yet to be completed and was therefore a contract to complete construction operations.
The case highlights that great care should be taken when drafting and negotiating the terms on which warranties are given. So, what might you do to avoid disputes under warranties being adjudicated in the future?
- Review the terms on which you are prepared to give warranties.
- Avoid wording which means you are agreeing to undertake the completion of outstanding works (but note you may find this difficult in warranties to employer, funder or forward funding purchaser).
- Consider the timing of when you will execute warranties and, where possible, (particularly for purchasers or tenants) aim to enter warranties only after practical completion of the works has taken place.
- Try to limit the number of warranties you will give on any project.
- Where in doubt about your potential legal exposure, seek legal advice.
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