Tag: Collateral Warranty

Third Party Rights

Despite being regarded as a profession and an industry, construction can generally be extremely slow to react to innovation and new ways of thinking, often lagging years behind

The Contract (Right of Third Parties) Act 1999 significantly reformed the common law, Doctrine of Privity which covers the relationship between parties to a contract and other parties or agents. At its most basic level, the rule is that a contract can neither give rights to, nor impose obligations on, anyone who is not a party to the original agreement, i.e. a “third party”.

With the Royal Assent of the Contract (Right of Third Parties) Act 1999 on 11th November 1999 a long standing and universally disliked element of the doctrine was reformed. This reform being to the second rule; which previously had the effect that a third party could not enforce a contract for which they had not provided consideration.

At a basic level the changed law allows third parties to enforce contract terms that benefit them in some way or which the contract empowers them to enforce. At the same time the legislation grants these third parties access to a range of remedies if the terms are breached. Further the legislation limits the extent in which a contract can be changed without the permission of an involved third party, while at the same time providing protection for the promisor and promisee in dispute situations with the third party, and allows parties to a contract to specifically exclude the protection afforded by the Act if they want to limit the involvement of third parties.

Despite this legislation being over 15 years old there are still parts of the industry that do not trust and want to limit third party rights. The Judgement in Parkwood Leisure Limited v Laing O’Rouke Wales and West in 2013 however tend to suggest that the industry should have been more sceptical of Collateral Warranties than 3rd Party rights per say. The judgement in this case tends to suggest the industry understanding of Collateral Warranties has been fundamentally flawed.

Background

The Defendant, Laing O’Rourke (The Contractor) was engaged by Orion Land and Leisure (Cardiff) Limited (The Employer) to carry out and complete the design and construction of a swimming pool and leisure centre under a standard Joint Contract Tribunal (JCT) Design and Build Contract

The Employer had entered into a lease with Parkwood Leisure Limited (A Third Party Facilities Management Company) to operate the pool on behalf of Orion Land and Leisure (Cardiff) Limited.

A key clause in the contract was that Laing O’Rourke were required to provide Collateral Warranties to a number of third parties, including Parkwood Leisure Limited. Before the works were completed Laing O’Rourke executed as a deed Collateral Warranties in favour of Parkwood Leisure Limited.

After the opening of the facility a number of defects occurred, mainly with the air handling units. Parkwood Leisure Limited claimed were construction and commissioning defects. Some of the alleged defects were subject to a Settlement Agreement, however issues continued to occur in relation to the air handing units. Parkwood Leisure Limited therefore believed they had no other effective remedy other than to claim against Laing O’Rourke’s Collateral Warranty.

Parkwood Leisure Limited therefore commenced under Civil Proceedings Rules (CPR) Part 8 an action to determine whether:

  • The Collateral Warranty amounted to a Construction Contract for the purposes of the Housing Grants, Construction and Regeneration Act 1996, as if this was the case it would enable them to Adjudicate their claim
  • The claim being brought was compromised by the Settlement Agreement

The Collateral Warranty

The Collateral Warranty contained the following clause:

“The Contractor warrants, acknowledges and undertakes that:-

  1. It has carried out and shall carry out and complete the Works in accordance with the Contract;
  2. In the design of Works the Contractor has exercised and will continue to exercise all reasonable skill and care to be expected of an architect;
  3. It has complied and will continue to comply with the terms of regularly and diligently carry out its obligations under the Contract.”

The presiding Judge, Justice Akenhead after reviewing the definitions of “construction contract” and “construction operations” under Sections 104 and 105 of the Housing Grants, Construction & Regeneration Act 1996 and determined a Collateral Warranty is a construction contract. This was as the definitions were widely construed and the Act applies to all contracts related to the carrying out of “construction operations. It was specifically notes that the Collateral Warranty had the wording “carried out and shall complete the works” which gave an obligation to complete the construction works. It was further found that the Collateral Warranty was a subsidiary to the Building Contract.

However not all Collateral Warranties would be construed as a ”Construction Contract” and would be evaluated based on the specific wording of the Warranty. It was Justice Akenhead’s view that Collateral Warranties related to future performance could be construed as “Construction Contracts” in accordance with the Act.; whereas those against could be where the Contractor completes the works and provides a warranty post completion.

Therefore Adjudication was possible by Parkwood Leisure Limited as the Collateral Warranty amounted to a Construction Contract.

The Settlement Agreement

In relation to the Settlement Agreement is was found that there was scope to bring claims for matters that did not exist at the time the agreement. In effect this could have been avoided with clear and careful drafting and avoiding ambiguities.

 Is the Parkwood judgement correct?

In effect it was decided that a Collateral Warranty is a Construction Contract where:

  • There is an undertaking by the contractor to continue to comply with the underlying construction contract.
  • The Collateral Warranty is delivered before Practical Completion

However at law we don’t pick and choose what provisions apply and this judgement may yet have some non-considered consequences.

In effect then Section 108 (Adjudication) and Section 109 (Payment) should also be incorporated into Collateral Warranties.

Section 109 in particular could have severe consequences, although one would hope a common sense approach would be taken by the courts. This section provides that a party to a Construction Contract is entitled to periodic payment if the works last longer than 45 days. While it is true the parties are free to agree the amount due, frequency and circumstances to trigger these payments, crucially in their absence the Scheme for Construction Contracts (England and Wales) Regulations will apply.

Collateral Warranties do not have Construction Act compliant payment provisions. This is primarily because the beneficiary of a Collateral Warranty is not expected to make payment, except where they have exercised their Step In rights. If the Collateral Warranty is a construction contract, then Section 109 will import The Scheme for Construction Contracts payment provisions which provides for the Contractor to be paid for the value of works done, less monies already paid. This could lead to the ludicrous situation where becomes directly liable to pay the Contractor.

Where does the Parkwood judgement leave 3rd Party Rights?

Beneficiary’s 3rd Party Rights derive directly from the Construction Contract and Sections 108 and 109 are applicable only to “a party to a construction contract”. A 3rd Party is not a party to the contract and therefore Section 108 and 109 of the 1996 Act cannot apply.

There is however no bar to 3rd parties right to Adjudicate should the parties wish. It can even be argued that sub-section 1(5) of the Third Party Rights Act 1999 extends the right to Adjudication to the beneficiary.

Where this judgement could sound the death knell of Collateral Warranties is where the contracting parties can exclude or extend the 3rd parties rights, the judgment appears to infer that all sections of the 1996 Act apply to Collateral Warranties, despite the potential absurdity as the Third Party Rights Act 1999 can only be used to confer rights, and not obligations.

Conclusion

The court’s decision was unexpected and resulted in greater scrutiny of Collateral Warranties with both Contractors and Consultants being loath to provide and even then that their application is limited to be retrospective only and limited. This has resulted in further complications for the negotiation and drafting of Collateral Warranties resulting in protracted and costly negotiations.