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When Is Adjudication Permitted Under a Collateral Warranty?

on Thursday, 05 August 2021.

VWV has successfully defended a contractor in adjudication enforcement proceedings brought by a tenant under a collateral warranty (Toppan & Abbey vs Simply 2021).

The Technology and Construction Court (TCC) dismissed the tenant's claim, ruling that the collateral warranty was not a construction contract and that the dispute should not have been referred to adjudication.

In order to fully understand the importance of the TCC decision, it is important to look back at how adjudication first entered the construction industry, what it was originally intended for and how it developed over the years.

How Is Adjudication Used in Construction?

Back in the nineties, the construction industry was facing a serious challenge. Employers often withheld money from their contractors, feeling secure in the knowledge that the contractor would lack the resources to fund expensive and lengthy court proceedings. Many contractors, especially smaller construction companies, were unable to enforce payment of sums that were owed to them.

The solution came in the form of the Housing Grants, Construction and Regeneration Act 1996, better known as the Construction Act, which introduced a statutory right for parties to a construction contract to refer their disputes to adjudication. The Construction Act defined a construction contract as an agreement for the carrying out of construction operations.The exact definition has been debated by legal commentators, but it seems to relate to ongoing construction operations, notably expressed in the present and future tense. Whatever the exact definition, the Construction Act was good news for contractors because adjudication was specifically intended (and used) to assist them with cash-flow during a construction project, allowing them to swiftly enforce an outstanding payment and continue the project. Adjudication also was (and remains) relatively inexpensive when compared to lengthy court proceedings.

However, even though adjudication became very popular with unpaid contractors, it was a double-edged sword. Contractors could now potentially become embroiled in an adjudication years after they had completed the works under a construction contract. Even though adjudication had been primarily intended to help contractors maintain cash-flow during the course of construction projects, the Construction Act also (perhaps unintentionally) permitted the parties to use adjudication long after completion of the works. The potential drawbacks in adjudication for contractors did not end there though...

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Can Adjudication Be Commenced Under a Collateral Warranty?

In 2013, it transpired (to the shock of many commentators) that not only could the contractor be taken to adjudication by its employer, but also by a beneficiary under a collateral warranty (eg a tenant or funder), who had not been a party to the original construction contract. Mr Justice Akenhead (who was in charge of the TCC at the time) gave his judgment in Parkwood v Laing in 2013, holding that the parties' collateral warranty was a construction contract under the Construction Act and the parties therefore had a right to refer a dispute to adjudication. Mr Justice Akenhead notably placed emphasis on the contractor having warranted that it "has carried out and shall carry out" the works, meaning that the collateral warranty did not merely relate to a past state of affairs but to an ongoing construction project that had not been completed yet. The collateral warranty was therefore an "agreement for the carrying out of construction operations". Again, the use of the present and future tense is important here.

What Did the TCC Decide?

Moving forward to 2016, a construction project was completed in London. The tenant in the new building obtained a collateral warranty from the contractor, but crucially not until 2020. The tenant then used its recently acquired collateral warranty to refer a defects claim to adjudication. The contractor (represented by VWV) challenged the adjudicator's decision in the TCC.

In its important ruling in July this year, the TCC sided with the contractor and declined to enforce the adjudicator's decision. Mr Martin Bowdery QC (sitting as a Deputy Judge of the High Court in Toppan & Abbey vs Simply 2021) held that the collateral warranty was not a construction contract and that there was no right to adjudicate under the Construction Act. There were similarities to Akenhead's decision in Parkwood, but the case was ultimately distinguished on the facts.

Does a Collateral Warranty Need to Be Executed Whilst the Project Is Still Ongoing?

The TCC drew a line in the sand, providing important guidance as to when a collateral warranty would not be a construction contract:

  • Like Mr Justice Akenhead before him, Mr Bowdery QC had to consider whether a collateral warranty was a construction contract, as in an agreement for the carrying out of construction operations.
  • Like in Parkwood, the claim related to defects in construction works, but the crucial difference was that the collateral warranty was executed four years after completion of the construction project and eight months after the remedial works had been completed by another contractor.
  • Like in Parkwood, the collateral warranty referred to present and future obligations, but Mr Bowdery QC considered that the wording of a collateral warranty is not necessarily sufficient to turn it into a construction contract and that the timing as to when it is executed is "also important".

Mr Bowdery QC succinctly summarised his conclusions as such: "On the facts of this case I cannot see how applying commercial common sense a collateral warranty executed four years after practical completion and months after the disputed remedial works had been remedied by another contractor can be construed as an agreement for carrying out of construction operations."

He also provided the following guidance for future cases:

  • ''where a contractor agrees to carry out uncompleted works in the future that will be a very strong pointer that the collateral warranty is a construction contract and the parties will have a right to adjudicate
  • where the works have already been completed, and as in this case even latent defects have been remedied by other contractors, a construction contract is unlikely to arise and there will be no right to adjudicate''

In Conclusion

Whilst the extended use of adjudication for defects claims is permitted (albeit perhaps not originally intended) under the Construction Act, even years after completion, the recent judgment in Abbey shows that there is a limit to what the courts will tolerate and enforce. If a collateral warranty is executed after completion of the construction project, it may not be a construction contract (as in an agreement for the carrying out of construction operations) at all. In that case, the beneficiary will have no right to adjudicate under the Construction Act and would have to take its claim to court instead.

For more information on adjudication enforcement proceedings, please contact a member of our Construction Law team, or complete the form below.

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