Not All Collateral Warranties Are Construction Contracts

• Published date: 10 August 2021
• Subject Matter: Corporate/Commercial Law, Real Estate and Construction, Contracts and Commercial Law, Construction & Planning, Landlord & Tenant - Leases
• Law Firm: Duane Morris LLP
• Author: Mr Matthew Friedlander and Tanya Chadha

The contractual matrix of commercial construction projects commonly includes collateral warranties. Collateral warranties typically grant a contractual cause of action to third parties (such as tenants or end-users) with an interest in the project who may not otherwise have a contract in place with parties that are designing, constructing or providing professional advice on the project. For the beneficiary, a collateral warranty can therefore be invaluable.

Recently, for example, collateral warranties have proven to be extremely useful for long leaseholders and tenants in private residential developments where cladding and fire safety issues have been discovered. Where such a warranty exists, leaseholders (as the beneficiaries) have been able in some cases to rely upon collateral warranties as a means of recovering losses, or compelling the original contractors or designers to rectify those fire safety defects in circumstances where the leaseholder was not involved in the original construction of the development.

In the context of construction projects, it is possible for a collateral warranty to be a 'construction contract' for the purposes of the Housing Grants Construction and Regeneration Act 1996 (as amended) (the Construction Act). This principle was established in Parkwood Leisure Ltd v Laing O'Rourke Wales and West Ltd (2013) EWHC 2665 (TCC) (Parkwood). Whether a collateral warranty is a construction contract within the meaning of the Construction Act is important because if it is, the parties to that warranty have a statutory right to refer any dispute thereunder to adjudication.

However, there is a common misconception that all collateral warranties will be construction contracts for the purposes of the Construction Act. The recent case of Toppan Holdings Ltd and another v Simply Construct (UK) LLP [2021] EWHC 2110 (TCC) (Toppan) demonstrates that the position it is not always straightforward.

The Position under Parkwood

In Parkwood, the court was asked to consider, amongst other things, whether a collateral warranty provided by Laing O'Rourke Wales and West Limited, in favour of Parkwood, was a construction contract for the purposes of the Construction Act, such that Parkwood could refer a dispute thereunder to adjudication.

Pursuant to section 104(1)(a) of the Construction Act, a 'construction contract' is essentially an agreement for 'the carrying out of construction operations'. In Parkwood, Akenhead J made it clear that whether a...