When is a collateral warranty a construction contract?

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27 September, 2021

John Pickervance
Partner and Head of Commercial

On a construction or engineering project, a collateral warranty is a contract between a person with an interest in the project (other than the client or employer) and a person who is involved in the project's design, management or construction.

In the previous case of Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd [2013] EWHC 2665 (TCC) Akenhead J held that a collateral warranty was a construction contract, as defined by section 104 of the Housing Grants, Construction and Regeneration Act 1996 (Construction Act 1996) which led to real implications for the negotiation of collateral warranties going forwards.

Previous Case of Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd

In April 2006, Laing O'Rourke Wales and West Ltd (Contractor) entered into a standard JCT Design and Build contract (Contract) with Orion Land and Leisure (Cardiff) Ltd (Employer) to design and build a swimming and leisure facility on Cardiff (Pool Works).

Article 10 of the Contract required the Contractor to enter into "a deed of warranty" with a financier of the project, first purchaser and mortgagee. In December 2007, a deed of warranty was executed under seal, with the tenant named as the beneficiary (collateral warranty).

Relevant parts of the collateral warranty included that the Contractor "warrants, acknowledges and undertakes" that it:

  • Would carry out the Pool Works in accordance with the contract.
  • Owed a duty of care to the beneficiary in carrying out its duties and the responsibilities in respect of the Pool Works.
  • Would exercise reasonable skill and care in the design of the Pool Works.
  • Would regularly and diligently carry out its obligations under the contract.

The collateral warranty included a "no greater liability" clause. It also provided that the Contractor would be liable for the reasonable cost of repair, renewal or reinstatement of any part of the Pool Works and "other losses or damages or costs incurred or suffered by the beneficiary as a result of a breach of [the collateral warranty]", including "loss of use, loss of profit or other consequential losses", capped at £2 million.

A number of issues arose with the air handling units and the Tenant ended up having two claims against the Contractor and Part 8 proceedings were issued. Akenhead J held that a collateral warranty was a construction contract and that Parkwood could pursue a defects claim under it by way of adjudication.

This case caused real implications for the negotiation of collateral warranties as contractors wished to amend future warranties in order to escape the effect of the decision within this case. Beneficiaries sought to resist such amendments and employers did the same out of concern that a warranty that is not caught by the Construction Act 1996 may be seen as "defective". This complicated the drafting and prolonged the negotiation of collateral warranties.

A recent case of Toppan Holdings Ltd and Abbey Healthcare (Mill Hill) Ltd v Simply Construct (UK) LLP

In June 2015, Sapphire Building Services Ltd entered into a JCT Design and Build Contract, 2011 Edition, with Simply Construct (UK) Ltd, whereby Simply was to design and build a care home in Mill Hill, London (the building contract). Those works reached practical completion in October 2016. In August 2020 Toppan issued Part 8 proceedings to require Simply to execute a collateral warranty in favour of Abbey.

The majority of the judgment within this case dealt with whether a collateral warranty can be considered as a construction contract. The judge, in this case, looked at the above Parkwood v Laing case and compared the words used in the Abbey collateral warranty with the language used in the Parkwood collateral warranty.

"Mr Justice Akenhead reviewed the precise wording of the collateral warranty and looked at each of the verbs, 'warrants, acknowledges and undertakes' as having a different meaning… The Abbey Collateral Warranty does not include the verbs 'acknowledges' or 'undertakes'… Simply warranted that … It 'has performed and will continue to perform diligently its obligations under the Contract'…"

Ultimately, the judge decided that the Abbey collateral warranty was not a construction contract and so there was no right to adjudicate.

In order to answer the question, 'when is a collateral warranty a construction contract', we should look at when the parties executed the collateral warranty and whether the works being warranted are ongoing at the time. In the Toppan case, the collateral warranty in favour of Abbey wasn't executed until four years after practical completion so there were no "construction operations" left for the contractor to perform.

Our Construction team at Forbes Solicitors are experts in drafting collateral warranties and other contracts in the construction sector and can assist you when drafting or reviewing these.

For more information contact John Pickervance in our Commercial department via email or phone on 0333 207 1134. Alternatively send any question through to Forbes Solicitors via our online Contact Form.

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