When can a collateral warranty amount to a construction contract
The Technology and Construction Court has recently found that a collateral warranty can amount to a construction contract within the meaning of the Housing Grants, Construction and Regeneration Act 1996 ('HGCRA').
The case concerned a standard Joint Contracts Tribunal ('JCT') design and build contract for the design and construction of a swimming and leisure facility. The contract was between Orion Land and Leisure (Cardiff) Ltd ('the Employer') and Laing O'Rourke Wales and West Ltd ('the Contractor'). The facility was sublet to a third party, Parkwood Leisure Ltd ('the Tenant'), whereby the Tenant acquired an interest in the pool works.
Prior to the completion of the works, the Contractor gave certain warranties to the Tenant ('the Collateral Warranty"), including that the works would be carried out and completed in accordance with the main contract. A dispute arose in relation to certain construction defects and the Tenant sought to enforce its right to damages under the Collateral Warranty. One of the questions before the Court was whether the Tenant, who was not a party to the main construction contract, could refer the dispute to adjudication. In order to do that, the Collateral Warranty had to be construed as a construction contract.
The main definition of a construction contract is contained in section 104 of the HGCRA and requires that the construction contract is "for the carrying out of construction operations". In reaching its conclusion that the Collateral Warranty was a construction contract, the Court made the following observations:
- whether or not a contract is a construction contract is a question of ordinary contract interpretation principles and depends on whether the actual contract is for the carrying out of construction operations within the meaning of the HGCRA;
- the fact that a construction contract is retrospective in effect does not bar it from being a construction contract. However if a collateral warranty is simply warranting "a past state of affairs as reaching a certain level, quality or standard" this will point against it being a construction contract;
- an agreement for the carrying out of construction operations is a broad expression and should be interpreted without "straight-jacketed judicial interpretation";
- where one party agrees to carry out and complete construction operations, it will be an agreement "for the carrying out of construction operations".
Based on the actual words used in the Collateral Warranty in the instant case, the Court had "no doubt" that it was "for the carrying out of construction operations" and was therefore a construction contract. Nevertheless, the Court emphasised that this conclusion does not mean that all collateral warranties given in connection with construction developments will be construction contract. Each case will have to be determined based on its own facts.
This decision has the potential of increasing the number of claims under collateral warranties being referred to adjudication, if they can be interpreted as construction contracts.